EXCELSIOR TAX EXEMPT FUNDS INC, 497, 1999-08-13

EXCELSIOR TAX EXEMPT FUNDS INC
497, 1999-08-13

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EXCELSIOR TAX-EXEMPT FUNDS, INC.

New York Intermediate-Term Tax-Exempt Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

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

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

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TABLE OF CONTENTS

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CLASSIFICATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS . . . . . . . . . . . . . . . . . 1
Additional Investment Policies. . . . . . . . . . . . . . . . . . . . . 1
Additional Information on Portfolio Instruments . . . . . . . . . . . . 2
Special Considerations Relating to New York Municipal Obligations . . .11
Additional Investment Limitations . . . . . . . . . . . . . . . . . . .23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . .25
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .26
Redemption Procedures . . . . . . . . . . . . . . . . . . . . . . . . .28
Other Redemption Information. . . . . . . . . . . . . . . . . . . . . .30
INVESTOR PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Systematic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . .31
Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . .31
Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Automatic Investment Program. . . . . . . . . . . . . . . . . . . . . .33
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . .33
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . .33
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . .35
Investment Advisory and Administration Agreements . . . . . . . . . . .41
Banking Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Shareholder Organizations . . . . . . . . . . . . . . . . . . . . . . .43
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . .44
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .45
PORTFOLIO VALUATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . .48
PERFORMANCE AND YIELD INFORMATION. . . . . . . . . . . . . . . . . . . . . .50
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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CLASSIFICATION AND HISTORY

Excelsior Tax-Exempt Funds, Inc. (the "Company") is an open-end,
management investment company. The Fund is a 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 8, 1984. Prior to December 28, 1995 the Company was known as "UST
Master Tax-Exempt Funds, Inc."

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

The following information supplements the description of the
investment objective, strategies and risks as set forth in the Prospectus. The
investment objective of the Fund may be changed without shareholder approval.
Except as expressly noted below, the investment policies of the Fund also may be
changed without shareholder approval.

ADDITIONAL INVESTMENT POLICIES

The Fund expects that, except during temporary defensive periods,
under normal market conditions 65% of the Fund's total assets will be invested
in debt securities of the State of New York, its political sub-divisions,
authorities, agencies, instrumentalities and corporations, and certain other
governmental issuers, the interest from which is, in the opinion of bond counsel
to the issuer, exempt from federal and New York State and New York City personal
income taxes ("New York Municipal Obligations"). In general, the Fund
anticipates that dividends derived from interest on Municipal Obligations (as
defined below under "Municipal Obligations") other than New York Municipal
Obligations will be exempt from regular federal income tax but may be subject to
New York State and New York City personal income taxes.

The Fund invests in Municipal Obligations which are determined by the
Adviser to present minimal credit risks. As a matter of fundamental policy,
except during temporary defensive periods, the Fund will maintain at least 80%
of its net assets in Municipal 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.) However, from time to time on a temporary defensive basis
due to market conditions, the Fund may hold uninvested cash reserves or invest
in taxable obligations in such proportions as, in the opinion of the Adviser,
prevailing market or economic conditions may warrant. Uninvested cash reserves
will not earn income. Should the Fund invest in taxable obligations, it would
purchase: (i) obligations of the U.S. Treasury; (ii) obligations of agencies
and instrumentalities of the U.S. government; (iii) money market instruments
such as certificates of deposit, commercial paper, and bankers' acceptances;
(iv) repurchase agreements collateralized by U.S. government obligations or
other money market instruments; (v) municipal bond index and interest rate
futures contracts; or (vi) securities issued by other investment companies that
invest in high quality, short-term securities.

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securities, however, will not exceed under normal market conditions 20% of the
Fund's total assets when added together with any taxable investments held by the
Fund.

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

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

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

MUNICIPAL OBLIGATIONS

"Municipal Obligations" are debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions, the interest from which is, in the opinion of bond
counsel to the issuer, exempt from federal income tax.

Municipal Obligations 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 Obligations" only if the interest paid
thereon is exempt from regular federal income tax and not treated as a specific
tax preference item under the federal alternative minimum tax.

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payment of principal and interest. Revenue securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as user fees of the facility being financed.

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

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

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

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private activity bonds is also considered to be an "issuer." An issuer's
obligations under its Municipal Obligations are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. The
power or ability of an issuer to meet its obligations for the payment of
interest on and principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.

Private activity bonds are issued to obtain funds to provide, among
other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. Private activity
bonds held by the 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.

Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. The Fund and Adviser
will not review the proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.

INSURED MUNICIPAL OBLIGATIONS

The Fund may purchase Municipal Obligations which are insured as to
timely payment of principal and interest at the time of purchase. The insurance
policies will usually be obtained by the issuer of the bond at the time of its
original issuance. Bonds of this type will be acquired only if at the time of
purchase they satisfy quality requirements generally applicable to Municipal
Obligations. Although insurance coverage for the Municipal Obligations held by
the 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 Obligations covered by
insurance policies.

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MONEY MARKET INSTRUMENTS

"Money market instruments" that may be purchased by the Fund in
accordance with its investment objective and policies include, among other
things, bank obligations, commercial paper and corporate bonds with remaining
maturities of 13 months or less.

Tax-exempt commercial paper purchased by the Fund will consist of
issues rated at the time of purchase "A-3" or higher by S&P, "F3" or higher by
Fitch, or "Prime-3" or higher by Moody's or, if not rated, determined to be of
comparable quality by the Adviser. These rating symbols are described in
Appendix A hereto.

VARIABLE AND FLOATING RATE INSTRUMENTS

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

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 such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser, pursuant to guidelines approved by the Company's
Board of Directors. The Fund will not enter into repurchase agreements with the
Adviser or ifs affiliates. Repurchase agreements with remaining

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maturities in excess of seven days will be considered illiquid securities
subject to the 10% limit described below under "Illiquid Securities."

The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose
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. Income on
repurchase agreements will be taxable.

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 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. Repurchase agreements are considered loans
by the Fund under the 1940 Act.

INVESTMENT COMPANY SECURITIES

The Fund may also invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory fees and other expenses 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.

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 liquid assets 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

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than when it sets aside cash. Because the Fund will set aside liquid assets to
satisfy its purchase commitments in the manner described, the Fund's liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceeded
25% of the value of its assets.

It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of 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 its
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 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.

STAND-BY COMMITMENTS

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

The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable,

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the Fund may pay for a "stand-by commitment" either separately in cash or by
paying a higher price for securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available for the same
securities). Where the 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 Fund intends 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
Fund will acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. "Stand-by commitments" acquired by the Fund will be valued at zero in
determining the Fund's net asset value.

FUTURES CONTRACTS

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

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

Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with the Fund's securities investments. The Fund
may engage in futures contracts only to the extent permitted by the Commodity
Futures Trading Commission ("CFTC") and the Securities and Exchange Commission
("SEC"). The Fund currently intends to limit its hedging transactions in
futures contracts so that, immediately after any such transaction, the aggregate
initial margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract is traded does not exceed 5% of the
Fund's total assets, after taking into account any unrealized profits and
unrealized losses on the Fund's open contracts.

When investing in futures contracts, the Fund must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the 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 the Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing

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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 the Fund "covers" a
futures position generally by entering into an offsetting position. Positions
in futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the 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. Such sale of securities may be, but will not necessarily be, at increased
prices which reflect the rising market. 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 by the Fund in futures contracts may subject the Fund to
a number of risks. Successful use of futures by the Fund is subject to the
ability of the Adviser to correctly predict movements in the direction of the
market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. There may be an
imperfect correlation, or no correlation at all, between movements in the price
of the futures contracts and movements in the price of the instruments being
hedged. In addition, investments in futures may subject the Fund to losses due
to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, the 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.

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

Utilization of futures transactions by the 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.

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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.

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.

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.

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

MISCELLANEOUS

The Fund may not invest in oil, gas, or mineral leases.

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL OBLIGATIONS

The Fund's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York Municipal Obligations 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 Obligations
to meet their financial obligations.

Certain substantial issuers of New York Municipal Obligations
(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 Obligations of New
York State and its agencies and instrumentalities and of New York City have been
downgraded by S&P and 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,
respectively. Strong demand for New York Municipal Obligations has also at
times had the effect of permitting New York Municipal Obligations 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 Obligations 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
Obligations. Although as of the date of this Statement of Additional
Information, no issuers of New York Municipal Obligations are in default with
respect to the payment of their Municipal Obligations, the occurrence of any
such

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<PAGE>

default could affect adversely the market values and marketability of all New
York Municipal Obligations and, consequently, the net asset value of the Fund's
portfolio.

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

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

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

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

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

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

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

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

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

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

On February 12, 1999, the State issued a revised cash-basis Financial
Plan for the 1999-2000 fiscal year that reflected the Governor's amendments to
his 1999-2000 Executive Budget. The revised Financial Plan projects total
General Fund disbursements and transfers to other funds of $37.14 billion in
1999-2000, a net increase of $42 million over the amount estimated in the
Executive Budget. The revised estimate reflects $81 million in new funding for
school districts, $13 million for the Department of Law, $5 million of offset
the loss of budgeted federal funding in the Department of Corrections and $11
million in projected spending for other initiatives. These increases are
partially offset by $8 million in lower projected social service costs, $15
million from projected lower spending on fringe benefits for State employees and
$45 million in one-time savings from permanently deferring one month of

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Supplemental Security Income payments.

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

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

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

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

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

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

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

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

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

The proposed 1998-99 through 2003-04 Capital Program and Financing
Plan was released with the Executive Budget on January 27, 1999. The recommended
five-year Capital Program and Financing Plan reflects debt reduction initiatives
that would reduce future State-supported debt issuances by significantly
increasing the share of the Plan financed with pay-as-you-go resources. Compared
to the last year of the July 1998 update to the Plan, outstanding
State-supported debt would be reduced by $4.7 billion (from $41.9 billion to

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<PAGE>

$37.2 billion).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-20-

<PAGE>

obligation bonds. On June 2, 1997, an action was commenced seeking a
declaratory judgment declaring the legislation establishing the Transitional
Finance Authority to be unconstitutional. If such legislation which is
currently on appeal to the Court of Appeals were voided, projected contracts
for the City capital projects would exceed the City's debt limit. Future
developments concerning the City or entities issuing debt for the benefit of
the City, and public discussion of such developments, as well as prevailing
market conditions and securities credit ratings, may affect the ability or
cost to sell securities issued by the City or such entities and may also
affect the market for their outstanding securities.

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

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

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

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

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<PAGE>

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

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

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

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

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

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<PAGE>

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.

ADDITIONAL 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.

The Fund may not:

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

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 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;

3. Purchase securities of any one issuer if, as a result, more than
5% of the value of the Fund's total assets would be invested in the securities
of such issuer, except that (a) up to 50% of the value of the Fund's assets may
be invested without regard to this 5% limitation,

-23-
<PAGE>

provided that no more than 25% of the value of the Fund's total assets are
invested in the securities of any one issuer; and (b) the foregoing 5%
limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities;

4. 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 and other securities which are not readily
marketable;

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

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

7. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Fund's investment objective, policies, and limitations may be deemed to
be underwriting;

8. Purchase or sell real estate, except that the Fund may invest in
Municipal Obligations secured by real estate or interests therein;

9. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Fund may
enter into futures contracts and futures options;

10. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that the Fund may enter into futures contracts and futures
options;

11. 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; and

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; provided that the Fund may enter into futures
contracts and futures options.

* * *

In addition to the investment limitations described above, the Fund will not
knowingly invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days and other securities which are not readily marketable.

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.

-24-
<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the 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>

Customer's account not less frequently than weekly and invest amounts in excess
of a minimum balance agreed to by the Shareholder Organization and its Customer
in shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.

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

PURCHASE OF SHARES

Shares of the 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 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 Tax-Exempt Funds, Inc., to:

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

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

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

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

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<PAGE>

other cash management services provided. The Company reserves the right to
reject any purchase order, in whole or in part, or to waive any minimum
investment requirements. Third party checks will not be accepted as payment for
Fund shares.

REDEMPTION PROCEDURES

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

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

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

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

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<PAGE>

banks, broker/dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations. All
eligible guarantor institutions must participate in the Securities Transfer
Agents Medallion Program ("STAMP") in order to be approved by CGFSC pursuant to
the Signature Guarantee Guidelines. Copies of the Signature Guarantee
Guidelines and information on STAMP can be obtained from CGFSC at (800) 446-1012
or at the address given above.

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

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

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

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

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<PAGE>

the need for more immediate access to his or her investment should purchase
shares by federal funds or bank wire or by certified or cashier's check. Banks
normally impose a charge in connection with the use of bank wires, as well as
certified checks, cashier's checks and federal funds. If a Direct Investor's
purchase check is not collected, the purchase will be cancelled and CGFSC will
charge a fee of $25.00 to the Direct Investor's account.

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 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 the 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 the 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.

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.

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<PAGE>

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

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

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

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

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund 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 an account in 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

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 Funds, Inc. ("Excelsior 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 the 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>

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.

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 and the minimum subsequent investment is $50.
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 Fund pursuant to retirement plans if such plans are offered by
their Shareholder Organizations.

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<PAGE>

AUTOMATIC INVESTMENT PROGRAM

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

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

ADDITIONAL INFORMATION

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

DESCRIPTION OF CAPITAL STOCK

The Company's Charter authorizes its Board of Directors to issue up to fourteen
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
seven classes of shares representing interests in seven investment portfolios.

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

-33-
<PAGE>

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.

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

The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of 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 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

-34-
<PAGE>

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:

<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 Board, Retired; Director of Excelsior Fund
238 June Road President & Treasurer and the Company (since 1995); Trustee of
Stamford, CT 06903 Excelsior Funds and Excelsior Institutional
Age: 68 Trust (since 1995); Vice Chairman of U.S.
Trust Corporation and U.S. Trust New York
(from February 1990 until September 1995);
and Chairman, U.S. Trust Connecticut
(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.
</TABLE>

-35-
<PAGE>

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

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

-36-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliation
- ---------------- ----------- -----------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of Excelsior Fund
2320 Cumberland Road and the Company (since 1986);
Charlottesville, VA Director of UST Master Variable
22901-7726 Series, Inc. (from 1994 to June
Age: 78 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).

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

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

-37-

<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliation
- ---------------- ----------- -----------------
<S> <C> <C>
Alfred C. Tannachion (1) Director Retired; Director of Excelsior Fund
6549 Pine Meadows Drive and the Company (since 1985);
Spring Hill, FL 34606 Chairman of the Board of Excelsior
Age: 73 Fund and Excelsior Tax-Exempt Fund
(1991-1997) and Excelsior
Institutional Trust (1996-1997);
President and Treasurer of Excelsior
Fund and Excelsior Tax-Exempt Fund
(1994-1997) and Excelsior
Institutional Trust (1996-1997);
Chairman of the Board, President and
Treasurer of UST Master Variable
Series, Inc. (1994-1997); and Trustee
of Excelsior Institutional Trust
(since 1995).

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

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

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

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

-38-

<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliation
- ---------------- ----------- -----------------
<S> <C> <C>
Patricia M. Leyne Assistant Treasurer Assistant Vice President, Senior
Chase Global Funds Manager of Fund Administration, Chase
Services Company Global Funds Services Company (since
73 Tremont Street July 1998); Assistant TreasureR,
Boston, MA 02108-3913 Manager of Fund Administration, Chase
Age: 32 Global Funds Services Company (from
NovembeR 1996 to July 1998);
Supervisor, Chase Global Funds
Services Company (From September 1995
to November 1996); Fund Administrator,
Chase Global Funds Services Company
(From February 1993 to September ^
1995).
</TABLE>

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

-39-

<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 from
Accrued as 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 $13,500 None $33,250 (3)**
Director

Rodman L. Drake $15,000 None $41,250 (4)**
Director

Joseph H. Dugan $15,000 None $36,500 (3)**
Director

Wolfe J. Frankl $15,000 None $36,500 (3)**
Director

W. Wallace McDowell, Jr.*** $ 9,750 None $28,000 (4)**
Director

Jonathan Piel $15,000 None $41,500 (4)**
Director

Robert A. Robinson $15,000 None $36,500 (3)**
Director

Alfred C. Tannachion $15,000 None $36,500 (3)**
Director

Frederick S. Wonham $20,000 None $51,500 (4)**
Chairman of the Board,
President and Treasurer
</TABLE>

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

* The "Fund Complex" consists of the Company, Excelsior Fund, Excelsior
Institutional Trust and Excelsior Funds.

** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Mr. Mcdowell resigned from the Company, Excelsior Fund, Excelsior
Institutional Trust and Excelsior Funds.

-40-
<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 Agreement, U.S. Trust 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 agreement
other than the cost of securities, including brokerage commissions, if any,
purchased for the Fund. The Adviser may, from time to time, voluntarily waive a
portion of its fees, which waivers may be terminated at any time.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Fund pursuant to an advisory agreement substantially similar to
the Investment Advisory Agreement currently in effect for the Fund.

For the fiscal years ended March 31, 1999, 1998 and 1997, the Company
paid the Adviser advisory fees of $696,284, $549,765 and $451,669,
respectively, with respect to the Fund. For the same periods, the Adviser waived
advisory fees totaling $33,685, $33,485 and $30,358, respectively, with
respect to the Fund.

The Investment Advisory Agreement provides 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 this agreement, 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 Agreement to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.

CGFSC, Federated Administrative Services (an affiliate of the
Distributor) and U.S. Trust Company (collectively, the "Administrators") serve
as the Fund'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, "exempt interest dividends" 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.

-41-
<PAGE>

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

The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior 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 Fund and
Excelsior Institutional Trust (except for the international portfolios of
Excelsior Fund and Excelsior Institutional Trust), the Administrators are
entitled jointly to fees, computed daily and paid monthly, based on the combined
aggregate average daily net assets of the three companies (excluding the
international portfolios of Excelsior Fund and Excelsior Institutional Trust) as
follows:

COMBINED AGGREGATE AVERAGE DAILY NET ASSETS
OF THE COMPANY, EXCELSIOR FUND AND
EXCELSIOR INSTITUTIONAL TRUST (EXCLUDING THE INTERNATIONAL PORTFOLIOS
OF EXCELSIOR FUND AND EXCELSIOR INSTITUTIONAL TRUST)
----------------------------------------------------

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

Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior 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 year ended March 31, 1999, the Company paid the
Administrators combined administration fees totaling $223,318 with respect to
the Fund. For the same period, the Administrators waived $53 with respect to
the Fund.

For the fiscal year ended March 31, 1998, the Company paid the
Administrators combined administration fees totaling $178,440 with respect to
the Fund. For the same period, CGFSC, Federated Administrative Services and U.S.
Trust waived $34 with respect to the Fund.

For the fiscal year ended March 31, 1997, the Company paid CGFSC,
Federated Administrative Services and U.S. Trust New York combined
administration fees totaling $148,160 with respect to the Fund. For the same
period, CGFSC, Federated Administrative Services and U.S. Trust New York waived
$50 with respect to the Fund.

-42-
<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 its net asset value 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.

-43-
<PAGE>

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 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 $33,738, $33,519 and $30,408, respectively,
with respect to the Fund, of which $33,512, $33,418 and $30,408, respectively,
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 Fund bears
the expenses incurred in its operations. Such expenses 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 qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; cost of independent pricing services; costs
of shareholder reports and meetings; and any extraordinary expenses. The Fund
also pays for any brokerage fees and commissions in connection with the purchase
of portfolio securities.

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the 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

-44-
<PAGE>

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, New York 11245.

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 portfolio securities.

The Fund may engage in short-term trading to achieve its investment
objective. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Fund's turnover rate may be
higher than that of many other investment companies with similar investment
objectives and policies. 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 Prospectus for the Fund's portfolio turnover rate.

-45-
<PAGE>

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

The Investment Advisory Agreement provides 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 Agreement authorizes 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 fixed-income 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 fee 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.

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 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

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<PAGE>

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 its parents
held by the Fund as of the close of the most recent fiscal year. ^ As of March
31, 1999, the Fund did not hold any securities of the Company's regular brokers
or dealers or their parents.^

PORTFOLIO VALUATIONS

Portfolio securities in the Fund for which market quotations are
readily available (other than debt securities maturing in 60 days or less) are
valued at market value. Securities and other assets for which market quotations
are not readily available are valued at fair value, pursuant to the guidelines
adopted by the Company's Board of Directors. Absent unusual circumstances,
portfolio securities maturing in 60 days or less are normally valued at
amortized cost. The net asset value of shares in the Fund will fluctuate as the
market value of its portfolio securities changes in response to changing market
rates or interest and other factors.

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

The Administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities in the Fund where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations to BE established will be reviewed by the
Administrators under the general supervision of the Board of Directors.

INDEPENDENT AUDITORS

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<PAGE>

by reference in this Statement of Additional Information have been audited by
Ernst & Young LLP for the periods included in their reports thereon which appear
therein.

COUNSEL

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

ADDITIONAL INFORMATION CONCERNING TAXES

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, the Fund is treated as a separate
corporate entity ^, and has qualified and intends to continue to qualify as a
regulated investment company. Such qualification generally relieves the Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. 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 (whether or
not derived from interest on Municipal Securities) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The 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."

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<PAGE>

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

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

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

The 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 Fund
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 Fund's dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Fund 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 Fund to pay exempt-interest dividends for any taxable
year, at least 50% of the aggregate value of the 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 Fund will notify their
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by the Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code received
by the Fund during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund for such year.

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<PAGE>

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

* * *

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

PERFORMANCE AND YIELD INFORMATION

The 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 separately 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.

-50-
<PAGE>

the last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest). Such yield
is then divided by 360, and the quotient is multiplied by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. The Fund calculates
interest gained on tax-exempt obligations issued without original issue discount
and having a current market discount by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations with
original issue discount, where the discount based on the current market value
exceeds the then-remaining portion of original issue discount, the yield to
maturity is the imputed rate based on the original issue discount calculation.
Conversely, where the discount based on the current market value is less than
the remaining portion of the original issue discount, the yield to maturity is
based on the market value.

Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the 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 Fund's standardized effective
yield for the 30-day period ended March 31, 1999 was 3.38%.

The Fund may from time to time advertise its "tax-equivalent yield" to
demonstrate the level of taxable yield necessary to produce an after-tax yield
equivalent to that achieved by the Fund. This yield is computed by increasing
the yield of the Fund's shares (calculated as above) by the amount necessary to
reflect the payment of federal income taxes (and New York State and New York
City income taxes) at a stated tax rate. The "tax-equivalent" yield of the
Fund is computed by: (a) dividing the portion of the yield (calculated as
above) that is exempt from both federal and New York State income taxes by
one minus a stated combined federal and New York State income tax rate; (b)
dividing the portion of the yield (calculated as above) that is exempt from
federal income tax only by one minus a stated federal income tax rate; and
(c) adding the figures resulting from (a) and (b) above to that portion, if
any, of the yield that is not exempt from federal income tax. Tax-equivalent
yields assume a federal income tax rate of 31%, a New York State and New York
City marginal income tax rate of 10.21% and an overall tax rate taking into
account the federal deduction for state and local taxes paid of 38.04%.
Based on the foregoing calculation, the tax-equivalent yield of the Fund for
the 30-day period ended March 31, 1999 was 5.46%

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<PAGE>

assume that dividends and capital gain distributions made by the Fund during the
period are reinvested in Fund shares. The Fund's "average annual total return"
is computed by determining the average annual compounded rate of return during
specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:

ERV 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 calculation is made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period. The average annual total returns for the Fund's shares for the
one year period ended March 31, 1999, the five year period ended March 31, 1999
and for the period from May 31, 1990 (commencement of operations) to March 31,
1999 were 5.16%, 6.14% and 6.42%, respectively.

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 formula 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 of each dividend or other distribution at net
asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.

The total return and yield of the Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by

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<PAGE>

independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the total return and/or yield 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 technologies 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 of the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciations 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 Investment
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 and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of the Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Fund with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.

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<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 net asset value of the Fund, assets allocable to the Fund are
charged with the direct liabilities 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 the Fund, are conclusive.

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

As of July 13, 1999, no persons other than U.S. Trust and its
affiliates owned of record 5% or more of the outstanding shares of the Fund.

FINANCIAL STATEMENTS

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

-54-
<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
rated in higher rating categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.

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

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

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

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

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

A-1
<PAGE>

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

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

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

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

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

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

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

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

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

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

A-2
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

A-3
<PAGE>

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

"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 non-payment 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 non-payment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial

A-4
<PAGE>

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
non-payment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.

"CC" - An obligation rated "CC" is currently highly vulnerable to
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. 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. "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of A similar action
if payments on an obligation are jeopardized.

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

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

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

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

A-5
<PAGE>

fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger
than the "Aaa" securities.

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

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

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

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

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

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

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

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

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

A-6
<PAGE>

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

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

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

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

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

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

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

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

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

A-7
<PAGE>

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

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

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

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

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

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

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

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

A-8
<PAGE>

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

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

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

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

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

MUNICIPAL NOTE RATINGS

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

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

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

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

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

A-9
<PAGE>

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

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

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

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

"SG" - This designation denotes speculative quality. Debt 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-10
<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

California Tax-Exempt Income 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 California
Tax-Exempt Income Fund (the "Fund") of Excelsior Tax-Exempt Funds, Inc. dated
August 1, 1999 (the "Prospectus"). A copy of the Prospectus may be obtained by
writing Excelsior Tax-Exempt Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.

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

<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
CLASSIFICATION AND HISTORY.......................................................................................1
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS.......................................................................1
Additional Investment Policies..........................................................................1
Additional Information on Portfolio Instruments.........................................................2
Special Considerations Relating to California Municipal Obligations....................................11
Investment Limitations................................................................................ 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................22
Purchase of Shares.................................................................................... 23
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 FUND......................................................................................... 33
Directors and Officers................................................................................ 33
Investment Advisory, Sub-Advisory and Administration Agreements........................................39
Banking Laws...........................................................................................41
Shareholder Organizations..............................................................................41
Expenses...............................................................................................42
Custodian and Transfer Agent...........................................................................43
PORTFOLIO TRANSACTIONS..........................................................................................44
PORTFOLIO VALUATION.............................................................................................45
INDEPENDENT AUDITORS............................................................................................46
COUNSEL.........................................................................................................46
ADDITIONAL INFORMATION CONCERNING TAXES.........................................................................46
Federal................................................................................................46
California.............................................................................................48
PERFORMANCE AND YIELD INFORMATION...............................................................................50
MISCELLANEOUS...................................................................................................53
FINANCIAL STATEMENTS............................................................................................54
APPENDIX A.....................................................................................................A-1
</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

Excelsior Tax-Exempt Funds, Inc. (the "Company") is an open-end,
management investment company. The Fund is a 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 8, 1984. Prior to December 28, 1995 the Company was known as "UST Master
Tax-Exempt Funds, Inc."

INVESTMENT OBJECTIVE, STRATEGIES AND RISKS

ADDITIONAL INVESTMENT POLICIES

The Fund expects that, except during temporary defensive periods,
under normal market conditions 65% of the Fund's total assets will be invested
in debt securities of the State of California, its political sub-divisions,
authorities, agencies, instrumentalities and corporations, and certain other
governmental issuers, the interest from which is, in the opinion of bond counsel
to the issuer, exempt from federal and California personal income taxes
("California Municipal Obligations"). In general, the Fund anticipates that
dividends derived from interest on Municipal Obligations (as defined below under
"Municipal Obligations") other than California Municipal Obligations will be
exempt from regular federal income tax but may be subject to California personal
income taxes. Dividends paid by the Fund may be subject to local taxes
regardless of their source.

The Fund invests in Municipal Obligations which are determined by the
Sub-Adviser to present minimal credit risks. As a matter of fundamental policy,
except during temporary defensive periods, the Fund will maintain at least 80%
of its net assets in Municipal 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.) However, from time to time on a temporary defensive basis
due to market conditions, the Fund may hold uninvested cash reserves or invest
in taxable obligations in such proportions as, in the opinion of the
Sub-Adviser, prevailing market or economic conditions may warrant. Uninvested
cash reserves will not earn income. Should the Fund invest in taxable
obligations, it would purchase: (i) obligations of the U.S. Treasury; (ii)
obligations of agencies and instrumentalities of the U.S. government; (iii)
money market instruments such as certificates of deposit, commercial paper, and
bankers' acceptances; (iv) repurchase agreements collateralized by U.S.
government obligations or other money market instruments; (v) municipal bond
index and interest rate futures contracts; or (vi) securities issued by other
investment companies that invest in high quality, short-term securities.

-1-
<PAGE>

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

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

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

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

MUNICIPAL OBLIGATIONS

-2-
<PAGE>

The two principal classifications of Municipal Obligations which may
be held by the Fund 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.

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

-3-
<PAGE>

The payment of principal and interest on most securities purchased by
the Fund 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 Obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.

Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. The Fund, Adviser and
Sub-Adviser will not review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.

INSURED MUNICIPAL OBLIGATIONS

The Fund may purchase Municipal Obligations which are insured as to
timely payment of principal and interest at the time of purchase. The insurance
policies will usually be obtained by the issuer of the bond at the time of its
original issuance. Bonds of this type will be acquired only if at the time of
purchase they satisfy quality requirements generally applicable to Municipal
Obligations. Although insurance coverage for the Municipal Obligations held by
the 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 Obligations covered by
insurance policies.

-4-
<PAGE>

MONEY MARKET INSTRUMENTS

Tax-exempt commercial paper purchased by the Fund will consist of
issues rated at the time of purchase "A-3" or higher by S&P, "F3" or higher by
Fitch, or "Prime-3" or higher by Moody's or, if not rated, determined to be of
comparable quality by the Sub-Adviser. These rating symbols are described in
Appendix A hereto.

VARIABLE AND FLOATING RATE INSTRUMENTS

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

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 such as banks or broker/dealers which are deemed to
be creditworthy by the Adviser, pursuant to guidelines approved by the Company's
Board of Directors. The Fund will not enter into repurchase agreements with the
Adviser, Sub-Adviser or their affiliates. Repurchase agreements

-5-
<PAGE>

with remaining maturities in excess of seven days will be considered illiquid
securities subject to the 10% limit described below under "Illiquid Securities."

The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however, expose 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. Income on
repurchase agreements will be taxable.

INVESTMENT COMPANY SECURITIES

The Fund may also invest in securities issued by other investment
companies which invest in high-quality, short-term securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory fees and other expenses 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.

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 liquid assets 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

-6-
<PAGE>

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 its investment
objectives.

STAND-BY COMMITMENTS

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

The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable,

-7-
<PAGE>

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

FUTURES CONTRACTS

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

Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with the Fund's securities investments. The Fund
may engage in futures contracts only to the extent permitted by the Commodity
Futures Trading Commission ("CFTC") and the Securities and Exchange Commission
("SEC"). The Fund currently intends to limit its hedging transactions in futures
contracts so that, immediately after any such transaction, the aggregate initial
margin that is required to be posted by the Fund under the rules of the exchange
on which the futures contract is traded does not exceed 5% of the Fund's total
assets, after taking into account any unrealized profits and unrealized losses
on the Fund's open contracts.

-8-
<PAGE>

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 the Fund
"covers" a futures position generally by entering into an offsetting position.
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the 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.
Such sale of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. 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 by the Fund in futures contracts may subject the Fund to
a number of risks. Successful use of futures by the Fund is subject to the
ability of the Sub-Adviser to correctly predict movements in the direction of
the market. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. There may be an
imperfect correlation, or no correlation at all, between movements in the price
of the futures contracts and movements in the price of the instruments being
hedged. In addition, investments in futures may subject the Fund to losses due
to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, the 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.

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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.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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

MISCELLANEOUS

The Fund may not invest in oil, gas, or mineral leases.

SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL OBLIGATIONS

The following information constitutes only a brief summary, does not
purport to be a complete description, and is based on information available as
of the date of this Statement of Additional Information from official statements
and prospectuses relating to securities offerings of the State of California and
various local agencies in California. While the Company has not independently
verified such information, it has no reason to believe that such information is
not correct in all material respects.

ECONOMIC FACTORS

FISCAL YEARS PRIOR TO 1995-96. Pressures on the State's budget in the
late 1980's and early 1990's were caused by a combination of external economic
conditions and growth of the largest General Fund Programs - K-14 education,
health, welfare and corrections --

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at rates faster than the revenue base. These pressures could continue as the
State's overall population and school age population continue to grow, and as
the State's corrections program responds to a "Three Strikes" law enacted in
1994, which requires mandatory life prison terms for certain third-time felony
offenders. In addition, the State's health and welfare programs are in a
transition period as a result of recent federal and State welfare reform
initiatives.

As a result of these factors and others, from the late 1980's until
1992-93, the State had periods of significant budget imbalance.

During this period, the State was forced to rely on external debt
market borrowings to meet its cash needs in the period from June 1992 to July
1994, often needed to pay previously maturing borrowings.

1995-96 THROUGH 1997-98 FISCAL YEARS

The State's financial condition improved markedly in the last
three fiscal years, with a combination of greater than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint.
The State's cash position also improved and no external deficit borrowing has
occurred over the last three fiscal years.

The economy grew strongly during this period, and as a result, the
General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96, $1.6 billion in 1996-97 and $2.4 billion in 1997-98) than
were initially planned when the budgets were enacted. These additional funds
were largely directed to school spending as mandated by Proposition 98, and to
cover shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated.

1998-99 FISCAL YEAR BUDGET

The Governor's proposed 1998-99 Fiscal Year Budget projected General
Fund revenues for the 1998-99 Fiscal Year of $55.4 billion, and proposed
expenditures in the same amount. By the time the May Revision to the 1998-99
Budget ("the May Revision") was released the Administration projected that
revenues for the 1997-98 and 1998-99 Fiscal Years combined would be more than
$4.2 billion higher than projected in January. Most of this increased revenue
was proposed to be dedicated to fund a 75% cut in the Vehicle License Fee
("VLF").

The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. In signing the Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360 billion
from the General Fund, and $160 million from Special Funds. Of this total, the
Governor indicated that about $250 million of vetoed funds were "set aside" to
fund programs for education.

The 1998-99 Budget Act is based on projected (using the May
Revision) General Fund revenues and transfers of $57.0 billion (after giving
effect to various tax reductions enacted

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in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures. Special
Fund revenues were estimated at $14.3 billion.

After giving effect to the Governor's vetoes, the Budget Act provided
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projected a balance in the SFEU at June 30, 1999 (but
without including the "set aside" veto amount) of $1.255 billion, a little more
than 2% of General Fund revenues. The Budget Act assumes the State will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes which were issued on October 1, 1998.

The most significant feature of the 1998-99 Budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the VLF. Sine the VLF is currently transferred to
cities and counties, the bill provides for the General Fund to replace lost
revenues. Commencing January 1, 1999, the VLF will be reduced 25%, at a cost to
the General Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99 Budget includes other
various tax credits of approximately $851 million.

1999-00 FISCAL YEAR BUDGET

On June 29, 1999, Governor Davis signed the new state budget for
Fiscal Year 1999-2000 (the "Budget"). The Budget anticipates $79.3 billion of
expenditures in FY 1999-00, with an $881 million SFEU reserve at June 30, 2000.
The Budget represented a 10% increase from the 1998-1999 budget. Some of the
principal Budget matters are summarized below:

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1. Spending for education is increased by $2.3 billion to a record
$26.4 billion. New program initiatives were proposed for: reading
improvement, new textbooks, school safety, improving teacher quality, funding
teacher bonuses, providing greater accountability for school performance,
increasing preschool and child care programs and funding deferred maintenance
of school facilities. The Budget also proposed increased funding for higher
education at the University of California and California State University.

2. About $1 billion would be directed toward infrastructure costs,
including $425 million in funding for the Infrastructure Bank, construction
of a new prison in the Central Valley, additional equipment for train and
ferry service, and payment of deferred maintenance for State parks.

The Governor proposed to maintain the SFEU budget reserve at a
level of $881 million at June 30, 2000, about $470 million above the Budget
proposal.

CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS

Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could produce
the adverse effects described below, among others.

REVENUE DISTRIBUTION. Certain Debt Obligations in the portfolio may be
obligations of issuers which rely in whole or in part on State revenues for
payment of these obligations. Property tax revenues and a portion of the State's
General Fund surplus are distributed to counties, cities and their various
taxing entities and the State assumes certain obligations theretofore paid out
of local funds. Whether and to what extent a portion of the State's General Fund
will be distributed in the future to counties, cities and their various entities
is unclear.

HEALTH CARE LEGISLATION. Certain Debt Obligations in the Portfolio may
be obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.

The federally sponsored Medicaid program for health care
services to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-

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Cal program has provided for a cost-based system of reimbursement for inpatient
care furnished to Medi-Cal beneficiaries by any hospital wanting to participate
in the Medi-Cal program, provided such hospital met applicable requirements for
participation. California law now requires that the State shall selectively
contract with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute inpatient services.
Generally, such selective contracting is made on a flat per diem payment basis
for all services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs or other factors. Other reductions or
limitations may be imposed on payment for services rendered to Medi-Cal
beneficiaries in the future.

Under this approach, in most geographical areas of California, only
those hospitals which enter into a Medi-Cal contract with the State are paid for
non-emergency acute inpatient services rendered to beneficiaries. The State may
also terminate these contracts without notice under certain circumstances and is
obligated to make contractual payments only to the extent the state legislature
appropriates adequate funding therefor.

California law authorizes private health plans and insurers to
contract directly with hospitals for services to beneficiaries on negotiated
terms. Some insurers have introduced plans known as "preferred provider
organizations" ("PPOS"), which offer financial incentives for subscribers who
use only the hospitals which contract with the plan. Under an exclusive provider
plan, which includes most health maintenance organizations ("HMOS"), private
payors limit coverage to those services provided by selected hospitals.
Discounts offered to HMOs and PPOs may result in payment to the contracting
hospital of less than actual cost and the volume of patients directed to a
hospital under an HMO or PPO contract may vary significantly from projections.
Often, HMO or PPO contracts are enforceable for a stated term, regardless of
provider losses or of bankruptcy of the respective HMO or PPO. It is expected
that failure to execute and maintain such PPO and HMO contracts would reduce a
hospital's patient base or gross revenues. Conversely, participation may
maintain or increase the patient base, but may result in reduced payment and
lower net income to the contracting hospitals.

These Debt Obligations may also be insured by the State of California
pursuant to an insurance program implemented by the Office of Statewide Health
Planning and Development for health facility construction loans. If a default
occurs on insured Debt Obligations, State law requires the State Treasurer to
issue debentures payable out of a reserve fund established under the insurance
program or to pay principal and interest on an unaccelerated basis from
unappropriated State funds.

MORTGAGES AND DEEDS. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money

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obligations. Another statute, commonly known as the "one form of action" rule,
requires creditors secured by real property to exhaust their real property
security by foreclosure before bringing a personal action against the debtor.
The fourth statutory provision limits any deficiency judgment obtained by a
creditor secured by real property following a judicial sale of such property to
the excess of the outstanding debt over the fair value of the property at the
time of the sale, thus preventing the creditor from obtaining a large deficiency
judgment against the debtor as the result of low bids at a judicial sale. The
fifth statutory provision gives the debtor the right to redeem the real property
from any judicial foreclosure sale as to which a deficiency judgment may be
ordered against the debtor.

Upon the default of a mortgage or deed of trust with respect to real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed upon transfers of title to real property by private power of sale.
During the three-month period beginning with the filing of a formal notice of
default, the debtor is entitled to reinstate the mortgage by making any overdue
payments. Under standard loan servicing procedures, the filing of the formal
notice of default does not occur unless at least three full monthly payments
have become due and remain unpaid. The power of sale is exercised by posting and
publishing a notice of sale for at least 20 days after expiration of the
three-month reinstatement period. The debtor may reinstate the mortgage, in the
manner described above, up to five business days prior to the scheduled sale
date. Therefore, the effective minimum period for foreclosing on a mortgage
could be in excess of seven months after the initial default. Such time delays
in collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the Debt Obligations if such defaults occur with
respect to a substantial number of mortgages or deeds of trust securing an
issuer's obligations.

In addition, a court could find that there is sufficient involvement
of the issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the
private-right-of-sale proceedings violate the due process requirements of the
Federal or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.

Certain Debt Obligations in the Portfolio may be obligations which
finance the acquisition of single family home mortgages for low and moderate
income mortgagors. These obligations may be payable solely from revenues derived
from the home mortgages, and are subject to statutory limitations described
above applicable to obligations secured by real property. Under antideficiency
legislation, there is no personal recourse against a mortgagor of a single
family residence purchased with the loan secured by the mortgage, regardless of
whether the creditor chooses judicial or nonjudicial foreclosure.

Mortgage loans secured by single-family owner-occupied dwellings may
be prepaid at any time. Prepayment charges on such mortgage loans may be imposed
only with respect to voluntary prepayments made during the first five years
during the term of the mortgage loan, and then only if the borrower prepays an
amount in excess of 20% of the original principal amount of the mortgage loan in
a 12-month period; a prepayment charge cannot in any

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event exceed six months' advance interest on the amount prepaid during the
12-month period in excess of 20% of the original principal amount of the loan.
This limitation could affect the flow of revenues available to an issuer for
debt service on the Debt Obligations which financed such home mortgages.

LOCAL GOVERNMENTS

The primary units of local government in California are the counties,
ranging in population from 1,200 to over 9,600,000. Counties are responsible for
the provision of many basic services, including indigent health care, welfare
and public safety in unincorporated areas. There are also about 470 incorporated
cities, and thousands of special districts formed for education, utility and
various other services. The fiscal condition of local governments has been
constrained since the enactment of "Proposition 13" in 1978, which reduced and
limited the future growth of property taxes, and limited the ability of local
governments to impose "special taxes" (those devoted to a specific purpose)
without two-thirds voter approval. Counties, in particular, have had fewer
options to raise revenues than many other local government entities, and have
been required to maintain many services.

Following the enactment of Proposition 13, the State provided aid to
local governments from the General Fund to make up some of the loss of property
tax moneys, including taking over the principal responsibility of funding K-12
schools and community colleges. Over time, the Legislature eliminated most of
the remaining components of post-Proposition 13 aid to local government entities
other than K-14 education districts by requiring cities and counties to transfer
some of their property tax revenues to school districts. However, the
Legislature also provided additional funding sources (such as sales taxes) and
reduced certain mandates for local services. Since then the State has also
provided additional funding to counties and cities through such programs as
health and welfare realignment, welfare reform, trial court restructuring and
various other measures.

Historically, funding for the State's trial court system was divided
between the State and the counties. In 1997, the Legislature implemented a
restructuring of the State's trial court funding system. Funding for the courts,
with the exception of costs for facilities, local judicial benefits, and revenue
collection, was consolidated at the State level. Employing a 1994-95 cap level
for county contributions, the State assumed responsibility for future growth in
trial court funding. The consolidation of funding is intended to streamline the
operation of the courts, provide a dedicated revenue source, and relieve fiscal
pressure on counties. Beginning in 1998-99, the county General Fund contribution
for court operations was reduced by $300 million, with cities retaining $62
million in fine and penalty revenue previously remitted to the State; the
General Fund reimbursed the $362 million revenue loss to the Trial Court Trust
Fund.

The entire statewide welfare system has been changed in response to
the change in federal welfare law enacted in 1996. Under the CalWORKs program,
counties are given flexibility to develop their own plans, consistent with State
law, to implement the program and to administer many of its elements, and their
costs for administrative and support services are capped at 1996-97 levels.
Counties are also given financial incentives if, at the individual county

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level or statewide, the program produces savings associated with specified
standards. Counties are still required to provide "general assistance" aid to
certain persons who cannot obtain welfare from other programs.

In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995, must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.

STATE APPROPRIATIONS LIMIT

The State is subject to an annual appropriations limit imposed by
Article XIIIB of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on
voter-authorized bonds.

Article XIIIB prohibits the State from spending "appropriations
subject to limitation" in excess of the appropriations limit. "Appropriations
subject to limitation" with respect to the State, are authorizations to spend
"proceeds of taxes," which consists of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.

Not included in the Appropriations Limit are appropriations for the
debt service costs on voter authorized bonds, appropriations required to comply
with court or federal government mandates, emergencies and appropriations for
types of projects and sources of revenues.

The State's Appropriations Limit in each year is based on the limit
for the prior year, adjusted annually for changes in state per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government or any transfer of the financial source for the provisions of
services from tax proceeds to non-tax proceeds. The measurement of change in
population is a blended average of statewide overall population growth, and
change in attendance at local school and community college ("K-14") districts.
Any excess of the aggregate "proceeds of taxes" received over a two-year testing
period above the combined

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Appropriations Limit for those two years is divided equally between transfers to
K-14 districts and refunds to taxpayers.

The Legislature enacted legislation to implement Article XIIIB which
defines certain terms in Article XIIIB and sets forth the methods for
determining the Appropriations Limit, California law requires an estimate of the
Appropriations Limit to be included in the Budget, and thereafter to be subject
to the budget process and established in the budget act.

PROPOSITION 98

On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute. Proposition 98 changed
State funding of public education below the university level and the operation
of the State Appropriations Limit, primarily by guaranteeing K-14 schools a
minimum share of General Fund revenues. Under Proposition 98, K-14 schools are
guaranteed a fixed percent of General Fund revenues determined pursuant to one
of those mandated formulas.

Proposition 98 permits the Legislature, with the Governor's
concurrence, to suspend the K-14 schools' minimum funding formula for a one-year
period. Proposition 98 also contains provisions transferring certain State tax
revenues in excess of the Article XIIIB limit to K-14 schools.

During the recession in the early 1990s, General Fund revenues for
several years were less than originally projected, so that the original
Proposition 98 appropriations turned out to be higher than the minimum
percentage provided in the law. The Legislature responded to these developments
by designating the "extra" Proposition 98 payments in one year as a "loan" from
future years' entitlements, and also intended that the "extra" payments would
not be included in the "base" for calculating future years' entitlements. By
implementing these actions, per-pupil funding from Proposition 98 sources stayed
almost constant from Fiscal Year 1991-92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called CALIFORNIA TEACHERS'
ASSOCIATION V. GOULD, which challenged the validity of these off-budget loans.
Settlement of the case was finalized in 1996 and provided, among other things,
that both the State and K-14 schools would share in the repayment of prior
years' emergency loans to schools. Of the total $1.76 billion in loans, the
State will repay $935 million by forgiveness of the amount owed, while school
will repay $825 million. The State share of the repayment will be reflected as
an appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.

Substantially increased General Fund revenues, above initial budget
projection, in the fiscal years 1994-95 through 1998-99 have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets. Because of the State's increasing

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revenues, per-pupil funding at the K-12 level has increased by about 42 percent
from the level in place from 1991-92 through 1993-94, and is estimated at about
$5,944 per ADA in 1999-00. A significant amount of the "extra" Proposition 98
monies in the last few years have been allocated to special programs, most
particularly an initiative to allow each classroom from grades K-3 to have no
more than 20 pupils by the end of the 1997-98 school year.

INFORMATION TECHNOLOGY

The State's and other political subdivisions' reliance on information
technology in many aspects of their operations has made Year 2000-related
("Y2K") information technology ("IT") issues a high priority for such agencies.
At the State level, the Department of Information Technology ("DOIT"), an
independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000. The DOIT has created a Year 2000 Task Force and a
California 2000 Office to establish statewide policy requirements; to gather,
coordinate, and share information; and to monitor statewide progress. In
December 1996, the DOIT began requiring departments to report on Y2K activities
and currently requires departmental monthly reporting of Y2K status. Various
other regional and local programs have also been undertaken at those levels of
government.

While substantial progress has been made toward the goal of Y2K
compliance, the State has indicated that it cannot predict whether all mission
critical systems will be ready and tested by late 1999 or what the impact
failure of any particular IT system(s) or of outside interfaces with IT systems
might have. Similar issues could arise with respect to programs at other levels
of government.

INVESTMENT LIMITATIONS

The Fund may not:

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and futures options. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding;

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

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

5. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except to the extent that the purchase of Municipal
Obligations or other securities directly from the issuer thereof in accordance
with the Fund's investment objective, policies, and limitations may be deemed to
be underwriting;

6. Purchase or sell real estate, except that the Fund may invest
in Municipal Obligations secured by real estate or interests therein;

7. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Fund may
enter into futures contracts and futures options;

8. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that the Fund may enter into futures contracts and futures
options;

9. 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; and

10. 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; provided that the Fund may enter into futures
contracts and futures options.

* * *

In addition to the investment limitations described above, the Fund
will not purchase securities of any one issuer if, as a result, more than 5% of
the value of the Fund's total

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assets would be invested in the securities of such issuer, except that (a) up to
50% of the value of the Fund's assets may be invested without regard to this 5%
limitation, provided that no more than 25% of the value of the Fund's total
assets are invested in the securities of any one issuer; and (b) the foregoing
5% limitation does not apply to securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. This policy may be changed by the
Company's Board of Directors without shareholder approval. For purposes of this
policy: (a) a security is considered to be issued by the governmental entity or
entities whose assets and revenues back the security, or, with respect to a
private activity bond that is backed only by the assets and revenues of a
non-governmental user, such non-governmental user; (b) in certain circumstances,
the guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee; and (c) securities issued or guaranteed by the
United States government, its agencies or instrumentalities (including
securities backed by the full faith and credit of the United States) are deemed
to be U.S. government obligations.

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>

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

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

PURCHASE OF SHARES

Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors").

-23-
<PAGE>

Shares may also be purchased by Customers of the Adviser and Sub-Adviser, their
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."

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

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 the Fund may be made
at any time by sending to the above address a check payable to 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.

-24-
<PAGE>

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 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

-25-
<PAGE>

available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may redeem all or part of
their shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

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

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

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

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

-26-
<PAGE>

instructing CGFSC by telephone to mail a check for redemption proceeds of $500
or more to the shareholder of record at his or her address of record.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access. Only redemptions of $500 or more will
be wired to a Direct Investor's account. The redemption proceeds for Direct
Investors must be paid to the same bank and account as designated on the
Application or in written instructions subsequently received by CGFSC.

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.

-27-
<PAGE>

OTHER REDEMPTION INFORMATION

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

(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.

-28-
<PAGE>

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 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 an account in 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

-29-
<PAGE>

shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

RETIREMENT PLANS

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

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

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

Keogh Plans for self-employed individuals.

Investors investing in the 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 and the minimum subsequent investment is $50. 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
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 per transaction) at regular intervals selected by the Investor.
The minimum initial investment for an Automatic Investment Program account is
$50. 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.

-30-
<PAGE>

be beneficial, it will not prevent a loss if an Investor ultimately redeems his
shares at a price which is lower than their purchase price. The Company may
modify or terminate this privilege at any time or charge a service fee, although
no such fee currently is contemplated. An Investor may also implement the Dollar
Cost Averaging method on his own initiative or through other entities.

ADDITIONAL INFORMATION

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

DESCRIPTION OF CAPITAL STOCK

The Company's Charter authorizes its Board of Directors to issue up to
fourteen 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 seven classes of shares representing interests in seven
investment portfolios.

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.

-31-
<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 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 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.

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 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:

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

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

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

-33-

<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Rodman L. Drake Director Director of Excelsior Fund and the
Continuation Investments Group, Inc. Company (since 1996); Trustee,
1251 Avenue of the Americas, 9th Floor Excelsior Institutional Trust and
New York, NY 10020 Excelsior Funds (since 1994);
Age: 56 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.
(1993-1998); Member of Advisory
Board, Argentina Private Equity Fund
L.P. (from 1992 to 1996) and Garantia
L.P. (Brazil) (from 1993 to 1996);
and Director, Mueller Industries,
Inc. (from 1992 to 1994).

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

-34-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Jonathan Piel Director Director of Excelsior Fund and the
558 E. 87th Street Company (since 1996); Trustee,
New York, New York 10128 Excelsior Funds and Excelsior
Age: 60 Institutional Trust (since 1994);
Vice President and Editor, Scientific
American, Inc. (from 1986 to 1994);
Director, Group for The South Fork,
Bridgehampton, New York (since 1993);
and Member, Advisory Committee,
Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).

-35-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Alfred C. Tannachion(2) Director Retired; Director of Excelsior Fund and
6549 Pine Meadows Drive the Company (since 1985); Chairman of
Spring Hill, FL 34606 the Board of Excelsior Fund and
Age: 73 Excelsior Tax-Exempt Fund (1991-1997)
and Excelsior Institutional Trust
(1996-1997); President and Treasurer of
Excelsior Fund and Excelsior Tax-Exempt
Fund (1994-1997) and Excelsior
Institutional Trust (1996-1997);
Chairman of the Board, President and
Treasurer of UST Master Variable
Series, Inc. (1994-1997); and Trustee
of Excelsior Institutional Trust
(since 1995).

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

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

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

-36-

<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Patricia M. Leyne Assistant Treasurer Assistant Vice President, Senior Manager of Fund
Chase Global Funds Administration, Chase Global Funds Services
Services Company Company (SINCE July 1998); Assistant Treasurer,
73 Tremont Street Manager of Fund Administration, Chase Global Funds
Boston, MA 02108-3913 Services Company (from NOVEMBER 1996 to July
Age: 32 1998); Supervisor, Chase Global Funds Services
Company (From September 1995 to November 1996);
Fund Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>

Each director of the Company receives an annual fee of $9,000 plus
a meeting fee of $1,500 for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $5,000 per annum for services in such
capacity. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy
are partners, receives legal fees as counsel to the Company. The employees of
Chase Global Funds Services Company 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 or Sub-Adviser serves as an
officer, director or employee of the Company. As of July 13, 1999, the
directors and officers of the Company as a group owned beneficially less than
1% of the outstanding shares of each fund of the Company, and less than 1% of
the outstanding shares of all funds of the Company in the aggregate.

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

<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Compensation from
Accrued as 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 $13,500 None $33,250(3)**
Director

Rodman L. Drake $15,000 None $41,250 (4)**
Director
</TABLE>

-37-

<PAGE>

<S> <C> <C> <C>
Joseph H. Dugan $15,000 None $36,500(3)**
Director

Wolfe J. Frankl $15,000 None $36,500 (3)**
Director

W. Wallace McDowell , Jr., *** $9,750 NONE $28,000(4)**
Director

Jonathan Piel $15,000 None $41,500(4)**
Director

Robert A. Robinson $15,000 None $36,500(3)**
Director

Alfred C. Tannachion $15,000 None $36,500(3)**
Director

Frederick S. Wonham $20,000 None $51,500(4)**
Chairman of the Board,
President and Treasurer
</TABLE>

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

* The "Fund Complex" consists of the Company, Excelsior Fund, Excelsior
Institutional Trust and Excelsior Funds.

** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Mr. McDowell resigned from the Company, Excelsior Fund, Excelsior
Institutional Trust and Excelsior Funds on May 21, 1999.

-38-
<PAGE>

INVESTMENT ADVISORY, SUB-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. U.S. Trust Company, N.A. serves as the Fund's sub-adviser (the
"Sub-Adviser"). In the Investment Advisory and Sub-Advisory Agreements, U.S.
Trust and the Sub-Adviser, respectively, have agreed to provide the services
described in the Prospectus. The Adviser and Sub-Adviser have also agreed to pay
all expenses incurred by them in connection with their activities under the
agreements other than the cost of securities, including brokerage commissions,
if any, purchased for the Fund. The Adviser and Sub-Adviser may, from time to
time, voluntarily waive a portion of their respective fees, which waivers may be
terminated at any time.

For the services provided and expenses assumed pursuant to the
Investment Advisory Agreement, the Adviser is entitled to be paid a fee computed
daily and paid monthly, at the annual rate of 0.50% of the Fund's average daily
net assets. The Sub-Adviser is entitled to receive from the Adviser an annual
fee, computed and paid monthly, at the annual rate of 0.50% of the Fund's
average daily net assets.

For the fiscal year ended March 31, 1999, the Company paid the
Adviser advisory fees of $0 with respect to the Fund. For the same period,
the Adviser waived advisory fees totaling $240,924 with respect to the Fund.
For the same period, the Company paid the Sub-Adviser sub-advisory fees of $0
with respect to the Fund.

For the fiscal year ended March 31, 1998, the Adviser waived its
entire advisory fee totaling $129,359 and reimbursed expenses totaling $63,053
with respect to the Fund. For the same period, the Sub-Adviser waived its entire
sub-advisory fee totaling $129,359 with respect to the Fund.

For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, U.S. Trust New York waived its entire advisory fee
totaling $19,111 and reimbursed expenses totaling $14,586 with respect to the
Fund. For the same period, the Sub-Adviser waived its entire sub-advisory fee
totaling $19,111 with respect to the Fund.

The Investment Advisory Agreement and the Sub-Advisory Agreement
provide that the Adviser and the Sub-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 the Adviser 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 on
the part of the Adviser or Sub-Adviser in the performance of their duties or
from reckless disregard by either of them of their duties and obligations
thereunder. In addition, the Adviser has undertaken in the

-39-
<PAGE>

Investment Advisory Agreement to maintain its policy and practice of conducting
its Asset Management Group independently of its Banking Group.

<TABLE>
<CAPTION>
COMBINED AGGREGATE AVERAGE DAILY NET ASSETS
OF THE COMPANY, EXCELSIOR FUND AND
EXCELSIOR INSTITUTIONAL TRUST (EXCLUDING THE INTERNATIONAL PORTFOLIOS
OF EXCELSIOR FUND AND EXCELSIOR INSTITUTIONAL TRUST)
----------------------------------------------------
ANNUAL FEE
----------

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

-40-

<PAGE>

For the fiscal year ended March 31, 1999, the Company paid the
Administrators combined administration fees totaling $73,723 with respect to the
Fund. For the same period, the Administrators waived $0.

For the fiscal year ended March 31, 1998, the Company paid CGFSC,
Federated Administrative Services and U.S. Trust combined administration fees
totaling $39,584 with respect to the Fund.

For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, the Company paid CGFSC, Federated Administrative
Services and U.S. Trust New York combined administration fees totaling $5,856
with respect to the 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 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, Sub-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, Sub-Adviser or other Shareholder
Organizations in connection with purchases of Fund shares, the Adviser,
Sub-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 its net asset value per share or result in financial
loss to any shareholder.

SHAREHOLDER ORGANIZATIONS

-41-
<PAGE>

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.

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 year ended March 31, 1999, payments to Shareholder
Organizations totaled $139,223 with respect to the Fund, all of which was
paid to affiliates of U.S. Trust.

For the fiscal year ended March 31, 1998, payments to Shareholder
Organizations totaled $91,274 with respect to the Fund, all of which was paid to
affiliates of U.S. Trust.

For the period from October 1, 1996 (commencement of operations)
through March 31, 1997, payments to Shareholder Organizations totaled $16,689
with respect to the Fund, all of which was paid to affiliates of U.S. Trust.

EXPENSES

Except as otherwise noted, the Adviser, Sub-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 the Fund's portion of the
fees paid to the Company's directors and officers who are not affiliated with
the Distributor or the Administrators); SEC fees; state securities qualification
fees; costs of preparing and printing prospectuses for regulatory purposes and
for distribution to shareholders; advisory, sub-advisory, administration and
administrative servicing fees; charges of the

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<PAGE>

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 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

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<PAGE>

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 and Sub-Adviser are responsible for, make decisions with respect to,
and place orders for all purchases and sales of portfolio securities.

The Investment Advisory and Sub-Advisory Agreements provide that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
and Sub-Adviser will seek to obtain the best net price and the most favorable
execution. The Adviser and Sub-Adviser shall consider factors they deem
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 and Sub-Advisory Agreements
authorize the Adviser and Sub-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 or Sub-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 or
Sub-Adviser to the accounts as to which it exercises investment discretion.

-44-
<PAGE>

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 fixed-income 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 the
Sub-Adviser and does not reduce the investment advisory fee payable by the Fund.
Such information may be useful to the Adviser or Sub-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 or
Sub-Adviser in carrying out its obligations to the Fund.

Portfolio securities will not be purchased from or sold to the
Adviser, the Sub-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 Fund are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser and the Sub-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 or Sub-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 and the Sub-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 did not hold any securities of the Company's regular
brokers or dealers or their parents.

PORTFOLIO VALUATION

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<PAGE>

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

The Administrators have undertaken to price the securities in the
Fund's portfolio and may use one or more pricing services to value certain
portfolio securities in the Fund where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations to established will be reviewed by the
Administrators under the general supervision of the Board of Directors.

INDEPENDENT AUDITORS

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

COUNSEL

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

ADDITIONAL INFORMATION CONCERNING TAXES

FEDERAL

The following supplements the tax information contained in the
Prospectus.

The Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and has qualified and intends to
continue to qualify as a regulated investment company. 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

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<PAGE>

earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders.

As stated in the Prospectus, the 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 Fund will 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 Fund's dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Fund may not be an appropriate investment for entities
which are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. "Substantial user" is defined under the Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, who occupies more
than 5% of the usable area of such facilities or for whom such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.

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

Interest on indebtedness incurred by a shareholder to purchase or
carry the Fund's Shares generally is not deductible for income tax purposes. In
addition, if a shareholder holds Shares for six months or less, any loss on the
sale or exchange of those Shares will be disallowed to the extent of the amount
of exempt-interest dividends received with respect to the Shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular dividend distributions where the investment company
regularly distributes at least 90% of its net tax-exempt interest. No such
regulations had been issued as of the date of this Statement of Additional
Information.

Any net long-term capital gains realized by the Fund will be
distributed at least annually. The Fund will generally have no tax liability
with respect to such gains and the

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<PAGE>

distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Shares. Such distributions will be
designated as a capital gain dividend in a written notice mailed by the Fund to
shareholders not later than 60 days after the close of the Fund's taxable year.

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 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.

The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or 31% of 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."

CALIFORNIA

As a regulated investment company, the Fund will be relieved of
liability for California state franchise and corporate income tax to the extent
its earnings are distributed to its shareholders (including interest income on
California Municipal Obligations for franchise tax purposes). The Fund will be
taxed on its undistributed taxable income. If for any year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of the Fund's taxable income may be subject to California state franchise or
income tax at regular corporate rates.

If, at the close of each quarter of its taxable year, at least 50% of
the value of the total assets of a regulated investment company, or series
thereof, consists of obligations the interest on which, if held by an
individual, is exempt from taxation by California ("California Exempt
Obligations"), then a regulated investment company, or series thereof, will be
qualified to pay dividends exempt from California state personal income tax to
its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). For this purpose, California Exempt Obligations are
generally limited to California Municipal Obligations and certain U.S.
Government and U.S. Possession obligations. A "series" of a regulated investment
company is defined as a segregated portfolio of assets, the beneficial interest
in which is owned by the holders of an exclusive class or series of stock of the
company. The Fund intends to qualify under the above requirements so that it can
pay California exempt-interest dividends. If the Fund fails to so qualify, no
part of its dividends to shareholders will be exempt from the California state
personal income tax. The Fund may reject purchase orders for Shares if it
appears desirable to avoid failing to so qualify.

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<PAGE>

Within 60 days after the close of its taxable year, the Fund will
notify each shareholder of the portion of the dividends paid by the Fund to the
shareholder with respect to such taxable year which is exempt from California
state personal income tax. The total amount of California exempt-interest
dividends paid by the Fund with respect to any taxable year cannot exceed the
excess of the amount of interest received by the Fund for such year on
California Exempt Obligations over any amounts that, if the Fund were treated as
an individual, would be considered expenses related to tax-exempt income or
amortizable bond premium and would thus not be deductible under Federal income
or California state personal income tax law. The percentage of total dividends
paid by the Fund with respect to any taxable year which qualifies as California
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund with respect to such year.

In cases where shareholders are "substantial users" or "related
persons" with respect to California Exempt Obligations held by the Fund, such
shareholders should consult their tax advisers to determine whether California
exempt-interest dividends paid by the Fund with respect to such obligations
retain California state personal income tax exclusion. In this connection rules
similar to those regarding the possible unavailability of Federal
exempt-interest dividend treatment to "substantial users" are applicable for
California state tax purposes. See "Additional Information Concerning Taxes --
Federal" above.

To the extent, if any, dividends paid to shareholders are derived from
the excess of net long-term capital gains over net short-term capital losses,
such dividends will not constitute California exempt-interest dividends and will
generally be taxed as long-term capital gains under rules similar to those
regarding the treatment of capital gains dividends for Federal income tax
purposes. See "Additional Information Concerning Taxes -- Federal" above.
Moreover, interest on indebtedness incurred by a shareholder to purchase or
carry Fund Shares is not deductible for California state personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.

The foregoing is only a summary of some of the important California
state personal income tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation of the
California state personal income tax treatment of the Fund or its shareholders,
and this discussion is not intended as a substitute for careful planning.
Further, it should be noted that the portion of any Fund dividends constituting
California exempt-interest dividends is excludable from income for California
state personal income tax purposes only. Any dividends paid to shareholders
subject to California state franchise tax or California state corporate income
tax may therefore be taxed as ordinary dividends to such purchasers
notwithstanding that all or a portion of such dividends is exempt from
California state personal income tax. Accordingly, potential investors in the
Fund, including, in particular, corporate investors which may be subject to
either California franchise tax or California corporate income tax, should
consult their tax advisers with respect to the application of such taxes to the
receipt of Fund dividends and as to their own California state tax situation, in
general.

* * *

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<PAGE>

The foregoing discussion is based on federal and California state 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. Shareholders will be advised at least annually as to the federal and
California personal income tax consequences of distributions made each year.

PERFORMANCE AND YIELD INFORMATION

a-b 6
Yield = 2 [(----- + 1) - 1]

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 Fund computes the yield to maturity of any
debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. The Fund calculates
interest gained on tax-exempt obligations issued without original issue discount
and having a current market discount by using the coupon rate of interest
instead of the yield to maturity. In the case of tax-exempt obligations with
original issue discount, where the discount based on the current market value
exceeds the then-remaining portion of original issue discount, the yield to
maturity is the imputed rate based on the original issue discount calculation.
Conversely, where the discount based on the current market value is

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<PAGE>

less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.

Based on the foregoing calculations, the Fund's standardized effective
yield for the 30-day period ended March 31, 1999 was 3.16%.

From time to time, the Fund may advertise its performance by using
"average annual total return" over various periods of time. 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 Fund may
also use aggregate total return figures for various periods, representing the
cumulative change in the value of an investment in the Fund for the specific
period. Both methods of calculating total return assume that dividends and
capital gain distributions made by the Fund during the period are reinvested in
Fund shares. The Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:

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

Where: T = average annual total return.

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<PAGE>

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 calculation is made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period. The average annual total returns for the Fund's shares for the
one year period ended March 31, 1999 and for the period from October 1, 1996
(commencement of operations) to March 31, 1999 were 4.74% and 5.27%,
respectively.

The total return and yield of the Fund may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the total return and/or yield of 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 technologies that together
with market conditions and events, materially affected the Fund's performance.

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<PAGE>

MISCELLANEOUS

-53-
<PAGE>

Board of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to the Fund, are conclusive.

FINANCIAL STATEMENTS

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<PAGE>

APPENDIX A

Commercial Paper Ratings

"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-1
<PAGE>

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

A-2
<PAGE>

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

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

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

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

A-3
<PAGE>

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

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

A-4
<PAGE>

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

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

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

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

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

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

"Y" - 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 on 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:

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

A-5
<PAGE>

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

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

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

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

A-6
<PAGE>

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

"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-7
<PAGE>

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

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

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

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

A-8
<PAGE>

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

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

MUNICIPAL NOTE RATINGS

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

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

A-9
<PAGE>

"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- 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-10
<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 Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 1999 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual report
are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.

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TABLE OF CONTENTS

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

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

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

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

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

ADDITIONAL INVESTMENT POLICIES

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

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

TREASURY MONEY FUND

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

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

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

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

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

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

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

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

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

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

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

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

VARIABLE AND FLOATING RATE INSTRUMENTS

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

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

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

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REPURCHASE AGREEMENTS

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

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

SECURITIES LENDING

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

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

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WHEN-ISSUED AND FORWARD TRANSACTIONS

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

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

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

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

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

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STAND-BY COMMITMENTS

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

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

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

MUNICIPAL SECURITIES

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

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

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

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

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

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

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

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

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

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

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

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

INSURED MUNICIPAL SECURITIES

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

MONEY MARKET INSTRUMENTS

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

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

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

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

GOVERNMENT OBLIGATIONS

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

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

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

INVESTMENT COMPANY SECURITIES

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

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

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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

ILLIQUID SECURITIES

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

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MISCELLANEOUS

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

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

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

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

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

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

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<PAGE>

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<PAGE>

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

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<PAGE>

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

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

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

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

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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.

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

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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.

INVESTMENT LIMITATIONS

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

No Fund may:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Tax-Exempt Money Fund may not:

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

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

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

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

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

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

The New York Tax-Exempt Money Fund may not:

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

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

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

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

The Treasury Money Fund may not:

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

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

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

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

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

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

* * *

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

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

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

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

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

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

NET ASSET VALUE AND NET INCOME

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

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

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

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

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

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

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

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

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

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PURCHASE OF SHARES

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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<PAGE>

REDEMPTION PROCEDURES

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

-34-
<PAGE>

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 the address listed above and must be
accompanied by a signature card with signatures guaranteed.

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

OTHER REDEMPTION INFORMATION

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

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

-35-
<PAGE>

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

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

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

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

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

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

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

(4) A declining-balance withdrawal.

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

-36-
<PAGE>

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

EXCHANGE PRIVILEGE

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

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

RETIREMENT PLANS

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

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<PAGE>

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

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

Keogh Plans for self-employed individuals.

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

AUTOMATIC INVESTMENT PROGRAM

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

ADDITIONAL INFORMATION

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

DESCRIPTION OF CAPITAL STOCK

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

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<PAGE>

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

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

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

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

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<PAGE>

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

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

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

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

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

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

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

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

-40-
<PAGE>

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

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

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

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

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

-41-
<PAGE>

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

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

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

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

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

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

-42-
<PAGE>

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

-43-
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

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

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

</TABLE>

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<PAGE>

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

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

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

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

BANKING LAWS

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

-47-
<PAGE>

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

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

SHAREHOLDER ORGANIZATIONS

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

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

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

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

-48-
<PAGE>

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

EXPENSES

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

CUSTODIAN AND TRANSFER AGENT

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

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

-49-
<PAGE>

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

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

PORTFOLIO TRANSACTIONS

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

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

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

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

-50-
<PAGE>

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

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

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

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

INDEPENDENT AUDITORS

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

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<PAGE>

COUNSEL

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

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

The following supplements the tax information contained in the
Prospectus.

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

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

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

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

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<PAGE>

TAXABLE FUNDS

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

TAX-EXEMPT FUNDS

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

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

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

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

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<PAGE>

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

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

* * *

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

YIELD INFORMATION

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

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

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<PAGE>

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

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

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

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

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

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<PAGE>

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

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

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

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

MISCELLANEOUS

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

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

-56-
<PAGE>

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

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

FINANCIAL STATEMENTS

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

-57-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

A-1
<PAGE>

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

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

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

A-2
<PAGE>

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

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

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

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

A-3
<PAGE>

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

A-4
<PAGE>

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

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

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

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

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

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

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

A-5
<PAGE>

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

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

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

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

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

A-6
<PAGE>

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

"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-7
<PAGE>

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

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

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

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

A-8
<PAGE>

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

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

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

MUNICIPAL NOTE RATINGS

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

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

A-9
<PAGE>

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

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

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

A-10
<PAGE>

EXCELSIOR FUNDS, INC.

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

EXCELSIOR TAX-EXEMPT FUNDS, INC.

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

STATEMENT OF ADDITIONAL INFORMATION

August 1, 1999

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

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

<PAGE>

TABLE OF CONTENTS

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

</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

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

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

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

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

ADDITIONAL INVESTMENT POLICIES

SHORT-TERM GOVERNMENT SECURITIES FUND

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

INTERMEDIATE-TERM MANAGED INCOME AND MANAGED INCOME FUNDS

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

-1-

<PAGE>

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

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

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

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

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

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

-2-
<PAGE>

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

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

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

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

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

MUNICIPAL OBLIGATIONS

-3-
<PAGE>

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

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

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

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

-4-
<PAGE>

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

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

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

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

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

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<PAGE>

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

INSURED MUNICIPAL OBLIGATIONS

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

REPURCHASE AGREEMENTS

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

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

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

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<PAGE>

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

INVESTMENT COMPANY SECURITIES

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

SECURITIES LENDING

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

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

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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<PAGE>

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

ILLIQUID SECURITIES

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

GOVERNMENT OBLIGATIONS

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

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

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<PAGE>

WHEN-ISSUED AND FORWARD TRANSACTIONS

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

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

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

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<PAGE>

STAND-BY COMMITMENTS

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

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

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

FUTURES CONTRACTS

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

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<PAGE>

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

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

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

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<PAGE>

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

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

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

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

FORWARD CURRENCY TRANSACTIONS

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

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<PAGE>

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

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

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

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<PAGE>

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

MONEY MARKET INSTRUMENTS

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

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

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

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VARIABLE AND FLOATING RATE INSTRUMENTS

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

PORTFOLIO TURNOVER

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

INVESTMENT LIMITATIONS

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

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

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

The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Managed Income and ST Government Funds. A Fixed-Income Fund may not:

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

-17-
<PAGE>

12. Purchase foreign securities; provided that subject to the limit
described below, the IT Managed Income and Managed Income Funds may purchase (a)
dollar-denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and

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

The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt, LT
Tax-Exempt and Managed Income Funds may not:

14. Write or sell puts, calls, straddles, spreads, or combinations
thereof; provided that each Fund may enter into futures contracts and futures
options; and

15. Purchase or sell commodity futures contracts, or invest in oil,
gas, or mineral exploration or development programs; provided that the Funds may
enter into futures contracts and futures options.

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

16. Purchase or sell commodities or commodity futures contracts, or
invest in oil, gas, or mineral exploration or development programs; provided
that the Funds may enter into futures contracts and futures options.

The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds. Each of the IT Tax-Exempt and LT
Tax-Exempt Funds may not:

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

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

-18-
<PAGE>

The following investment limitations are fundamental with respect to
the Managed Income Fund. The Managed Income Fund may not:

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

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

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

* * *

In addition to the investment limitations described above, as
a matter of fundamental policy for each Fund, which may not be changed without
the vote of the holders of a majority of the Fund's outstanding shares, a Fund
may not invest in the securities of any single issuer if, as a result, the Fund
holds more than 10% of the outstanding voting securities of such issuer.

The Managed Income, IT Tax-Exempt and LT Tax-Exempt Funds will not
invest more than 25% of the value of their respective total assets in domestic
bank obligations.

In Investment Limitation No. 6 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.

In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Managed Income and Managed Income Funds'
investments in warrants so that,

-19-
<PAGE>

valued at the lower of cost or market value, they do not exceed 5% of a Fund's
net assets. For the purpose of this limitation, warrants acquired by the IT
Managed Income or Managed Income Fund in units or attached to securities will be
deemed to be without value.

The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.

The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities on
margin, short sales of securities and the maintenance of a short position; the
issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

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

-20-
<PAGE>

The net asset value of each Fund is determined and the shares of each
Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
Adviser are open for trading (a "Business Day"). Currently, the holidays which
the Funds observe are New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per share
for purposes of pricing sales and redemptions is calculated by dividing the
value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

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

PURCHASE OF SHARES

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

-21-
<PAGE>

agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."

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

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

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

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

-22-
<PAGE>

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

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

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

REDEMPTION PROCEDURES

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

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

-23-
<PAGE>

(these procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

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

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

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).

-24-
<PAGE>

proceeds for Direct Investors must be paid to the same bank and account as
designated on the Application or in written instructions subsequently received
by CGFSC.

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

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

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

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

OTHER REDEMPTION INFORMATION

The Companies may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is

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<PAGE>

restricted by applicable rules and regulations of the SEC; (b) the Exchange is
closed for other than customary weekend and holiday closings; (c) the SEC has by
order permitted such suspension; or (d) an emergency exists as determined by the
SEC.

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

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

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

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

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

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

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

(4) A declining-balance withdrawal.

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<PAGE>

of shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and procedures and fees relating to, the Systematic Withdrawal
Plan directly from their Shareholder Organizations.

EXCHANGE PRIVILEGE

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

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<PAGE>

RETIREMENT PLANS

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

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

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

Keogh Plans for self-employed individuals.

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

AUTOMATIC INVESTMENT PROGRAM

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

The Automatic Investment Program is one means by which an Investor may
use "Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, Dollar Cost Averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using Dollar Cost Averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find Dollar Cost Averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Companies may modify or terminate this
privilege

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<PAGE>

at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the Dollar Cost Averaging method on
his own initiative or through other entities.

ADDITIONAL INFORMATION

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

DESCRIPTION OF CAPITAL STOCK

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

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

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

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<PAGE>

The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The exercise
of such authority by the Boards of Directors will be subject to the provisions
of the 1940 Act, and the Boards of Directors will not take any action described
in this paragraph unless the proposed action has been disclosed in writing to
the particular Fund's shareholders at least 30 days prior thereto.

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

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

-30-
<PAGE>

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Board, Retired; Director of the Companies (since
238 June Road President and Treasurer 1995); Trustee of Excelsior Funds and
Stamford, CT 06903 Excelsior Institutional Trust (since 1995);
Age: 68 Vice Chairman of U.S. Trust Corporation and
U.S. Trust New York (from February 1990 until
September 1995); and Chairman, U.S. Trust
Company (from March 1993 to May 1997).

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

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

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

</TABLE>

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

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<PAGE>

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since
2320 Cumberland Road 1986); Director of UST Master Variable Series,
Charlottesville, VA 22901-7726 Inc. (from 1994 to June 1997); Trustee of
Age: 78 Excelsior Institutional Trust (since 1995);
Director, Deutsche Bank Financial, Inc. (since
1989); Director, The Harbus Corporation (since
1951); and Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).

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

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

</TABLE>

-32-
<PAGE>

Position with Principal Occupation During
Name and Address the Companies Past 5 Years and Other Affiliations
- ---------------- ------------- -----------------------------------
<S> <C> <C>
Alfred C. Tannachion(2) Director Retired; Director of the Companies (since
26549 Pine Meadows Drive 1985); Chairman of the Board of the Companies
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust
Age: 73 (1996-1997); President and Treasurer of the
Companies (1994-1997) and Excelsior Institutional
Trust (1996-1997); Chairman of the Board, President
and Treasurer of UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior Institutional
Trust (since 1995).

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

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age: 40
Assistant Manager of Blue Sky Compliance, Chase Global
Eddie Wang Secretary Funds Services Company (November 1996 to
Chase Global Funds present); and Officer and Manager of Financial
Services Company Reporting, Investors Bank & Trust Company
73 Tremont Street (January 1991 to November 1996).
Boston, MA 02108-3913
Age: 38

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

</TABLE>

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

-33-
<PAGE>

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

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

-34-
<PAGE>

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

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

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

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

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

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

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

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

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

</TABLE>

- -----------------------------
* The "Fund Complex" consists of Excelsior Fund, Excelsior Tax-Exempt
Fund, Excelsior Funds and Excelsior Institutional Trust.

** Number of investment companies in the Fund Complex for which director
served as director or trustee.

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

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

-35-
<PAGE>

Prospectuses. The Adviser has also agreed to pay all expenses incurred by it in
connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, if any, purchased for the
Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment adviser
to the Funds pursuant to an advisory agreement substantially similar to the
Investment Advisory Agreement currently in effect for the Funds.

For the services provided and expenses assumed pursuant to its
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly at the annual rate of .30% of the average daily
net assets of the ST Government and ST Tax-Exempt Funds; .35% of the average
daily net assets of the IT Managed Income and IT Tax-Exempt Funds; .50% of the
average daily net assets of the LT Tax-Exempt Fund; and .75% of the average
daily net assets of the Managed Income Fund.

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

For the fiscal year ended March 31, 1999, the particular Company paid
U.S. Trust advisory fees of $98,059, $317,118, $1,287,808, $92,164, $844,392 and
$690,785 with respect to the ST Government, IT Income, Managed Income, ST
Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same
period, U.S. Trust waived advisory fees totaling $40,855, $74,201, $272,533,
$28,715, $186,350 and $150,919 with respect to the ST Government, IT Managed
Income, Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1998, the particular Company paid
U.S. Trust advisory fees of $72,860, $260,708, $1,203,851, $99,010, $746,025 and
$545,298 with respect to the ST Government, IT Managed Income, Managed Income,
ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same
period, U.S. Trust waived advisory fees totaling $21,549, $42,260, $243,873,
$24,358, $133,635 and $89,459 with respect to the ST Government, IT Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1997, the particular Company paid
U.S. Trust New York advisory fees of $63,713, $217,254, $1,185,427, $95,564,
$741,452 and $457,137 with respect to the ST Government, IT Managed Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, U.S. Trust New York waived advisory fees
totaling $21,478, $35,586, $77,751, $28,208, $140,769 and $69,305 with respect
to the ST Government, IT Managed Income, Managed Income, ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds, respectively.

-36-
<PAGE>

Company shall be jointly, but not severally, liable for a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
advisory services or a loss resulting from willful misfeasance, bad faith or
gross negligence in the performance of their duties or from reckless disregard
by them of their duties and obligations thereunder. In addition, the Adviser has
undertaken in the Investment Advisory Agreement to maintain its policy and
practice of conducting its Asset Management Group independently of its Banking
Group.

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

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

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

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

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

</TABLE>

-37-
<PAGE>

For the fiscal year ended March 31, 1999, Excelsior Tax-Exempt Fund
paid the Administrators $61,646, $449,336 and $243,351 in the aggregate with
respect to the ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively. For the same period, Excelsior Fund paid the Administrators
$70,684, $170,673 and $316,445 in the aggregate with respect to the ST
Government, IT Managed Income and Managed Income Funds, respectively. For the
same period, the Administrators waived fees totaling $162, $389, $1,864, $3,
$1,245 and $14,210 with respect to the ST Government, IT Managed Income, Managed
Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds, respectively.

For the fiscal year ended March 31, 1998, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust $62,813, $383,863
and $189,687 in the aggregate with respect to the ST Tax-Exempt, IT Tax-Exempt
and LT Tax-Exempt Funds, respectively. For the same period, Excelsior Fund paid
CGFSC, Federated Administrative Services and U.S. Trust $48,138, $132,050 and
$294,955 in the aggregate with respect to the ST Government, IT Managed Income
and Managed Income Funds, respectively. For the same period, CGFSC, Federated
Administrative Services and U.S. Trust waived fees totaling $11, $390, $381,
$104, $674 and $4,549 with respect to the ST Government, IT Managed Income,
Managed Income, ST Tax-Exempt, IT Tax-Exempt and LT Tax-Exempt Funds,
respectively.

For the fiscal year ended March 31, 1997, Excelsior Tax-Exempt Fund
paid CGFSC, Federated Administrative Services and U.S. Trust New York $63,343,
$387,111 and $160,259 in the aggregate with respect to the ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds, respectively. For the same period, Excelsior
Fund paid CGFSC, Federated Administrative Services and U.S. Trust New York
$43,657, $110,146 and $258,438 in the aggregate with respect to the ST
Government, IT Income and Managed Income Funds, respectively. For the same
period, CGFSC, Federated Administrative Services and U.S. Trust New York waived
fees totaling $1, $909, $468, $96, $489 and $1,651 with respect to the ST
Government, IT Managed Income, Managed Income, ST Tax-Exempt, IT Tax-Exempt and
LT Tax-Exempt Funds, respectively.

BANKING LAWS

-38-
<PAGE>

company, or from purchasing shares of such company for and upon the order of
customers. The Adviser, CGFSC and certain Shareholder Organizations may be
subject to such banking laws and regulations. State securities laws may differ
from the interpretations of federal law discussed in this paragraph and banks
and financial institutions may be required to register as dealers pursuant to
state law.

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

SHAREHOLDER ORGANIZATIONS

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

-39-
<PAGE>

Shareholder Organizations are in effect, the selection and nomination of the
members of the Companies' Boards of Directors who are not "interested persons"
(as defined in the 1940 Act) of the Companies will be committed to the
discretion of such Disinterested Directors.

For the fiscal years ended March 31, 1999, 1998 and 1997, payments to
Shareholder Organizations under the Plans totaled $28,718, $24,462 and $28,304;
$187,595, $134,309 and $141,258; $165,129, $94,008 and $70,956; $41,017, $19,835
and $21,479; $74,590, $42,650 and $36,495; and $66,277, $51,215 and $78,219 with
respect to the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT
Managed Income and Managed Income Funds, respectively. Of these respective
amounts, $28,709, $24,157 and $28,304; $182,945, $131,684 and $139,275;
$114,441, $78,373 and $68,722; $40,538, $19,800 and $21,479; $73,338, $41,041
and $36,495; and $64,528, $48,468 and $77,550 were paid to affiliates of U.S.
Trust with respect to the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST
Government, IT Managed Income and Managed Income Funds, respectively.

EXPENSES

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

CUSTODIAN AND TRANSFER AGENT

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

-40-
<PAGE>

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

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

PORTFOLIO TRANSACTIONS

Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of all portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.

The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are not
normally paid on instruments purchased by the Funds, portfolio turnover is not
expected to have a material effect on the net income of any of the Funds. The
Funds' portfolio turnover rates may also be affected by cash requirements for
redemptions of shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in the
Prospectuses for the Funds' portfolio turnover rates.

-41-
<PAGE>

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

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

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

-42-
<PAGE>

Adviser believes to be equitable to the Funds and such other investment company
or common trust fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Funds or the size of the position
obtained by the Funds. To the extent permitted by law, the Adviser may aggregate
the securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or common trust funds in order to
obtain best execution.

The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1999, the Managed Income Fund held one corporate bond issued by Morgan
Stanley Dean Witter & Co. with a principal amount Of $5,000,000.

PORTFOLIO VALUATION

Assets in the Funds which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. A futures contract is valued at the last sales price quoted on the
principal exchange or board of trade on which such contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices. Restricted
securities and securities or other assets for which market quotations are not
readily available are valued at fair value pursuant to guidelines adopted by the
Companies' Boards of Directors. Absent unusual circumstances, portfolio
securities maturing in 60 days or less are normally valued at amortized cost.
The net asset value of shares in the Funds will fluctuate as the market value of
their portfolio securities changes in response to changing market rates of
interest and other factors.

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

-43-
<PAGE>

The Administrators have undertaken to price the securities in the
Funds' portfolios and may use one or more pricing services to value certain
portfolio securities in the Funds where the prices provided are believed to
reflect the fair market value of such securities. The methods used by the
pricing services and the valuations so established will be reviewed by the
Administrators under the general supervision of the Boards of Directors.

INDEPENDENT AUDITORS

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

COUNSEL

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

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

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

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

-44-
<PAGE>

FIXED INCOME FUNDS

Each Fixed-Income Fund contemplates declaring as dividends each year
all or substantially all of its taxable income, including its net capital gain
(the excess of long-term capital gain over short-term capital loss).
Distributions attributable to the net capital gain of a Fixed-Income Fund will
be taxable to you as long-term capital gain, regardless of how long you have
held your shares. Other Fixed-Income Fund distributions will generally be
taxable as ordinary income. You will be subject to income tax on a fixed-income
fund distributions regardless whether they are paid in cash or reinvested in
additional shares. You will be notified annually of the tax status of
distributions to you.

You should note that if you purchase shares just before a distribution,
the purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though, as
an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."

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

Any loss realized on shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gain dividends that
were received on the shares. The one major exception to these tax principles is
that distributions on, and sales, exchanges and redemptions of share held in an
IRA (or other tax-qualified plan) will not be currently taxable.

TAX-EXEMPT FUNDS

It is expected that each Tax-Exempt Fund will distribute dividends
derived from interest earned on securities exempt from taxation and these
"exempt-interest dividends" will be exempt income for shareholders for federal
income tax purposes. However, distributions, if any, derived from net capital
gains (the excess of any long-term capital gains over short-term capital gains)
will generally be taxable to you as long-term capital gains. it is expected that
each Tax-Exempt Fund may pay such capital gains

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<PAGE>

distributions from time to time. Dividends, if any, derived from taxable
interest income or short-term capital gains will be taxable to you as ordinary
income. You will be notified annually of the tax status of distributions to you.

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

If you receive an exempt-interest dividend with respect to any share
and the share is held by you for six months or less, any loss on the sale or
exchange of the share will be disallowed to the extent of such dividend amount.
Also, any loss realized on shares held for six months or less will be treated as
a long-term capital loss to the extent of any capital gain dividends that were
received on the shares.

Interest on indebtedness incurred by a shareholder to purchase or carry
shares of each tax-exempt fund generally will not be deductible for federal
income tax purposes.

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

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

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<PAGE>

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

Generally, if a shareholder holds Tax-Exempt Fund shares for six months
or less, any loss on the sale or exchange of those shares will be disallowed to
the extent of the amount of exempt-interest dividends received with respect to
the shares. The Treasury Department, however, is authorized to issue regulations
reducing the six-month holding requirement to a period of not less than the
greater of 31 days or the period between regular dividend distributions where
the investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.

* * * * *

The foregoing is only a summary of certain tax considerations under
current law, which may be subject to change in the future. You should consult
your tax adviser for further information regarding federal, state, local and/or
foreign tax consequences relevant to your specific situation. Share owners may
also be subject to state and local taxes on distributions and redemptions. State
income taxes may not apply however to the portions of each Fund's distributions,
if any, that are attributable to interest on federal securities or interest on
securities of the particular state. For example, interest earned on the New York
Intermediate-Term Tax-Exempt Fund will generally be exempt from federal, New
York State and New York City taxes; and interest earned on the California
Tax-Exempt Income Fund will generally be exempt from federal and California
taxes. Shareowners should consult their tax advisers regarding the tax status of
distributions in their state and locality.

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<PAGE>

PERFORMANCE AND YIELD INFORMATION

YIELDS AND PERFORMANCE

The Funds may advertise the standardized effective 30-day (or
one month) yields calculated in accordance with the method prescribed by the SEC
for mutual funds. Such yield will be calculated separately for each Fund
according to the following formula:

a-b TO THE POWER OF 6
Yield = 2 [(-------- + 1) - 1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).
c = average daily number of shares outstanding that
were entitled to receive dividends.

d = maximum offering price per share on the last day
of the period.

For the purpose of determining interest earned during the period
(variable "a" in the formula), each of the Funds computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. Each of the Funds
calculates interest gained on tax-exempt obligations issued without original
issue discount and having a current market discount by using the coupon rate of
interest instead of the yield to maturity. In the case of tax-exempt obligations
with original issue discount, where the discount based on the current market
value exceeds the then-remaining portion of original issue discount, the yield
to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.

Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by each of the Funds to all shareholder accounts and
to the particular series of shares in proportion to the length of the base
period and that Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula).

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<PAGE>

Based on the foregoing calculations, the effective yields for shares of
the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the 30-day period ended March 31, 1999 were
2.95%, 3.52%, 4.08%, 4.84%, 5.33% and 5.04%, respectively.

The "tax-equivalent" yield of the ST Tax-Exempt, IT Tax-Exempt and LT
Tax-Exempt Funds is computed by: (a) dividing the portion of the yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate and (b) adding that figure to that portion, if
any, of the yield that is not exempt from federal income tax. Tax-equivalent
yields assume the payment of federal income taxes at a rate of 31%. Based on the
foregoing calculations, the tax-equivalent yields of the ST Tax-Exempt, IT
Tax-Exempt and LT Tax-Exempt Funds for the 30-day period ended March 31, 1999
were 4.28%, 5.10% and 5.91%, respectively.

Each Fund's "average annual total return" is computed by determining
the average annual compounded rate of return during specified periods that
equates the initial amount invested to the ending redeemable value of such
investment according to the following formula:

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

Where: T = average annual total return.

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

P = hypothetical initial payment of $1,000.

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

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

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

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<PAGE>

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

Based on the foregoing calculations, the total returns for shares of
the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed
Income and Managed Income Funds for the one year period ended March 31, 1999
were 4.51%, 5.53%, 5.42%, 5.54%, 6.02% and 5.95%, respectively. The average
annual total returns for the ST Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST
Government, IT Managed Income and Managed Income Funds for the five year
period ended March 31, 1999 were 4.38%, 6.69%, 8.64%, 5.66%, 7.29% and 7.48%,
respectively. The average annual total returns for shares of the ST
Tax-Exempt Securities, ST Government and IT Managed Income Funds for the
period from December 31, 1992 (commencement of operations) to March 31, 1999
were 4.18%, 5.14% and 6.51%, respectively. The average annual total returns
for the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds for the ten
year period ended March 31, 1999 were 7.15%, 9.14% and 9.00%, respectively.

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

The total return and yield of a Fund may be compared to those of other
mutual funds with similar investment objectives and to other relevant indices or
to ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return and/or yield of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Weisenberger
Investment Company Service. Total return and yield data as reported in national
financial publications such as MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET
JOURNAL AND THE NEW YORK TIMES, or in publications of a local or regional
nature, may also be used in comparing the performance of a Fund. Advertisements,
sales literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and technologies that together with market
conditions and events, materially affected each Fund's performance.

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<PAGE>

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions of a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation's of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisement, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communicators may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.

Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in the Funds with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that the
performance and yield are generally functions of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses, and
market conditions. Any fees charged by the Shareholder Organizations with
respect to accounts of Customers that have invested in shares will not be
included in calculations of yield and performance.

MISCELLANEOUS

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

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<PAGE>

Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities and the allocable portion of any general assets with
respect to a particular Fund are conclusive.

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

As of July 13, 1999, the name, address and percentage ownership of each
person, in addition to U.S. Trust and its affiliates, that owned beneficially or
of record 5% or more of the outstanding shares of a Fund were as follows:
SHORT-TERM GOVERNMENT SECURITIES FUND: International Planned Parenthood, c/o
United States Trust Company of New York, 114 West 47th Street, New York, New
York, 10036, 6.45%; United States Trust Company of New York FBO U.S. Trust Plan,
114 West 47th Street, New York, New York 10036, 7.16%; and Manhattan School of
Music Building Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 11.45%; Managed Income Fund: U.S. Trust
Retirement Fund, c/o United States Trust Company of New York, 114 West 47th
Street, New York, New York 10036, 39.26%; and United States Trust Company of New
York Trustee FBO U.S. Trust Plan, U. S. Trust Company of the Pacific Northwest,
Attention: Sandra Woolcock, 4380 S.W. Macadam Avenue, Suite 2700, Portland,
Oregon 97201, 6.20%; SHORT-TERM TAX-EXEMPT SECURITIES FUND: Donald C. Opantry,
Jr., c/o United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, 7.30%; and LONG-TERM TAX-EXEMPT FUND: Charles Schwab &
Co., Inc., Special Custody A/C for Benefit of Customers, Attention: Mutual
Funds, 101 Montgomery Street, San Francisco, California 94104, 7.97%.

FINANCIAL STATEMENTS

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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 upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.

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

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

A-1
<PAGE>

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

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

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

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

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

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

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

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

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

A-2
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

A-3
<PAGE>

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

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

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

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

"BB" - An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse

A-4
<PAGE>

business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.

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

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

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

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

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

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

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

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

A-5
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic change over

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time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

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

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

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

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

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

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

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

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

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"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

"BBB" - This designation represents the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.

"BB," "B," "CCC," and "CC" - These designations are assigned
by Thomson Financial BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.

"D" - This designation indicates that the long-term debt is in
default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

MUNICIPAL NOTE RATINGS

A Standard and Poor's rating reflects the liquidity factors
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's for municipal notes:

"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.

"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.

Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:

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"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.

"MIG-2"/"VMIG-2" - This designation denotes high quality,
with margins of protection that are ample although not so large as in the
preceding group.

"MIG-3"/"VMIG-3" - This designation denotes favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.

"SG" - This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.

Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.

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