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

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

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<PAGE>

As filed with the Securities and Exchange Commission on May 28, 1999
Registration Nos. 2-93068; 811-4101

- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Excelsior Tax-Exempt Funds, Inc: Post-Effective Amendment No. 26

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY

ACT OF 1940

Excelsior Tax-Exempt Funds, Inc.: Amendment No. 28

(Exact Name of Registrant as Specified in Charter)

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

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

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

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

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

If appropriate, check the following box:

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

----------------
Title of Securities Being Registered................Shares of Common Stock

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

PROSPECTUS

AUGUST 1, 1999

SHORT-TERM TAX-EXEMPT SECURITIES FUND
INTERMEDIATE-TERM TAX-EXEMPT FUND
LONG-TERM TAX-EXEMPT FUND
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND
CALIFORNIA TAX-EXEMPT INCOME FUND

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

INVESTMENT SUB-ADVISER
U.S. TRUST COMPANY, N.A.
(CALIFORNIA TAX-EXEMPT INCOME FUND)

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

Page 1 of 31
<PAGE>

HOW TO READ THIS PROSPECTUS

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

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

<TABLE>
<CAPTION>
PAGE
<S> <C>
SHORT-TERM TAX-EXEMPT SECURITIES FUND XXX
INTERMEDIATE-TERM TAX-EXEMPT FUND XXX
LONG-TERM TAX-EXEMPT FUND XXX
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND XXX
CALIFORNIA TAX-EXEMPT INCOME FUND XXX
MORE INFORMATION ABOUT RISK XXX
EACH FUND'S OTHER INVESTMENTS XXX
EACH FUND'S INVESTMENT OBJECTIVE XXX
THE INVESTMENT ADVISER AND SUB-ADVISER
AND PORTFOLIO MANAGERS XXX
PURCHASING, SELLING AND EXCHANGING FUND SHARES XXX
DIVIDENDS, DISTRIBUTIONS AND TAXES XXX
FINANCIAL HIGHLIGHTS XXX
HOW TO OBTAIN MORE INFORMATION ABOUT
EXCELSIOR TAX-EXEMPT FUNDS, INC. BACK COVER
</TABLE>

Page 2 of 31
<PAGE>

INTRODUCTION

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

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

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

Page 3 of 31
<PAGE>

SHORT-TERM TAX-EXEMPT SECURITIES FUND

FUND SUMMARY

INVESTMENT GOAL Current income exempt from federal income
taxes, consistent with relative stability of
principal

INVESTMENT FOCUS Tax-exempt municipal securities

SHARE PRICE VOLATILITY Low

PRINCIPAL INVESTMENT STRATEGY Investing in a diversified portfolio of
investment grade tax-exempt municipal
obligations

INVESTOR PROFILE Investors seeking tax-exempt income with the
risk of limited share price volatility

INVESTMENT STRATEGY OF THE SHORT-TERM TAX-EXEMPT SECURITIES FUND

The Short-Term Tax-Exempt Securities Fund invests primarily in tax-exempt
securities issued by U.S. states, territories and possessions and their
political subdivisions, the interest on which is exempt from federal income
taxes ("municipal securities"). In selecting municipal securities for the
Fund, the Adviser emphasizes preservation of principal and considers each
security's yield and total return potential relative to other available
municipal securities. The Fund generally will have a dollar-weighted average
portfolio maturity of 1 to 3 years.

The Fund emphasizes investment in municipal securities rated in the two
highest rating categories at the time of purchase. However, the Fund may
purchase without limitation investment grade municipal securities rated at
the time of purchase in one of the four highest rating categories by a major
rating agency or, if unrated, determined by the Adviser to be of equivalent
quality. The Fund ordinarily will not invest in municipal securities that pay
interest subject to the alternative minimum tax. There is no restriction on
the maturity of any single security held by the Fund.

PRINCIPAL RISKS OF INVESTING IN THE SHORT-TERM TAX-EXEMPT SECURITIES FUND

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

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

Page 4 of 31
<PAGE>

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

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

PERFORMANCE INFORMATION

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

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

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

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

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

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

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

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

WHAT IS AN INDEX?

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

FUND FEES AND EXPENSES

Page 5 of 31
<PAGE>

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

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

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

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

SHORT-TERM TAX-EXEMPT SECURITIES FUND ____%

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

EXAMPLE

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

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

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

Page 6 of 31
<PAGE>

INTERMEDIATE-TERM TAX-EXEMPT FUND

FUND SUMMARY

INVESTMENT GOAL Moderate current income exempt from federal
income taxes, consistent with relative
stability of principal

INVESTMENT FOCUS Tax-exempt municipal securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT STRATEGY Investing in a diversified portfolio of
investment grade tax-exempt municipal
obligations

INVESTOR PROFILE Investors in higher tax brackets seeking
tax-exempt income - - who are willing to
accept moderate share price volatility

INVESTMENT STRATEGY OF THE INTERMEDIATE-TERM TAX-EXEMPT FUND

The Intermediate-Term Tax-Exempt Fund invests primarily in tax-exempt securities
issued by U.S. states, territories and possessions and their political
subdivisions, the interest from which is exempt from federal income taxes
("municipal securities"). In selecting municipal securities for the Fund, the
Adviser considers each security's yield and total return potential relative to
other available municipal securities and manages the Fund through gradual shifts
in the Fund's average maturity. The Fund generally will have a dollar-weighted
average maturity of 3 to 10 years.

The Fund emphasizes investment in municipal securities rated in the two
highest rating categories at the time of purchase. However, the Fund may
purchase without limitation in investment grade municipal securities rated at
the time of purchase in one of the four highest rating categories by a major
rating agency or, if unrated, determined by the Adviser to be of equivalent
quality. The Fund ordinarily will not invest in municipal securities that pay
interest subject to the alternative minimum tax. There is no restriction on
the maturity of any single security held by the Fund.

PRINCIPAL RISKS OF INVESTING IN THE INTERMEDIATE-TERM TAX-EXEMPT FUND

Page 7 of 31
<PAGE>

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

PERFORMANCE INFORMATION

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

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

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

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

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

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 8 of 31
<PAGE>

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

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

INTERMEDIATE-TERM TAX-EXEMPT FUND ____%

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

EXAMPLE

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

Page 9 of 31
<PAGE>

LONG-TERM TAX-EXEMPT FUND

FUND SUMMARY

INVESTMENT GOAL High current income exempt from federal income
taxes

INVESTMENT FOCUS Tax-exempt municipal securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT STRATEGY Investing in a diversified portfolio of
investment grade tax-exempt municipal
obligations

INVESTOR PROFILE Investors in higher tax brackets seeking to
maximize tax-exempt income, and who are willing
to accept risk of share price volatility

INVESTMENT STRATEGY OF THE LONG-TERM TAX-EXEMPT FUND

The Long-Term Tax-Exempt Fund invests primarily in tax-exempt securities
issued by U.S. states, territories and possessions and their political
subdivisions, the interest on which is exempt from federal income taxes
("municipal securities"). In selecting municipal securities for the Fund, the
Adviser considers each security's yield and total return potential relative
to other available municipal securities and manages the Fund through gradual
shifts in the Fund's average maturity. The Fund generally will have a
dollar-weighted portfolio maturity between 10 and 25 years.

The Fund emphasizes investment in municipal securities rated in the two
highest rating categories at the time of purchase. However, the Fund may
purchase without limitation in investment grade municipal securities rated at
the time of purchase in one of the four highest rating categories by a major
rating agency, or determined by the Adviser to be of equivalent quality. The
Fund ordinarily will not invest in municipal securities that pay interest
subject to the alternative minimum tax. The Fund's average weighted portfolio
maturity may be as high as 30 years and there is no restriction on the
maturity of any single security held by the Fund.

PRINCIPAL RISKS OF INVESTING IN THE LONG-TERM TAX-EXEMPT FUND

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

Page 10 of 31
<PAGE>

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

PERFORMANCE INFORMATION

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

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

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

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

1 YEAR 5 YEARS 10 YEARS
- -------------------------------------- ----------------- ------------- ----------------
<S> <C> <C> <C>
Long-Term Tax-Exempt Fund X.XX% X.XX% X.XX%
[insert index name] X.XX% X.XX% X.XX%
</TABLE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

Page 11 of 31
<PAGE>

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

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

</TABLE>

LONG-TERM TAX-EXEMPT FUND ____%

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

EXAMPLE

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

Page 12 of 31
<PAGE>

NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND

FUND SUMMARY

INVESTMENT GOAL Maximize current income exempt from federal,
New York State and New York City income taxes

INVESTMENT FOCUS New York tax-exempt municipal securities

SHARE PRICE VOLATILITY Medium

PRINCIPAL INVESTMENT STRATEGY Investing in a portfolio of investment
grade municipal obligations
that pay interest that is
exempt from federal, New York
State and New York City income
taxes

INVESTOR PROFILE High tax bracket investors seeking tax-exempt
current income - - who are willing to accept a
moderate degree of share price volatility

INVESTMENT STRATEGY OF THE NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND

The New York Intermediate-Term Tax-Exempt Fund invests substantially all of
its assets in tax-exempt securities issued by New York State local
governments and agencies in New York and other Governmental issuers including
U.S. territories and possessions that pay interest exempt from Federal, New
York State and New York City income taxes ("New York municipal securities").
In selecting securities for the Fund, the Adviser considers each security's
yield and total return potential relative to other available municipal
securities and manages the Fund through gradual shifts in the Fund's average
maturity. The Fund generally will have a dollar-weighted average portfolio
maturity of 3 to 10 years.

The Fund emphasizes investment in New York municipal securities rated in the
two highest rating categories at the time of purchase. However, the Fund may
purchase without limitation investment grade municipal securities rated at
the time of purchase in one of the four highest rating categories by a major
rating agency or, if unrated, determined by the Adviser to be of equivalent
quality. The Fund ordinarily will not invest in securities that pay interest
subject to the alternative minimum tax. There is no restriction on the
maturity of any single security held by the Fund.

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

There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial

Page 13 of 31
<PAGE>

condition or credit rating of municipal issuers also may adversely affect the
value of the Fund's securities.

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

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

The Fund is also subject to the risk that New York municipal securities may
underperform other market segments of the fixed income markets or the fixed
income markets as a whole.

PERFORMANCE INFORMATION

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

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

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

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

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

* Since May 31, 1990
** Since [calc. date for index]

Page 14 of 31
<PAGE>

WHAT IS AN INDEX?

FUND FEES AND EXPENSES

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

NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND ____%

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

EXAMPLE

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

Page 15 of 31
<PAGE>

CALIFORNIA TAX-EXEMPT INCOME FUND

FUND SUMMARY

INVESTMENT GOAL Moderate current income exempt from federal
and California income taxes

INVESTMENT FOCUS California tax-exempt municipal securities

SHARE PRICE VOLATILITY Low

PRINCIPAL INVESTMENT STRATEGY Investing in municipal obligations that pay
interest that is exempt from federal and
California taxes

INVESTOR PROFILE Investors seeking tax-exempt current
income, and who are willing to accept some
degree of share price volatility

INVESTMENT STRATEGY OF THE CALIFORNIA TAX-EXEMPT INCOME FUND

The California Tax-Exempt Income Fund invests primarily in tax-exempt
securities issued by the State of California and its cities, counties and
political subdivisions, the interest from which is exempt from federal and
California State income taxes ("California municipal securities"). The Fund
also may invest in municipal securities issued by U.S. territories and
possessions. In selecting securities for the Fund, the Sub-Adviser considers
each security's yield and total return potential relative to other available
municipal securities and manages the Fund through gradual shifts in the
Fund's average maturity. The Fund generally will have a dollar-weighted
average remaining maturity of 3 to 5 years.

The Fund emphasizes investment in California municipal securities rated in
the two highest rating categories at the time of investment. However, the
Fund may invest without limit in investment grade municipal securities, which
are those rated at the time of investment in one of the four highest rating
categories by a major rating agency or, if unrated, determined by the
Sub-Adviser to be of equivalent quality. The Fund ordinarily will not invest
in securities that pay interest subject to the alternative minimum tax. There
is no restriction on the maturity of any single security held by the Fund.

PRINCIPAL RISKS OF INVESTING IN THE CALIFORNIA TAX-EXEMPT INCOME FUND

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

Page 16 of 31
<PAGE>

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

The Fund is also subject to the risk that California municipal securities
may underperform other market segments of the fixed income markets or the fixed
income markets as a whole.

PERFORMANCE INFORMATION

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

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

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

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

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

1 YEAR SINCE INCEPTION
- ------------------------------------------ ---------- -------------------
<S> <C> <C>
California Tax-Exempt Income Fund X.XX% X.XX%*
[insert index name] X.XX% X.XX%**
</TABLE>

* Since October 1, 1996
** Since [calc. date for index]

WHAT IS AN INDEX?

Page 17 of 31
<PAGE>

FUND FEES AND EXPENSES

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

CALIFORNIA TAX-EXEMPT INCOME FUND ____%

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

EXAMPLE

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

Page 18 of 31
<PAGE>

MORE INFORMATION ABOUT RISK

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

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

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

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

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

Page 19 of 31
<PAGE>

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

Page 20 of 31
<PAGE>

EACH FUND'S OTHER INVESTMENTS

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

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

EACH FUND'S INVESTMENT OBJECTIVE

The Short-Term Tax-Exempt Securities Fund seeks as high a level of current
interest income exempt from federal income taxes as is consistent with relative
stability of principal.

The Intermediate-Term Tax-Exempt Fund seeks as high a level of current interest
income exempt from federal income taxes as is consistent with relative stability
of principal.

The Long-Term Tax-Exempt Fund seeks to maximize current interest income exempt
from federal income taxes.

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

The California Tax-Exempt Income Fund seeks to provide California investors
with as high a level of current interest income exempt from federal income
tax and, to the extent possible, from California state personal income tax as
is consistent with the preservation of capital and relative stability of
principal. This objective may be changed without shareholder approval.

INVESTMENT ADVISER AND SUB-ADVISER

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

Page 21 of 31
<PAGE>

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

The Adviser makes investment decisions for the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt and New York
Intermediate-Term Tax-Exempt Funds and continuously reviews, supervises and
administers each Fund's investment program.

U.S. Trust Company, N.A. (the Sub-Adviser) serves as the investment sub-adviser
to the California Tax-Exempt Income Fund. The Sub-Adviser is a national bank and
a wholly-owned subsidiary of U.S. Trust Corporation, and has its principal
offices at 515 South Flower Street, Los Angeles, CA 90071. The Sub-Adviser makes
investment decisions for the Fund.

The Adviser oversees the Sub-Adviser to ensure compliance with the California
Tax-Exempt Income Fund's investment policies and guidelines, and monitors the
Sub-Adviser's adherence to its investment style. The Adviser pays the
Sub-Adviser out of the investment advisory fee it receives from the Fund
(described below).

The Board of Directors of Excelsior Tax-Exempt Funds, Inc. supervises the
Adviser and Sub-Adviser and establishes policies that the Adviser and
Sub-Adviser must follow in their management activities.

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

SHORT-TERM TAX-EXEMPT SECURITIES FUND _______%
INTERMEDIATE-TERM TAX-EXEMPT FUND _______%
LONG-TERM TAX-EXEMPT FUND _______%
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND _______%
CALIFORNIA TAX-EXEMPT INCOME FUND _______%

PORTFOLIO MANAGERS

Kenneth J. McAlley has served as the Short-Term Tax-Exempt Securities,
Intermediate-Term Tax-Exempt and New York Intermediate-Term Tax-Exempt Funds'
portfolio manager since 1995 and the Long-Term Tax-Exempt Fund's portfolio
manager since 1986. Mr. McAlley, Executive Vice President and Manager of the
Fixed Income Investment Division of U.S. Trust, has been with U.S. Trust since
1980. Mr. McAlley is primarily responsible for the day to day management of the
Short-Term Tax-Exempt Securities, Intermediate-Term Tax-Exempt, Long-Term
Tax-Exempt and New York Intermediate-Term Tax-Exempt Funds' portfolios.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.

Lois G. Ingham, C.F.A. and Alan G. Remedios have served as the California
Tax-Exempt Income Fund's portfolio managers since 1997 and 1998, respectively.
Ms. Ingham, a Senior Vice President and Director of Fixed Income Investments,
has been with the Sub-Adviser since 1990. Mr. Remedios, a Vice President in the
Sub-Adviser's Fixed-Income Division, has been with the Sub-Adviser since 1993.
Ms. Ingham and Mr. Remedios are primarily responsible for the day to

Page 22 of 31
<PAGE>

day management of the California Tax-Exempt Income Fund's portfolio.
Research, analyses, trade execution and other facilities provided by the
Sub-Adviser and other personnel also play a significant role in portfolio
management and performance.

PURCHASING, SELLING AND EXCHANGING FUND SHARES

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

HOW TO PURCHASE FUND SHARES

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

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

The Chase Manhattan Bank
ABA # 021000021
Excelsior Funds, Account Number 9102732915
For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration
(including account number)

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

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

Page 23 of 31
<PAGE>

provide incentives, in the form of cash or other compensation, including
merchandise, airline vouchers, trips and vacation packages, to dealers selling
shares of a Fund. If any such program is made available to any dealer, it will
be made available to all dealers on the same terms.

GENERAL INFORMATION

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

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

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

HOW WE CALCULATE NAV

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

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

MINIMUM PURCHASES

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

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

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

AUTOMATIC INVESTMENT PROGRAM

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

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

Page 24 of 31
<PAGE>

HOW TO SELL YOUR FUND SHARES

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

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

You may sell your shares by sending 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

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

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

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

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

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

SYSTEMATIC WITHDRAWAL PLAN

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

Page 25 of 31
<PAGE>

RECEIVING YOUR MONEY

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

REDEMPTIONS IN KIND

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

INVOLUNTARY SALES OF YOUR SHARES

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

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

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

HOW TO EXCHANGE YOUR SHARES

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

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

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

Page 26 of 31
<PAGE>

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

TELEPHONE TRANSACTIONS

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

AUTHORIZED INTERMEDIARIES

Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund shares.
These intermediaries may authorize other organizations to accept purchase,
redemption and exchange requests for Fund shares. These requests are normally
executed at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.

SHAREHOLDER SERVICING

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

Page 27 of 31
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

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

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

TAXES

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

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

The Funds intend to distribute federally tax-exempt income. Each Fund may invest
a portion of its assets in securities that generate taxable income for federal
or state income taxes. Income exempt from federal tax may be subject to state
and local taxes. Any capital gains distributed by these Funds may be taxable.

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

Page 28 of 31
<PAGE>

FINANCIAL HIGHLIGHTS

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

Page 29 of 31
<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

INVESTMENT ADVISER

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

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

SUB-ADVISER

U.S. Trust Company, N.A.
515 South Flower Street
Los Angeles, California 90071

DISTRIBUTOR

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

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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

ANNUAL AND SEMI-ANNUAL REPORTS

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

TO OBTAIN MORE INFORMATION:

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

Page 30 of 31
<PAGE>

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

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

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about Excelsior Tax-Exempt Funds, Inc., from the
SEC's website ("HTTP://WWW.SEC.GOV"). You may review and copy documents at the
SEC Public Reference Room in Washington, DC (for information call
1-800-SEC-0330). You may request documents by mail from the SEC, upon payment of
a duplicating fee, by writing to: Securities and Exchange Commission, Public
Reference Section, Washington, DC 20549-6009. Excelsior Tax-Exempt Funds, Inc.'s
Investment Company Act registration number is 811-4101.

Page 31 of 31

<PAGE>

EXCELSIOR FUNDS, INC.

MONEY FUND
GOVERNMENT MONEY FUND
TREASURY MONEY FUND

EXCELSIOR TAX-EXEMPT FUNDS, INC.

TAX-EXEMPT MONEY FUND
NEW YORK TAX-EXEMPT MONEY FUND

PROSPECTUS
AUGUST 1, 1999

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

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

Page 1 of 31
<PAGE>

HOW TO READ THIS PROSPECTUS

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

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

Page 2 of 31
<PAGE>

INTRODUCTION

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

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

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

Page 3 of 31
<PAGE>

MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS Money market instruments

SHARE PRICE VOLATILITY Very low

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

INVESTOR PROFILE Conservative investors seeking current
income from their investment

INVESTMENT STRATEGY OF THE MONEY FUND

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

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

PRINCIPAL RISKS OF INVESTING IN THE MONEY FUND

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

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

Page 4 of 31
<PAGE>

PERFORMANCE INFORMATION

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

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

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

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

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

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

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

FUND FEES AND EXPENSES

Page 5 of 31
<PAGE>

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

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

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

MONEY FUND (SHARES) ____%

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

EXAMPLE

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

Page 6 of 31
<PAGE>

GOVERNMENT MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

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

SHARE PRICE VOLATILITY Very low

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

INVESTOR PROFILE Conservative investors seeking current
income from their investment

INVESTMENT STRATEGY OF THE GOVERNMENT MONEY FUND

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

PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT MONEY FUND

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

Page 7 of 31
<PAGE>

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

PERFORMANCE INFORMATION

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

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

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

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

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

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

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

FUND FEES AND EXPENSES

Page 8 of 31
<PAGE>

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

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

GOVERNMENT MONEY FUND ____%

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

EXAMPLE

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

Page 9 of 31
<PAGE>

TREASURY MONEY FUND

FUND SUMMARY

INVESTMENT GOAL Current income consistent with preserving
capital and maintaining liquidity

INVESTMENT FOCUS U.S. Treasury securities

SHARE PRICE VOLATILITY Very low

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

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

INVESTMENT STRATEGY OF THE TREASURY MONEY FUND

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

PRINCIPAL RISKS OF INVESTING IN THE TREASURY MONEY FUND

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

Page 10 of 31
<PAGE>

PERFORMANCE INFORMATION

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

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

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

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

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

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

* Since February 13, 1991

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

FUND FEES AND EXPENSES

Page 11 of 31
<PAGE>

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

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

TREASURY MONEY FUND ____%

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

EXAMPLE

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

Page 12 of 31
<PAGE>

TAX-EXEMPT MONEY FUND

FUND SUMMARY

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

INVESTMENT FOCUS Municipal money market instruments

SHARE PRICE VOLATILITY Very low

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

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

INVESTMENT STRATEGY OF THE TAX-EXEMPT MONEY FUND

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

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

PRINCIPAL RISKS OF INVESTING IN THE TAX-EXEMPT MONEY FUND

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

Page 13 of 31
<PAGE>

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

PERFORMANCE INFORMATION

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

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

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

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

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

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

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

FUND FEES AND EXPENSES

Page 14 of 31
<PAGE>

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

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

TAX-EXEMPT MONEY FUND ____%

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

EXAMPLE

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

Page 15 of 31
<PAGE>

NEW YORK TAX-EXEMPT MONEY FUND

FUND SUMMARY

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

INVESTMENT FOCUS New York tax-exempt money market
instruments

SHARE PRICE VOLATILITY Very low

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

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

INVESTMENT STRATEGY OF THE NEW YORK TAX-EXEMPT MONEY FUND

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

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

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

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

Page 16 of 31
<PAGE>

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

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

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

PERFORMANCE INFORMATION

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

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

FUND FEES AND EXPENSES

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

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

NEW YORK TAX-EXEMPT MONEY FUND ____%

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

Page 17 of 31
<PAGE>

EXAMPLE

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

Page 18 of 31
<PAGE>

MORE INFORMATION ABOUT RISK

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

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

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

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

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

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

Page 19 of 31
<PAGE>

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

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

Page 20 of 31
<PAGE>

EACH FUND'S OTHER INVESTMENTS

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

EACH FUND'S INVESTMENT OBJECTIVE

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

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

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

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

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

INVESTMENT ADVISER

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

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

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

Page 21 of 31
<PAGE>

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

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

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

PURCHASING, SELLING AND EXCHANGING FUND SHARES

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

HOW TO PURCHASE FUND SHARES

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

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

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account Number 9102732915

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

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

Page 22 of 31
<PAGE>

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

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

GENERAL INFORMATION

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

HOW WE CALCULATE NAV

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

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

MINIMUM PURCHASES

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

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

Page 23 of 31
<PAGE>

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

AUTOMATIC INVESTMENT PROGRAM

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

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

HOW TO SELL YOUR FUND SHARES

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

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

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

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

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

Page 24 of 31
<PAGE>

If you own your shares directly and previously indicated on your account
application or arranged in writing to do so, you may sell your shares by writing
a check for at least $500 drawn on your account. Checks are available free of
charge, and may be obtained by calling (800) 446-1012 (from overseas, call (617)
557-8280). You cannot use a check to close your account.

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

SYSTEMATIC WITHDRAWAL PLAN

RECEIVING YOUR MONEY

Normally, we will send your sale proceeds within five Business Days after we
receive your redemption request in good order. Your proceeds can be wired to
your bank account (if more than $500) or sent to you by check. You can request
to have redemption proceeds wired to your bank account on the same day you call
us to sell your shares, as long as we hear from you by 1:00 p.m., Eastern time
(12:00 noon, Eastern time for the Tax-Exempt Money and New York Tax-Exempt Money
Funds) on that day. Otherwise, redemption proceeds will be wired the next
Business Day. Shares redeemed and wired on the same day will not receive the
dividend declared on that day. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED (WHICH MAY
TAKE UP TO 15 BUSINESS DAYS).

REDEMPTIONS IN KIND

INVOLUNTARY SALES OF YOUR SHARES

SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES

Page 25 of 31
<PAGE>

HOW TO EXCHANGE YOUR SHARES

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

TELEPHONE TRANSACTIONS

AUTHORIZED INTERMEDIARIES

SHAREHOLDER SERVICING

Page 26 of 31
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

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

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

Page 27 of 31
<PAGE>

TAXES

The Tax-Exempt Money and New York Tax-Exempt Money Funds intend to distribute
federally tax-exempt income. Each Fund may invest a portion of its assets in
securities that generate taxable income for federal or state income taxes.
Income exempt from federal tax may be subject to state and local taxes. Any
capital gains distributed by these Funds may be taxable.

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

Page 28 of 31
<PAGE>

FINANCIAL HIGHLIGHTS

The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand each Fund. This
information is intended to help you understand each Fund's financial performance
for the past five years, or, if shorter, the period of the Fund's operations.
Some of this information reflects financial information for a single Fund share.
The total returns in the table represent the rate that you would have earned (or
lost) on an investment in a Fund, assuming you reinvested all of your dividends
and distributions. This information has been audited by _____________________,
independent public accountants. Their report, along with each Fund's financial
statements, appears in the annual report that accompanies our Statement of
Additional Information. You can obtain the annual report, which contains more
performance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8780).

Page 29 of 31
<PAGE>

EXCELSIOR FUNDS, INC.

INVESTMENT ADVISER

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

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

DISTRIBUTOR

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

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

STATEMENT OF ADDITIONAL INFORMATION (SAI)

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

ANNUAL AND SEMI-ANNUAL REPORTS

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

TO OBTAIN MORE INFORMATION:

BY TELEPHONE: CALL (800) 446-1012 (FROM OVERSEAS, CALL (617) 557-8780)

BY MAIL:
Excelsior Funds, Inc. (or Excelsior Tax-Exempt Funds, Inc.)
73 Tremont Street
Boston, Massachusetts 02108-3913

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

BY INTERNET: [VAR:FUND.INTERNETADDRESS]]

Page 30 of 31
<PAGE>

FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about Excelsior Funds, Inc. and Excelsior
Tax-Exempt Funds, Inc., from the SEC's website ("HTTP://WWW.SEC.GOV"). You may
review and copy documents at the SEC Public Reference Room in Washington, DC
(for information call 1-800-SEC-0330). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and
Exchange Commission, Public Reference Section, Washington, DC 20549-6009. The
Investment Company Act registration numbers of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. are 811-4088 and 811-4101, respectively.

Page 31 of 31
<PAGE>

EXCELSIOR 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 _________,
independent auditors, contained in the annual report to the Fund's shareholders
for the fiscal year ended ________ 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.

<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
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 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 .......................40
Banking Laws ............................................................42
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
Federal .................................................................48
New York .. .............................................................50
PERFORMANCE AND YIELD INFORMATION ............................................50
MISCELLANEOUS ................................................................54
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

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.

<PAGE>

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.

-2-
<PAGE>

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.

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

-3-
<PAGE>

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.

-4-
<PAGE>

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

-5-
<PAGE>

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

-6-
<PAGE>

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,

-7-
<PAGE>

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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<PAGE>

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

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

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

The Additional Information Statement reflects estimates of receipts
and disbursements as formulated in the State Financial Plan released on June 25,
1998, as updated on a quarterly basis. The third quarterly update ("Third
Quarterly Update") was released on January 27, 1999 in connection with the
1999-2000 Executive Budget. There can be no assurance that the State economy
will not experience worse-than-predicted results, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.

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

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<PAGE>

year. The Governor is required to submit to the Legislature
quarterly budget updates which include a revised cash-basis state financial
plan, and an explanation of any changes from the previous state financial plan.

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

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

The Third Quarterly Update of the 1998-99 Financial Plan projected a
year-end available cash surplus of $1.79 billion in the General Fund, an
increase of $749 million over the surplus estimate in the Mid-Year Update.
Strong growth in receipts as well as lower-than expected disbursements during
the first nine months of the fiscal year account for the higher surplus
estimate. As of February 9, 1999, this amount was projected to be reduced by the
transfer of $1.04 billion to the tax refund reserve. The projected remaining
closing balance of $799 million in the General Fund is comprised of $473 million
in the TSRF, $226 million in the CPF, and $100 million in the CRF.

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

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

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<PAGE>

appropriations as a result of the Governor's 1998 vetoes, used to fund other
expenditures in 1999-2000.

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

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

Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The DOB believes that its projections
of receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. The projections assume
no changes in federal tax law, which could substantially alter the current
receipts forecast. In addition, these projections do not include funding for new
collective bargaining agreements after the current contracts expire on April 1,
1999. Actual results, however, could differ materially and adversely from their
projections, and those projections may be changed materially and adversely from
time to time.

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

The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes,

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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
$37.2 billion).

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

Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.85 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1998-99.

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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) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to regulations promulgated by the
Superintendent of Insurance establishing certain excess medical malpractice
premium rates; (5) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(6) action seeking enforcement of certain sales and excise taxes and tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations; (7)
a challenge to the Governor's application of his constitutional line item veto
authority; and (8) a challenge to the enactment of the CLEAN WATER/CLEAN AIR
BOND ACT OF 1996.

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<PAGE>

million. Annual payments to the various parties will continue through the
State's 2002-03 fiscal year in amounts which will not exceed $48.4 million in
any fiscal year subsequent to the State's 1994-95 fiscal year. Litigation
challenging the constitutionality of the treatment of certain moneys held in a
reserve fund was settled in June 1996 and certain amounts in a Supplemental
Reserve Fund previously credited by the State against prior State and local
pension contributions will be paid in 1998.

The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could affect
adversely the financial condition of the State in the 1998-99 fiscal year or
thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings could
exceed the amount of the reserve established in the State's financial plan for
the payment of judgments and, therefore, could affect the ability of the State
to maintain a balanced financial plan.

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

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

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

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<PAGE>

However, in the event that such local assistance payments are so diverted, the
affected localities could seek additional State funds.

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

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

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

On July 2, 1985, S&P revised its rating of City bonds upward to BBB+
and on November 19, 1987, to A-. On February 3, 1998 and again on May 27, 1998,
S&P assigned a BBB+ rating to the City's general obligation debt and placed the
ratings on CreditWatch with positive implications. On March 9, 1999, S&P
assigned its A- rating to Series 1999H of New York City general obligation bonds
and affirmed the A- rating on various previously issued New York City bonds.

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

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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.

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

The 1998-99 forecast for user taxes and fees also reflects the impact
of scheduled tax reductions that will lower receipts by $38 million, as well as
the impact of two Executive

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<PAGE>

Budget proposals that are projected to lower receipts by an additional $79
million. The first proposal would divert $30 million in motor vehicle
registration fees from the General Fund to the Dedicated Highway and Bridge
Trust Fund; the second would reduce fees for motor vehicle registrations, which
would further lower receipts by $49 million. The underlying growth of receipts
in this category is projected at 4 percent, after adjusting for these scheduled
and recommended changes.

In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 billion to $4.96
billion. The decline in this category is largely attributable to scheduled tax
reductions. In total, collections for corporation and utility taxes and the
petroleum business tax are projected to fall by $107 million from 1997-98. The
decline in receipts in these categories is partially offset by growth in the
corporation franchise, insurance and bank taxes, which are projected to grow by
$88 million over the current fiscal year.

The Financial Plan is projected to show a GAAP-basis surplus of $131
million for 1997-98 and a GAAP-basis deficit of $1.3 billion for 1998-99 in the
General Fund, primarily as a result of the use of the 1997-98 cash surplus. In
1998-99, the General Fund GAAP Financial Plan shows total revenues of $34.68
billion, total expenditures of $35.94 billion, and net other financing sources
and uses of $42 million.

Although the City has consistently maintained balanced budgets and is
projected to achieve balanced operating results for the 1999 fiscal year, there
can be no assurance that the gap-closing actions proposed in the 1998-2001
Financial Plan can be successfully implemented or that the City will maintain a
balanced budget in future years without additional State aid, revenue increases
or expenditure reductions. Additional tax increases and reductions in essential
City services could adversely affect the City's economic base.

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

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<PAGE>

(the "Finance Authority") to finance City capital projects. The Finance
Authority, was created as part of the City's effort to assist in keeping the
City's indebtedness within the forecast level of the constitutional restrictions
on the amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds. On June 2, 1997,
an action was commenced seeking a declaratory judgment declaring the legislation
establishing the Transitional Finance Authority to be unconstitutional. If such
legislation were voided, projected contracts for the City capital projects would
exceed the City's debt limit during fiscal year 1997-98. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.

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

The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. Although the City's 1998 fiscal year financial plan
projected $2.4 billion of seasonal financing, the City expected to undertake
only approximately $1.4 billion of seasonal financing. The City issued $2.4
billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively.
Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.

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

Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by New York State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken by
the State to assist Yonkers could result in increased State expenditures for
extraordinary local assistance.

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<PAGE>

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

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

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

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

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

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

The Office for Technology is monitoring compliance progress for the
State's mission-critical and high-priority systems and is reporting compliance
progress to the Governor's

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<PAGE>

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

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

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;

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<PAGE>

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, 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.

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<PAGE>

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

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

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

The net asset value of the Fund is determined and the shares of the
Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for the Fund are determined on each day the Exchange and the Adviser
are open for trading (a "Business Day"). Currently, the holidays which the Fund
observes are New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas. The Fund's net asset value per share for
purposes of pricing sales and redemptions is calculated by dividing the value of
all securities and other assets allocable to the Fund, less the liabilities
allocable to the Fund, by the number of its outstanding shares.

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<PAGE>

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

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

PURCHASE OF SHARES

Shares of the 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."

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<PAGE>

connection with such purchases. Such Investors should contact their registered
investment adviser or certified financial planner for further information on
transaction fees. Investors may also purchase shares directly from the
Distributor in accordance with procedures described in the Prospectus.

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

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

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<PAGE>

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

REDEMPTION PROCEDURES

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

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

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

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

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<PAGE>

amount if the proceeds are to be sent elsewhere than the address of record, must
be accompanied by signature guarantees from any eligible guarantor institution
approved by CGFSC in accordance with its Standards, Procedures and Guidelines
for the Acceptance of Signature Guarantees ("Signature Guarantee Guidelines").
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. All eligible guarantor institutions
must participate in the Securities Transfer Agents Medallion Program ("STAMP")
in order to be approved by CGFSC pursuant to the Signature Guarantee Guidelines.
Copies of the Signature Guarantee Guidelines and information on STAMP can be
obtained from CGFSC at (800) 446-1012 or at the address given above.

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

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

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

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>

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

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

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

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<PAGE>

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

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

-31-
<PAGE>

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.

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.

-32-
<PAGE>

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.

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.

-33-
<PAGE>

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.

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.

-34-
<PAGE>

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.

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
Stamford, CT 06903 of Excelsior Funds and Excelsior
Age: 67 Institutional Trust (since 1995);
Vice Chairman of U.S. Trust
Corporation and U.S. Trust New York
(from February 1990 until September
1995); and Chairman, U.S. Trust
Connecticut (from March 1993 to May
1997).
</TABLE>

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

-35-
<PAGE>

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: 55 Director, Parsons Brinkerhoff Energy
Services Inc. (since 1996); Director,
Parsons Brinkerhoff, Inc.
(engineering firm) (since 1995);
President, Continuation Investments
Group, Inc. (since 1997); President,
Mandrake Group (investment and
consulting firm) (1994-1997);
Director, Hyperion Total Return Fund,
Inc. and four other funds for which
Hyperion Capital Management, Inc.
serves as investment adviser (since
1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993
to 1996); Director, The Latin America
Smaller Companies Fund, Inc. (since
1993); Member of Advisory Board,
Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and
Director, Mueller Industries, Inc.
(from 1992 to 1994).

Joseph H. Dugan Director Retired; Director of Excelsior Fund
913 Franklin Lake Road and the Company (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable
Age: 73 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 Affiliations
- ---------------- ----------- ------------------
<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 Series, Inc. (from 1994 to June
Age: 77 1997); Trustee of Excelsior
Institutional Trust (since 1995);
Director, Deutsche Bank Financial,
Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC
Mutual Funds Trust (since 1988).

W. Wallace McDowell, Jr Director Director of Excelsior Fund and the
c/o Prospect Capital Company (since 1996); Trustee of
Corp. Excelsior Funds and Excelsior
43 Arch Street Institutional Trust (since 1994);
Greenwich, CT 06830 Private Investor (since 1994);
Age: 61 Managing Director, Morgan Lewis
Githens & Ahn (from 1991 to 1994);
and Director, U.S. Homecare
Corporation (since 1992), Grossmans,
Inc. (from 1993 to 1996), Children's
Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and
Jack Morton Productions (since 1987).

Jonathan Piel Director Director of Excelsior Fund and the
558 E. 87th Street Company (since 1996); Trustee,
New York, New York 10128 Excelsior Funds and Excelsior
Age: 59 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).
</TABLE>

-37-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of Excelsior Fund and the
Church Pension Fund Company (since 1987); Director of UST
800 Second Avenue Master Variable Series, Inc. (from
New York, NY 10017 1994 to June 1997); Trustee of
Age: 72 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).

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: 72 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
Philadelphia National Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 55
</TABLE>

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

-38-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker
Philadelphia National Bank Building Biddle & Reath LLP.
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 40

Edward 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: 37 Company (January 1991 to November
1996).

John M. Corcoran Assistant Treasurer Vice President, Director of Fund
Chase Global Funds Administration, Chase Global Funds
Services Company Services Company (since April
73 Tremont Street 1998); Vice President, Senior
Boston, MA 02108-3913 Manager of Fund Administration,
Age: 33 Chase Global Funds Services
Company (from July 1996 to April
1998); Second Vice President,
Manager of Fund Administration,
Chase Global Funds Services
Company (from October 1993 to
July 1996); and Audit Manager,
Ernst & Young LLP (from August
1987 to September 1993).
</TABLE>

Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to receive
an additional $5,000 per annum for services in such capacity. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to the Company. The employees of 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
_____, 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 $______ None $______ (3)**
Director

Rodman L. Drake $______ None $______ (4)**
Director

Joseph H. Dugan $______ None $______ (3)**
Director

Wolfe J. Frankl $______ None $______ (3)**
Director

W. Wallace McDowell $______ None $______ (4)**
Director

Jonathan Piel $______ None $______ (4)**
Director

Robert A. Robinson $______ None $______ (3)**
Director

Alfred C. Tannachion $______ None $______ (3)**
Director

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

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

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

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

-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 $______, $549,765 and $451,669, respectively,
with respect to the Fund. For the same periods, the Adviser waived advisory fees
totaling $________, $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)

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

Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior 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 $_________ with respect to
the Fund. For the same period, the Administrators waived __________ 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 $___________, $33,519 and $30,408,
respectively, with respect to the Fund, of which $__________, $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.

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<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 established will be reviewed by the
Administrators under the general supervision of the Board of Directors.

INDEPENDENT AUDITORS

____________________, independent auditors, [ADDRESS] , serve as
auditors of the Company. The Fund's Financial Highlights included in the
Prospectus and the financial statements for the fiscal year ended ____________
incorporated by reference in this

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<PAGE>

Statement of Additional Information have been audited by __________________ for
the periods included in their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Company and will pass upon the legality of
the shares offered by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

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 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.

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<PAGE>

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 Federal 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 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."

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<PAGE>

NEW YORK

Exempt-interest dividends (as defined for federal income tax purposes)
derived from interest on New York Municipal Obligations will be exempt from New
York State and New York City personal income taxes (but not corporate franchise
taxes), provided the interest on such obligations is and continues to be exempt
from applicable federal, New York State and New York City income taxes. To the
extent that Investors are subject to state and local taxes outside of New York
State and New York City, distributions by the Fund may be taxable income for
purposes thereof. Dividends and distributions derived from income (including
capital gains on all New York Municipal Obligations) other than interest on the
New York Municipal Obligations described above are not exempt from New York
State and New York City taxes. A percentage of the interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
generally is not deductible for federal, New York State or New York City
personal income tax purposes.

* * *

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state and local taxes. Shareholders
will be advised at least annually as to the federal, New York State and New York
City personal income tax consequences of distributions made each year.

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
Yield = 2 [(------ + 1)TO THE POWER OF 6 - 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.

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<PAGE>

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 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 _____%.

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 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 calculation, the
tax-equivalent yield of the Fund for the 30-day period ended March 31, 1999 was
_____%.

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<PAGE>

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:

ERV TO THE POWER OF 1/n
T = [(-----) - 1]
P

Where: T = average annual total return.

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

P = hypothetical initial payment of $1,000.

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

The 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 ______%, _____% and _____%, 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.

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<PAGE>

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.

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

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<PAGE>

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 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 ________, 1999, U.S. Trust and its affiliates held of record
_____% 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 May 19, 1999, the name, address and percentage ownership of
each person, in addition to U.S. Trust and its affiliates, that beneficially
owned 5% or more of the outstanding shares of the Fund were as follows:
NEW YORK INTERMEDIATE-TERM TAX-EXEMPT FUND: Fredric and Anne Garonzik, 85
Broad Street, 26th Floor, New York, New York, 10004, 7.77%.

FINANCIAL STATEMENTS

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

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<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

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

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

"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
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 on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.

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

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

A-1
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse

A-3
<PAGE>

developments (both internal and external) than those with higher ratings, the
capacity to service principal and interest in a timely fashion is considered
adequate.

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

"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 commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

A-4
<PAGE>

"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 similar action if
payments on an obligation are jeopardized.

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

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

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

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

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

A-5
<PAGE>

"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 operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

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

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

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

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

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

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

A-6
<PAGE>

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

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

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

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

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

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

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

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

A-7
<PAGE>

"CCC", "CC", "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. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved, and
"D" represents the lowest potential for recovery.

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

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

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

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

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

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

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

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

A-8
<PAGE>

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

MUNICIPAL NOTE RATINGS

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

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

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

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

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

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

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

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

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

A-9
<PAGE>

"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
____________________, independent auditors, contained in the annual report to
the Fund's shareholders for the fiscal year ended ____________ are incorporated
herein by reference in the section entitled "Financial Statements." No other
parts of the annual report are incorporated herein by reference. Copies of the
annual report may be obtained upon request and without charge by calling (800)
446-1012.

<PAGE>

<TABLE>
<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..................................................21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................................22
Purchase of Shares......................................................24
Redemption Procedures...................................................26
Other Redemption Information............................................28
INVESTOR PROGRAMS................................................................29
Systematic Withdrawal Plan..............................................29
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

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.

<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.

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

-3-
<PAGE>

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

-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."

INVESTMENT COMPANY SECURITIES

WHEN-ISSUED AND FORWARD TRANSACTIONS

-6-
<PAGE>

STAND-BY COMMITMENTS

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

-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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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 (the "State"). 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 -- at rates

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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, expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in its budget reserve, the Special
Fund for Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak in
1993.

For several fiscal years during the recession, 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 end of these 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, released on
January 9, 1998, 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 ("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.

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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 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 an increase
in the personal income tax dependent credit ($612 million General Fund cost in
1998-99, but less in future years), and various other credits ($239 million).

The revised 1998-99 Budget, as reported in the 1999-00 Budget, also
reflects the latest estimated costs or savings as provided in various pieces of
legislation passed and signed after the 1998 Budget Act. Major budget items
include costs for the All-American Canal, the State's share of purchase of
Headwaters Forest, and additional funds for state prisons and juvenile
facilities. The revised budget reflects a $433 million reduction in the State's
obligation to contribute to STRS in 1998-99.

PROPOSED 1999-00 BUDGET

On January 8, 1999, Governor Davis released his proposed budget for
Fiscal Year 1999-2000 (the "Budget"). The Budget generally reported that General
Fund revenues for FY 1998-99 and FY 1999-00 would be lower than earlier
projections (primarily due to the overseas economic downturn), while some costs
would be higher than earlier projections. The Budget was designed to meet
ongoing costs and basic inflation adjustments, and included certain new
programs.

The Budget projected General Fund revenues and transfers in 1990-00 of
$60.3 billion. This included anticipated initial payments from the tobacco
litigation settlement of about $560 million, and receipt of one-time revenue
from sale of assets. The Budget assumed receipt of about $400 million of federal
aid for certain health and welfare programs and reimbursement

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for costs for incarceration of undocumented felons, above the amount presently
received from the federal government.

The Budget proposes General Fund expenditures of $60.5 billion, giving
highest priority to education.

Based on the proposed revenues and expenditures, the Budget projected
the June 30, 2000 balance in the SFEU would drop to about $415 million.

On February 16, 1999, the Legislative Analyst released a report on the
Budget (the "LAO Report"). The LAO Report was based in part on actual revenues
received in December 1998 and January 1999. These revenues were higher than had
been predicted in the Budget, apparently reflecting stronger than expected
economic activity in the nation and the State. The LAO Report projected that
General Fund revenues in 1998-99 could be as much as $750 million higher than
predicted in the Budget, and 1999-00 revenues could be $550 million above the
Budget.

THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, Orange County,
California and its Investment Pool (the "Pool") filed for bankruptcy under
Chapter 9 of the United States Bankruptcy Code. The subsequent restructuring led
to the sale of substantially all of the Pool's portfolio and resulted in losses
estimated to be approximately $1.7 billion (or approximately 22% of amounts
deposited by the Pool investors). Approximately 187 California public entities
- -- substantially all of which are public agencies within the county -- had
various bonds, notes or other forms of indebtedness outstanding. In some
instances the proceeds of such indebtedness were invested in the Pool. In April,
1996, the County emerged from bankruptcy. At that time, the County and its
financial advisors stated that the County had emerged from the bankruptcy
without any structural fiscal problems. However, repayment for many of the
cities, schools and special districts that lost money in the County portfolio
remains contingent on the outcome of litigation pending against investment firms
and other finance professionals. Settlement discussions involving a number of
the defendants have occurred and a number of agreements have been executed.
However, until any such agreements become final and any remaining litigation is
resolved, it is impossible to determine the ultimate impact of the bankruptcy
and its aftermath on these various agencies and their claims.

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 Municipal Obligations held by the Fund
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

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State's general fund will be distributed in the future to counties, cities and
their various entities is unclear.

HEALTH CARE LEGISLATION. Certain Municipal Obligations held by the
Fund 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 Municipal 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-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 Municipal 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 Municipal 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

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basis from unappropriated State funds. Since 1983, Arthur D. Little, Inc. has
prepared and updated studies (the most recent of which was in 1990). That study
evaluated the adequacy of the reserve fund established under the insurance
program and recommended maintaining the current reserve calculation method. In
March of 1990, Arthur D. Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for "multi-level"
facilities at a reserve level consistent with those that would be required by an
insurance company.

MORTGAGES AND DEEDS. Certain Municipal Obligations held by the Fund
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 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 Municipal 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

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requirements of the federal or State Constitutions, consequently preventing
an issuer from using the nonjudicial foreclosure remedy described above.

Certain Municipal Obligations held by the Fund 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 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 Municipal
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.

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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 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

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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 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 by two-thirds vote of both
houses, 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' Proposition 98 entitlements, and also intended that the "extra"
payments would not be included in the Proposition 98 "base" for calculating
future years' entitlements. By

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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
projects, 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 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.

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INVESTMENT LIMITATIONS

The Fund may not:

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;

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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 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

-22-
<PAGE>

-23-
<PAGE>

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"). 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."

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.

-24-
<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

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)

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

-25-
<PAGE>

purchase order, in whole or in part, or to waive any minimum investment
requirements. Third party checks will not be accepted as payment for Fund
shares.

REDEMPTION PROCEDURES

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

Excelsior 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

-26-
<PAGE>

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.

-27-
<PAGE>

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.

OTHER REDEMPTION INFORMATION

-28-
<PAGE>

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.

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.

-29-
<PAGE>

other shareholders, the Companies and Excelsior Institutional Trust reserve the
right to limit the number of exchange requests of Investors to no more than six
per year. The Companies and Excelsior Institutional Trust may modify or
terminate the exchange program at any time upon 60 days' written notice to
shareholders, and may reject any exchange request. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.

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

-30-
<PAGE>

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.

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.

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

-31-
<PAGE>

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.

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.

-32-
<PAGE>

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

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 and the Company (since
238 June Road President & Treasurer 1995); Trustee of Excelsior Funds and Excelsior
Stamford, CT 06903 Institutional Trust (since 1995); Vice Chairman of U.S.
Age: 67 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 and the Company (since
333 East 69th Street 1984); Director of UST Master Variable Series, Inc. (from
Apt. 10-H 1994 to June 1997); Trustee of Excelsior Institutional Trust
New York, NY 10021 (since 1995); and Director, Royal Life Insurance Co. of New
Age: 72 York (since 1991).

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

-33-
<PAGE>

<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 Company (since 1996);
Continuation Investments Group, Inc. Trustee, Excelsior Institutional Trust and Excelsior Funds
1251 Avenue of the Americas, 9th Floor (since 1994); Director, Parsons Brinkerhoff Energy Services
New York, NY 10020 Inc. (since 1996); Director, Parsons Brinkerhoff, Inc.
Age: 55 (engineering firm) (since 1995); President, Continuation
Investments Group, Inc. (since 1997); President, Mandrake
Group (investment and consulting firm) (1994-1997);
Director, Hyperion Total Return Fund, Inc. and four other
funds for which Hyperion Capital Management, Inc. serves as
investment adviser (since 1991); Co-Chairman, KMR Power
Corporation (power plants) (from 1993 to 1996); Director,
The Latin America Smaller Companies Fund, Inc. (since 1993);
Member of Advisory Board, Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P. (Brazil) (from 1993 to
1996); and Director, Mueller Industries, Inc. (from 1992 to
1994).

Joseph H. Dugan Director Retired; Director of Excelsior Fund and the Company (since
913 Franklin Lake Road 1984); Director of UST Master Variable Series, Inc. (from
Franklin Lakes, NJ 07417 1994 to June 1997); and Trustee of Excelsior Institutional
Age: 73 Trust (since 1995).

Wolfe J. Frankl Director Retired; Director of Excelsior Fund and the Company (since
2320 Cumberland Road 1986); Director of UST Master Variable Series, Inc. (from
Charlottesville, VA 1994 to June 1997); Trustee of Excelsior Institutional Trust
22901 (since 1995); Director, Deutsche Bank Financial, Inc. (since
Age: 77 1989); Director, The Harbus Corporation (since 1951); and
Trustee, HSBC Funds Trust and HSBC Mutual Funds Trust (since
1988).

-34-
<PAGE>

Jonathan Piel Director Director of Excelsior Fund and the Company (since 1996);
558 E. 87th Street Trustee, Excelsior Funds and Excelsior Institutional Trust
New York, New York 10128 (since 1994); Vice President and Editor, Scientific
Age: 59 American, Inc. (from 1986 to 1994); Director, Group for The
South Fork, Bridgehampton, New York (since 1993); and
Member, Advisory Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology (since 1984).

-35-
<PAGE>

<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of Excelsior Fund and the Company (since 1987);
Church Pension Fund Director of UST Master Variable Series, Inc. (from 1994 to
800 Second Avenue June 1997); Trustee of Excelsior Institutional Trust (since
New York, NY 10017 1995); President Emeritus, The Church Pension Fund and its
Age: 72 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).

Alfred C. Tannachion(2) Director Retired; Director of Excelsior Fund and the Company (since
6549 Pine Meadows Drive 1985); Chairman of the Board of Excelsior Fund and Excelsior
Spring Hill, FL 34606 Tax-Exempt Fund (1991-1997) and Excelsior Institutional
Age: 72 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 & Reath LLP.
Philadelphia National
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 55

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

-36-
<PAGE>

<CAPTION>
Principal Occupation
Position with During Past 5 years and
Name and Address the Company Other Affiliations
- ---------------- ----------- ------------------
<S> <C> <C>
Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3497
Age: 40

Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds Services
Chase Global Funds Company (November 1996 to present); and Officer and Manager
Services Company of Financial Reporting, Investors Bank & Trust Company
73 Tremont Street (January 1991 to November 1996).
Boston, MA 02108-3913
Age: 37

John M. Corcoran Assistant Treasurer Vice President, Director of Fund Administration, Chase
Chase Global Funds Global Funds Services Company (since April 1998); Vice
Services Company President, Senior Manager of Fund Administration, Chase
73 Tremont Street Global Funds Services Company (from July 1996 to April
Boston, MA 02108-3913 1998); Second Vice President, Manager of Fund
Age: 33 Administration, Chase Global Funds Services Company (from
October 1993 to July 1996); and Audit Manager, Ernst & Young
LLP (from August 1987 to September 1993).
</TABLE>

Each director of the Company receives an annual fee of $9,000 plus a
meeting fee of $1,500 for each meeting attended and is reimbursed for expenses
incurred in attending meetings. The Chairman of the Board is entitled to receive
an additional $5,000 per annum for services in such capacity. Drinker Biddle &
Reath LLP, of which Messrs. McConnel and Malloy are partners, receives legal
fees as counsel to the Company. The employees of 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 _____, 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.

-37-

<PAGE>

Rodman L. Drake $______ None $______ (4)**
Director

Joseph H. Dugan $______ None $______ (3)**
Director

Wolfe J. Frankl $______ None $______ (3)**
Director

W. Wallace McDowell $______ None $______ (4)**
Director

Jonathan Piel $______ None $______ (4)**
Director

Robert A. Robinson $______ None $______ (3)**
Director

Alfred C. Tannachion $______ None $______ (3)**
Director

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

</TABLE>

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

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

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

-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.

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 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 $______ with respect to the Fund. For the same period,
the Adviser waived advisory fees totaling $______ with respect to the Fund. For
the same period, the Sub-Adviser ____________________.

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.

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:

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.

-40-

<PAGE>

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").

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 year ended March 31, 1999, payments to Shareholder
Organizations totaled $________ with respect to the Fund, $_______ 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

-42-

<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

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

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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 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.

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 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.

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<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

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.

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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

____________________, independent auditors, __[address]__,
serve as auditors of the Company. The Fund's Financial Highlights included in
the Prospectus and the financial statements for the fiscal year ended
____________ incorporated by reference in this Statement of Additional
Information have been audited by __________________ for the periods included
in their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Company, and Mr. Malloy, Assistant Secretary of the Company, are
partners), Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107, is counsel to the Company and will pass upon
the legality of the shares offered by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

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

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:

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

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of reimbursements).

c = average daily number of shares outstanding that were
entitled to receive dividends.

d = maximum offering price per share on the last day of the
period.

For the purpose of determining interest earned during the
period (variable "a" in the formula), the 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.

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 _____%.

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 California 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 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 calculation, the tax-equivalent
yield of the Fund for the 30-day period ended March 31, 1999 was _____%.

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:

ERV 1/n
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 _____% and _____%,
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 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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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.

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

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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 ________, 1999, U.S. Trust and its affiliates held of
record _____% 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.

FINANCIAL STATEMENTS

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

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APPENDIX A

COMMERCIAL PAPER RATINGS

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

"A-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.

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

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

A-1

<PAGE>

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

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

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

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 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 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.

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

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

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

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

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

A-3

<PAGE>

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

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

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

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

A-4

<PAGE>

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

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

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

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

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

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

"r" - This symbol is attached to the ratings of instruments
with significant noncredit risks. Examples include obligations linked 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:

"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 in "Aaa" securities.

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

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

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

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

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

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

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

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

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

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 very unlikely to be adversely
affected by foreseeable events.

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

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

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

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

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 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. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved, and
"D" represents the lowest potential for recovery.

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

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

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

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

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

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

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

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 concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:

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

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

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

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

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

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

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

A-9

<PAGE>

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

<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS. . . . . . . . . . . . . . . . . . . . .1
Additional Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . .1
Additional Information on Portfolio Instruments . . . . . . . . . . . . . . . .4
Special Considerations Relating to New York Municipal Securities. . . . . . . 12
Investment Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
NET ASSET VALUE AND NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . 29
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Redemption Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other Redemption Information. . . . . . . . . . . . . . . . . . . . . . . . . 35
INVESTOR PROGRAMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Systematic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Exchange Privilege. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Automatic Investment Program. . . . . . . . . . . . . . . . . . . . . . . . . 37
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Investment Advisory and Administration Agreements . . . . . . . . . . . . . . 44
Banking Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Shareholder Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . 48
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . . . . 51
Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Tax-Exempt Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
YIELD INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>

<PAGE>

CLASSIFICATION AND HISTORY

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

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

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

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

ADDITIONAL INVESTMENT POLICIES

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

<PAGE>

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

TREASURY MONEY FUND

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

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

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

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

-2-
<PAGE>

expects that under normal market conditions, at least 65% of its total assets
will be invested in New York Municipal Securities.

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

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

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

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

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

ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS

VARIABLE AND FLOATING RATE INSTRUMENTS

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

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

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

REPURCHASE AGREEMENTS

The Money, Government Money, Tax-Exempt Money and New York Tax-Exempt
Money Funds may agree to purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The

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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.

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

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<PAGE>

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

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

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

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

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

STAND-BY COMMITMENTS

Each Tax-Exempt Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a dealer or
bank agrees to purchase at the Fund's option, specified Municipal Securities at
a specified price. The amount payable to a Fund upon its exercise of a
"stand-by commitment" is normally (i) the Fund's acquisition cost of the
Municipal Securities (excluding any accrued interest which the Fund paid

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<PAGE>

on their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by the Tax-Exempt Funds at any time before the maturity of the
underlying Municipal Securities, and may be sold, transferred or assigned by a
Fund only with the underlying instruments.

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

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

MUNICIPAL SECURITIES

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

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

Each Tax-Exempt Fund's portfolio may also include "moral obligation"
securities, which are usually issued by public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund -- the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality

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<PAGE>

which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by a Tax-Exempt Fund.

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

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

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

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<PAGE>

to privately held or publicly owned corporations in the financing of commercial
or industrial facilities. State and local governments are authorized in most
states to issue private activity bonds for such purposes in order to encourage
corporations to locate within their communities. Private activity bonds held by
the Fund are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. The principal and interest on these
obligations may be payable from the general revenues of the users of such
facilities. Consequently, the credit quality of these obligations is usually
directly related to the credit standing of the corporate user of the facility
involved.

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

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

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

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

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<PAGE>

independently the underlying proceedings relating to the issuance of Municipal
Securities, the creation of any tax-exempt derivative securities, or the bases
for such opinions.

INSURED MUNICIPAL SECURITIES

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

MONEY MARKET INSTRUMENTS

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

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations
acquired by the Money Fund may also include U.S. dollar-denominated obligations
of foreign branches of U.S. banks and obligations of domestic branches of
foreign banks. Investments in bank obligations are limited to the obligations
of financial institutions having more than $2 billion in total assets at the
time of purchase. Investments in bank obligations of foreign branches of
domestic financial institutions or of domestic branches of foreign banks are
limited so that no more than 5% of the value of the Fund's total assets may be
invested in any one branch, and that no more than 20% of the Fund's total assets
at the time of purchase may be invested in the aggregate in such obligations.
Investments in non-negotiable time deposits are limited to no more than 5% of
the value of a Fund's total assets at time of purchase, and are further subject
to the overall 10% limit on illiquid securities described below under "Illiquid
Securities."

Investments in obligations of foreign branches of U.S. banks and of
U.S. branches of foreign banks may subject the Money Fund to additional
investment risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than

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<PAGE>

those applicable to domestic branches of U.S. banks. Investments in the
obligations of U.S. branches of foreign banks or foreign branches of U.S. banks
will be made only when the Adviser believes that the credit risk with respect to
the instrument is minimal.

GOVERNMENT OBLIGATIONS

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

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

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

INVESTMENT COMPANY SECURITIES

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

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shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Any change by
the Funds in the future with respect to their policies concerning investments in
securities issued by other investment companies will be made only in accordance
with the requirements of the 1940 Act.

BORROWING AND REVERSE REPURCHASE AGREEMENTS

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.

MISCELLANEOUS

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

SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES

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

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<PAGE>

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

The Annual Information Statement reflects estimates of receipts and
disbursements as formulated in the State Financial Plan released on June 25,
1998, as updated on a quarterly basis. The third quarterly update ("Third
Quarterly Update") was released on January 27, 1999 in connection with the
1999-2000 Executive Budget. There can be no assurance that the State economy
will not experience worse-than-predicted results, with corresponding material
and adverse effects on the State's projections of receipts and disbursements.

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

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<PAGE>

fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes.

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

The Third Quarterly Update of the 1998-99 Financial Plan projected a
year-end available cash surplus of $1.79 billion in the General Fund, an
increase of $749 million over the surplus estimate in the Mid-Year Update.
Strong growth in receipts as well as lower-than expected disbursements during
the first nine months of the fiscal year account for the higher surplus
estimate. As of February 9, 1999, this amount was projected to be reduced by
the transfer of $1.04 billion to the tax refund reserve. The projected
remaining closing balance of $799 million in the General Fund is comprised of
$473 million in the TSRF, $226 million in the CPF, and $100 million in the CRF.

The 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.

Over the long-term, uncertainties with regard to the economy present
the largest potential risk to future budget balance in New York State. For
example, a downturn in the

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

Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to
fiscal year and are influenced by governments, institutions, and organizations
that are not subject to the State's control. The State Financial Plan is also
necessarily based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. The DOB believes
that its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
The projections assume no changes in federal tax law, which could substantially
alter the current receipts forecast. In addition, these projections do not
include funding for new collective bargaining agreements after the current
contracts expire on April 1, 1999. Actual results, however, could differ
materially and adversely from their projections, and those projections may be
changed materially and adversely from time to time.

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.

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<PAGE>

equipment, and expect to meet their debt service requirements through the
receipt of rental or other contractual payments made by the State. Although
these financing arrangements involve a contractual agreement by the State to
make payments to a public authority, municipality or other entity, the State's
obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the LGAC to restructure the
way the State makes certain local aid payments.

The proposed 1998-99 through 2003-04 Capital Program and Financing
Plan was released with the Executive Budget on January 27, 1999. The
recommended five-year Capital Program and Financing Plan reflects debt reduction
initiatives that would reduce future State-supported debt issuances by
significantly increasing the share of the Plan financed with pay-as-you-go
resources. Compared to the last year of the July 1998 update to the Plan,
outstanding State-supported debt would be reduced by $4.7 billion (from $41.9
billion to $37.2 billion).

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.

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<PAGE>

LITIGATION. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) challenges to regulations promulgated by the
Superintendent of Insurance establishing certain excess medical malpractice
premium rates; (5) challenges to the constitutionality of Public Health Law
2807-d, which imposes a gross receipts tax from certain patient care services;
(6) action seeking enforcement of certain sales and excise taxes and tobacco
products and motor fuel sold to non-Indian consumers on Indian reservations;
(7) a challenge to the Governor's application of his constitutional line item
veto authority; and (8) a challenge to the enactment of the CLEAN WATER/CLEAN
AIR BOND ACT OF 1996.

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

The legal proceedings noted above involve State finances, State
programs and miscellaneous cure rights, tort, real property and contract claims
in which the State is a defendant and the monetary damages sought are
substantial, generally in excess of $100 million. These proceedings could
affect adversely the financial condition of the State in the 1998-99 fiscal year
or thereafter. Adverse developments in these proceedings, other proceedings for
which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced financial plan. An adverse decision in any of these proceedings
could exceed the amount of the reserve established in the State's financial plan

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for the payment of judgments and, therefore, could affect the ability of the
State to maintain a balanced financial plan.

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

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

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

NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State
may also be impacted by the fiscal health of its localities, particularly the
City, which has required and

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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.

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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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.

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

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

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Plan shows total revenues of $34.68 billion, total expenditures of
$35.94 billion, and net other financing sources and uses of $42 million.

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

Implementation of the 1998-2001 Financial Plan is also dependent upon
the City's ability to market its securities successfully. The City's financing
program for fiscal years 1998 through 2001 contemplates the issuance of $5.7
billion of general obligation bonds and $5.7 billion of bonds to be issued by
the proposed New York City Transitional Finance Authority (the "Finance
Authority") to finance City capital projects. The Finance Authority, was
created as part of the City's effort to assist in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. Despite this additional
financing mechanism, the City currently projects that, if no further action is
taken, it will reach its debt limit in City fiscal year 1999-2000. Indebtedness
subject to the constitutional debt limit includes liability on capital contracts
that are expected to be funded with general obligation bonds. On June 2, 1997,
an action was commenced seeking a declaratory judgment declaring the legislation
establishing the Transitional Finance Authority to be unconstitutional. If such
legislation were voided, projected contracts for the City capital projects would
exceed the City's debt limit during fiscal year 1997-98. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.

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<PAGE>

to expect that such reports and statements will continue to be issued and to
engender public comment.

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.

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

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authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding.

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

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

INVESTMENT LIMITATIONS

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policy, the affirmative vote of the lesser of (a) more than 50% of the
outstanding shares of such Company or such Fund, or (b) 67% or more of the
shares of such Company or such Fund present at a meeting if more than 50% of the
outstanding shares of such Company or such Fund are represented at the meeting
in person or by proxy. Investment limitations which are "operating policies"
with respect to the Funds may be changed by the Companies' Boards of Directors
without shareholder approval.

No Fund may:

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

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

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

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

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

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

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

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facilitate the orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.) A Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding;

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

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

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

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

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

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

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

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

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

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

16. Purchase any securities which would cause more than 25% of the
value of a Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no

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<PAGE>

limitation with respect to securities issued or guaranteed by the U.S.
government or domestic bank obligations, and (b) neither all finance companies,
as a group, nor all utility companies, as a group, are considered a single
industry for purposes of this policy; and

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

The Tax-Exempt Money Fund may not:

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

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

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

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

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

The New York Tax-Exempt Money Fund may not:

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

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

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<PAGE>

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

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

The Treasury Money Fund may not:

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

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

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

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

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

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

* * *

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

In Investment Limitation No. 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued

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<PAGE>

or guaranteed as to principal or interest by the United States, or by a person
controlled or supervised by and acting as an instrumentality of the government
of the United States, or any certificate of deposit for any of the foregoing,
are deemed to be Government Securities.

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

The Funds invest only in high-quality instruments and maintain a
dollar-weighted average portfolio maturity appropriate to their objective of
maintaining a constant net asset value per Share. The Funds will not purchase
any security deemed to have a remaining maturity of more than 13 months within
the meaning of the 1940 Act or maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. The Companies' Boards of Directors have
established procedures that are intended to stabilize the net asset value per
Share of each Fund for purposes of sales and redemptions at $1.00. These
procedures include the determination, at such intervals as the Boards deem
appropriate, of the extent, if any, to which the net asset value per Share of a
Fund calculated by using available market quotations deviates from $1.00 per
Share. In the event such deviation exceeds one half of one percent, the Boards
of Directors will promptly consider what action, if any, should be initiated.
If the Boards of Directors believe that the extent of any deviation from a
Fund's $1.00 amortized cost price per Share may result in material dilution or
other unfair results to new or existing investors, they will take appropriate
steps to eliminate or reduce, to the extent reasonably practicable, any such
dilution or unfair results. These steps may include selling portfolio
instruments prior to maturity; shortening the average

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portfolio maturity; withholding or reducing dividends; redeeming Shares in kind;
reducing the number of the Fund's outstanding Shares without monetary
consideration; or utilizing a net asset value per Share determined by using
available market quotations.

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

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

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

The net asset value of each of the Money, Government Money and
Treasury Money Funds is determined and the Shares of each such Fund are priced
for purchases and redemptions as of 1:00 p.m. (Eastern time) and the close of
regular trading hours on the New York Stock Exchange (the "Exchange"), currently
4:00 p.m. (Eastern time). The net asset value of each of the Tax-Exempt Money
and New York Tax-Exempt Money Funds is determined and the Shares of each such
Fund are priced for purchases and redemptions as of 12:00 p.m. (Eastern time)
and the close

-29-
<PAGE>

of regular trading hours on the Exchange. Net asset value and pricing for each
Fund are determined on each day the Exchange and the Adviser are open for
trading (a "Business Day"). Currently, the holidays which the Funds observe are
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas. Net asset value per Share for purposes of
pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged to
the Fund, by the number of its outstanding Shares.

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

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

PURCHASE OF SHARES

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

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

A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Funds'
sub-transfer agent, in accordance with the procedures agreed to by the
Shareholder Organization and the Distributor. Confirmations of all such
Customer purchases (and redemptions) will be sent by CGFSC to the particular
Shareholder Organization. As an alternative, a Shareholder

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<PAGE>

Organization may elect to establish its Customers' accounts of record with
CGFSC. In this event, even if the Shareholder Organization continues to place
its Customers' purchase (and redemption) requests with the Funds, CGFSC will
send confirmations of such transactions and periodic account statements directly
to the shareholders of record. Shares in the Funds bear the expense of fees
payable to Shareholder Organizations for such services. See "Shareholder
Organizations."

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

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

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

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

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

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<PAGE>

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

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

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

REDEMPTION PROCEDURES

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

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

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<PAGE>

redeem all or part of their Shares in accordance with any of the procedures
described below (these procedures also apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC).

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

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

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

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

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

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<PAGE>

proceeds for Direct Investors must be paid to the same bank and account as
designated on the Application or in written instructions subsequently received
by CGFSC.

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

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

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

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

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

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<PAGE>

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

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

OTHER REDEMPTION INFORMATION

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

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

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

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

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

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<PAGE>

INVESTOR PROGRAMS

SYSTEMATIC WITHDRAWAL PLAN

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

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

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

(4) A declining-balance withdrawal.

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

EXCHANGE PRIVILEGE

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

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<PAGE>

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

RETIREMENT PLANS

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

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

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

Keogh Plans for self-employed individuals.

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

AUTOMATIC INVESTMENT PROGRAM

The Automatic Investment Program permits Investors to purchase Retail
Shares (minimum of $50 per Fund per transaction) at regular intervals selected
by the Investor. The

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<PAGE>

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

ADDITIONAL INFORMATION

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

DESCRIPTION OF CAPITAL STOCK

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

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

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<PAGE>

outstanding Shares may elect all of that Company's directors, regardless of the
votes of other shareholders.

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

The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding Shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding Shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding Shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.

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

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

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<PAGE>

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

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

<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Frederick S. Wonham (1) Chairman of the Board, Retired; Director of the Companies (since 1995); Trustee of
238 June Road President and Treasurer Excelsior Funds and Excelsior Institutional Trust (since
Stamford, CT 06903 1995); Vice Chairman of U.S. Trust Corporation and U.S. Trust
Age: 67 New York (from February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March 1993 to May 1997).

Donald L. Campbell Director Retired; Director of the Companies (since 1984); Director of
333 East 69th Street UST Master Variable Series, Inc. (from 1994 to June 1997);
Apt. 10-H Trustee of Excelsior Institutional Trust (since 1995); and
New York, NY 10021 Director, Royal Life Insurance Co. of New York (since 1991).
Age: 72

Rodman L. Drake Director Director of the Companies (since 1996); Trustee of Excelsior
Continuation Investments Group, Inc. Institutional Trust and Excelsior Funds (since 1994);
1251 Avenue of the Americas Director, Parsons Brinkerhoff Energy Services Inc. (since
9th Floor 1996); Director, Parsons Brinkerhoff, Inc. (engineering firm)
New York, NY 10020 (since 1995); President, Continuation Investments Group,
Age: 55 Inc. (since 1997); President, Mandrake Group (investment and
consulting firm) (1994-1997); Director, Hyperion Total Return
Fund, Inc. and four other funds for which Hyperion Capital
Management, Inc. serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power plants) (from 1993
to 1996); Director, The Latin America Smaller Companies
Fund, Inc. (since 1993); Member of Advisory Board, Argentina
Private Equity Fund L.P. (from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and Director, Mueller
Industries, Inc. (from 1992 to 1994).

Joseph H. Dugan Director Retired; Director of the Companies (since 1984); Director of
913 Franklin Lake Road UST Master Variable Series, Inc. (from 1994 to June 1997); and
Franklin Lakes, NJ 07417 Trustee of Excelsior Institutional Trust (since 1995).
Age: 73
</TABLE>
- --------------------
(1). This director is considered to be an "interested person" of the Companies
as defined in the 1940 Act.

-40-
<PAGE>

<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the Companies (since 1986); Director of
2320 Cumberland Road UST Master Variable Series, Inc. (from 1994 to June 1997);
Charlottesville, VA 22901 Trustee of Excelsior Institutional Trust (since 1995);
Age: 77 Director, Deutsche Bank Financial, Inc. (since 1989);
Director, The Harbus Corporation (since 1951); and Trustee,
HSBC Funds Trust and HSBC Mutual Funds Trust (since 1988).

W. Wallace McDowell, Jr. Director Director of the Companies (since 1996); Trustee of Excelsior
c/o Prospect Capital Corp. Institutional Trust and Excelsior Funds (since 1994); Private
43 Arch Street Investor (since 1994); Managing Director, Morgan Lewis Githens
Greenwich, CT 06830 & Ahn (from 1991 to 1994); and Director, U.S. Homecare
Age: 61 Corporation (since 1992), Grossmans, Inc. (from 1993 to
1996), Children's Discovery Centers (since 1984), ITI
Technologies, Inc. (since 1992) and Jack Morton Productions
(since 1987).

Jonathan Piel Director Director of the Companies (since 1996); Trustee of Excelsior
558 E. 87th Street Institutional Trust and Excelsior Funds (since 1994); Vice
New York, NY 10128 President and Editor, Scientific American, Inc. (from 1986 to
Age: 59 1994); Director, Group for The South Fork, Bridgehampton, New
York (since 1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute of
Technology (since 1984).

Robert A. Robinson Director Director of the Companies (since 1987); Director of UST Master
Church Pension Fund Variable Series, Inc. (from 1994 to June 1997); Trustee of
800 Second Avenue Excelsior Institutional Trust (since 1995); President
New York, NY 10017 Emeritus, The Church Pension Fund and its affiliated companies
Age: 72 (since 1966); Trustee, H.B. and F.H. Bugher Foundation and
Director of its wholly owned subsidiaries -- Rosiclear Lead
and Flourspar Mining Co. and The Pigmy Corporation (since
1984); Director, Morehouse Publishing Co. (1974-1998);
Trustee, HSBC Funds Trust and HSBC Mutual Funds Trust (since
1982); and Director, Infinity Funds, Inc. (since 1995).

Alfred C. Tannachion (1) Director Retired; Director of the Companies (since 1985); Chairman of
6549 Pine Meadows Drive the Board of Excelsior Fund and Excelsior Tax-Exempt Fund
Spring Hill, FL 34606 (1991-1997) and Excelsior Institutional Trust (1996-1997);
Age: 72 President and Treasurer of Excelsior Fund and Excelsior
Tax-Exempt Fund (1994-1997) and Excelsior Institutional Trust
(1996-1997); Chairman of the Board, President and Treasurer of
UST Master
</TABLE>

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

-41-
<PAGE>

<TABLE>
<CAPTION>
Position with the
----------------- Principal Occupation During Past
Name and Address Companies 5 Years and Other Affiliations
- ---------------- --------- ------------------------------
<S> <C> <C>
Variable Series, Inc. (1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40

Edward Wang Assistant Secretary Manager of Blue Sky Compliance, Chase Global Funds Services
Chase Global Funds Services Company Company (November 1996 to present); and Officer and Manager of
73 Tremont Street Financial Reporting, Investors Bank & Trust Company (January
Boston, MA 02108-3913 1991 to November 1996).
Age: 37

John M. Corcoran Assistant Treasurer Vice President, Director of Fund Administration, Chase Global
Chase Global Funds Services Company Funds Services Company (since April 1998); Vice President,
73 Tremont Street Senior Manager of Fund Administration, Chase Global Funds
Boston, MA 02108-3913 Services Company (from July 1996 to April 1998); Second Vice
Age: 33 President, Manager of Fund Administration, Chase Global Funds
Services Company (from October 1993 to July 1996); and Audit
Manager, Ernst & Young LLP (from August 1987 to September
1993).
</TABLE>

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

-42-
<PAGE>

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

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

Rodman L. Drake
Director $_______ None $_______(4)**

Joseph H. Dugan
Director $_______ None $_______(3)**

Wolfe J. Frankl
Director $_______ None $_______(3)**

W. Wallace McDowell, Jr.
Director $_______ None $_______(4)**

Jonathan Piel
Director $_______ None $_______(4)**

Robert A. Robinson
Director $_______ None $_______(3)**

Alfred C. Tannachion
Director $_______ None $_______(3)**

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

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

-43-
<PAGE>

INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS

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

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

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

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

For the fiscal year or period ended March 31, 1999, Excelsior Fund
paid U.S. Trust advisory fees of $_____, $_____ and $_____ with respect to the
Money, Government Money and Treasury Money Funds, respectively. For the same
period, Excelsior Tax-Exempt Fund paid U.S. Trust advisory fees of $_____ and
$_____ with respect to the Tax-Exempt Money and New York Tax-Exempt Money Funds,
respectively. For the fiscal year or period ended March 31, 1999, U.S. Trust
waived advisory fees totaling $_____, $_____, $_____, $_____ and $_____ with
respect to the Money, Government Money, Treasury Money, Tax-Exempt Money and New
York Tax-Exempt Money Funds, respectively.

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

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

-44-
<PAGE>

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

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

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

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

-45-
<PAGE>

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

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

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

For the fiscal year or period ended March 31, 1999, Excelsior Fund
paid the Administrators $_____, $_____ and $_____ in the aggregate with respect
to the Money, Government Money and Treasury Money Funds, respectively. For the
same period, Excelsior Tax-Exempt Fund paid the Administrators $_____ and $_____
in the aggregate with respect to the Tax-Exempt Money and New York Tax-Exempt
Money Funds, respectively. For the fiscal year or period ended March 31, 1999,
the Administrators waived fees totaling $_____ and $_____ with respect to the
_____ and _____ Funds, respectively.

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

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

BANKING LAWS

-46-
<PAGE>

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

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

SHAREHOLDER ORGANIZATIONS

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

The Companies' agreements with Shareholder Organizations are governed
by Administrative Services Plans (the "Plans") adopted by the Companies.
Pursuant to the Plans, each Company's Board of Directors will review, at least
quarterly, a written report of the amounts expended under the Company's
agreements with Shareholder Organizations and the purposes for which the
expenditures were made. In addition, the arrangements with Shareholder
Organizations will be approved annually by a majority of each Company's
directors, including a majority of the directors who are not "interested
persons" of the Company as defined in the 1940

-47-
<PAGE>

Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").

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

For the fiscal years ended March 31, 1999, 1998 and 1997, payments to
Shareholder Organizations totaled $_____, $231,371 and $215,140; $_____,
$168,833 and $184,235; $_____, $82,614 and $79,008; and $_____, $627,413 and
$502,764 with respect to the Money, Government Money, Treasury Money and
Tax-Exempt Money Funds, respectively. Of these respective amounts, $_____,
$231,347 and $215,090; $_____, $168,139 and $182,579; $_____, $82,614 and
$79,008; and $_____, $627,412 and $502,764 were paid to affiliates of U.S. Trust
with respect to the Money, Government Money, Treasury Money and Tax-Exempt Money
Funds, respectively. For the fiscal period ended March 31, 1999, payments to
Shareholder Organizations totaled $_____ with respect to the New York Tax-Exempt
Money Fund. Of this amount, $_____ was paid to affiliates of U.S. Trust with
respect to the New York Tax-Exempt Money Fund.

EXPENSES

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

CUSTODIAN AND TRANSFER AGENT

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of the
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under
the Custodian Agreements, Chase has agreed to: (i) maintain a separate account
or accounts in the name of the Funds; (ii) make receipts and disbursements of
money on behalf of the Funds; (iii) collect and receive all income and other
payments and distributions on account of the Funds' portfolio securities; (iv)
respond to correspondence from securities brokers and others relating to its
duties; (v) maintain certain financial accounts and records; and (vi) make
periodic reports to each Company's Board of Directors concerning the Funds'
operations. Chase may, at its own expense, open and maintain custody accounts
with respect to the Funds with other banks or trust

-48-
<PAGE>

companies, provided that Chase shall remain liable for the performance of all
its custodial duties under the Custodian Agreements, notwithstanding any
delegation. Communications to the custodian should be directed to Chase, Mutual
Funds Service Division, 3 Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.

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

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

PORTFOLIO TRANSACTIONS

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

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

-49-
<PAGE>

securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. With respect to over-the-counter transactions, the Funds, where
possible, will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where better prices and
execution are available elsewhere.

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

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

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

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

-50-
<PAGE>

The Companies are required to identify any securities of their regular
brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their
parents held by the Funds as of the close of the most recent fiscal year. As of
March 31, 1998, none of the Funds held any securities of Excelsior Fund's or
Excelsior Tax-Exempt Fund's regular brokers or dealers or their parents.

INDEPENDENT AUDITORS

____________________, independent auditors, [address] ,
serve as auditors of the Companies. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
___________________ incorporated by reference in this Statement of Additional
Information have been audited by _________________ for the periods included
in their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107, is counsel to the Companies, and will pass upon the legality
of the Shares offered by the Prospectus.

ADDITIONAL INFORMATION CONCERNING TAXES

GENERALLY

The following supplements the tax information contained in the
Prospectus.

Each Fund is treated as a separate corporate entity under the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to qualify as a
regulated investment company. If, for any reason, a Fund does not qualify for a
taxable year for the special Federal tax treatment afforded regulated investment
companies, such Fund would be subject to Federal tax on all of its taxable
income at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions (whether or not derived
from interest on Municipal Securities) would be taxable as ordinary income to
shareholders to the extent of the Fund's current and accumulated earnings and
profits and would be eligible for the dividends received deduction in the case
of corporate shareholders.

Qualification as a regulated investment company under the Code
requires, among other things, that a Fund distribute to its shareholders an
amount equal to at least 90% of its investment company taxable income for each
taxable year. In general, a Fund's investment company taxable income will be
its income (including dividends and interest), subject to certain adjustments
and excluding the excess of any net long-term capital gain for the taxable year
over the net short-term capital loss, if any, for such year. The taxable Funds
intend to distribute substantially all of their investment company taxable
income each year. Such dividends will be

-51-
<PAGE>

taxable as ordinary income to Fund shareholders who are not currently exempt
from Federal income taxes, whether such income is received in cash or reinvested
in additional shares. (Federal income taxes for distributions to IRAs and
qualified pension plans are deferred under the Code.) Because all of each
Fund's net investment income is expected to be derived from earned interest, it
is anticipated that no part of any distributions will be eligible for the
dividends received deduction for corporations.

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

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

TAX-EXEMPT FUNDS

Each Tax-Exempt Fund's policy is to pay dividends each year equal to
at least the sum of 90% of its net exempt-interest income and 90% of its
investment company taxable income, if any. Dividends derived from
exempt-interest income ("exempt-interest dividends") may be treated by a Fund's
shareholders as items of interest excludable from their gross income under
Section 103(a) of the Code, unless, under the circumstances applicable to the
particular shareholder, exclusion would be disallowed.

If a Tax-Exempt Fund should hold certain "private activity bonds"
issued after August 7, 1986, the portion of dividends paid by the Fund which is
attributable to interest on such bonds must be included in a shareholder's
Federal alternative minimum taxable income, as an item of tax preference, for
the purpose of determining liability (if any) for the 26% to 28% alternative
minimum tax for individuals and the 20% alternative minimum tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for Federal
alternative minimum tax purposes. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.

Dividends payable by a Tax-Exempt Fund which are derived from taxable
income or from long-term or short-term capital gains, if any, will be subject to
Federal income tax, whether such dividends are paid in the form of cash or
additional shares. If a shareholder holds shares of a Tax-Exempt Fund for six
months or less and during that time receives an exempt-interest dividend on
those shares, any loss recognized on the sale or exchange of those shares will
be disallowed to the extent of the exempt-interest dividend.

-52-
<PAGE>

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

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

Interest on indebtedness incurred by a shareholder to purchase or
carry the Tax-Exempt Funds' shares generally is not deductible for Federal
income tax purposes.

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

-53-
<PAGE>

NEW YORK TAX-EXEMPT MONEY FUND

Exempt-interest dividends (as defined for federal income tax purposes)
derived from interest on New York Municipal Securities (as defined above) will
be exempt from New York State and New York City personal income taxes (but not
corporate franchise taxes), provided the interest on such obligations is and
continues to be exempt from applicable Federal, New York State and New York City
income taxes. To the extent that Investors are subject to state and local taxes
outside of New York State and New York City, distributions by the New York
Tax-Exempt Money Fund may be taxable income for purposes thereof. Dividends and
distributions derived from income (including capital gains on all New York
Municipal Securities) other than interest on the New York Municipal Securities
described above are not exempt from New York State and New York City taxes.

Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the New York Tax-Exempt Money Fund generally is not
deductible for federal, New York State or New York City personal income tax
purposes.

STATE AND LOCAL

The Treasury Money Fund is structured to provide shareholders, to the
extent permissible by Federal and state law, with income that is exempt or
excluded from taxation at the state and local level. Most states -- by statute,
judicial decision or administrative action -- have taken the position that
dividends of a regulated investment company such as the Treasury Money Fund that
are attributable to interest on obligations of the U.S. Treasury and certain
U.S. Government agencies and instrumentalities (including those authorized for
purchase by the Fund) are the functional equivalent of interest from such
obligations and are, therefore, exempt from state and local income taxes. As a
result, substantially all dividends paid by the Treasury Money Fund to
shareholders residing in those states will be exempt or excluded from state
income tax.

Nevertheless in some jurisdictions, exempt-interest dividends and
other distributions paid by the Tax-Exempt Money Fund may be taxable to
shareholders under state or local law as dividend income, even though all or a
portion of such distributions is derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes.

MISCELLANEOUS

The foregoing summarizes some of the important tax considerations
generally affecting the Funds and their shareholders and is not intended as a
substitute for careful tax planning. The above discussion is based on federal
tax laws and regulations which are in effect on the date of this Statement of
Additional Information; such laws and regulations may be changed by legislative
or administrative action. Accordingly, potential investors in the Funds should
consult their tax advisers with specific reference to their own tax situations
and the application of state and local taxes. Shareholders will be advised
annually as to the Federal, New York State and New York City personal income tax
consequences of distributions made each year.

* * *

-54-
<PAGE>

YIELD INFORMATION

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

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

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

From time to time, in advertisements, sales literature or in reports
to shareholders, the yields of each Money Market Fund's Shares may be quoted and
compared to those of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, the yield of such a Fund's
Shares may be compared to the Donoghue's Money Fund average, which is an average
compiled by Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely
recognized independent publication that monitors the performance of money market
funds, or to the data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service that monitors the performance of mutual funds.
The yields of the Taxable Funds may also be compared to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the

-55-
<PAGE>

top five standard metropolitan statistical areas. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including without
limitation, those factors, strategies and techniques that, together with market
conditions and events, materially affected each Fund's performance.

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

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

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

The "tax-equivalent" yield of the New York Tax-Exempt Money Fund is
computed by: (a) dividing the portion of the yield (calculated as above) that
is exempt from both federal and New York State income taxes by one minus a
stated combined federal and New York State income tax rate; (b) dividing the
portion of the yield (calculated as above) that is exempt from federal income
tax only by one minus a stated federal income tax rate; and (c) adding the
figures resulting from (a) and (b) above to that portion, if any, of the yield
that is not exempt from federal income tax. Tax-equivalent yields assume a
marginal federal income tax rate of 28%, a New York State and New York City
marginal income tax rate of 10.25% and an overall tax rate taking into account
the federal tax deduction for state and local taxes paid of 35.38%.

Based on the foregoing calculation, the annualized tax-equivalent
yield of the Retail Shares of the Tax-Exempt Money Fund and the New York
Tax-Exempt Money Fund for the seven-day period ended March 31, 1998 were _____%
and _____%.

MISCELLANEOUS

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

-56-
<PAGE>

Company's portfolios at the time of allocation. Subject to the provisions of
the Companies' Charters, determinations by the Boards of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets with respect to a particular Fund, are conclusive.

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

FINANCIAL STATEMENTS

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

-57-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

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

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

A-1
<PAGE>

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

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

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

A-2
<PAGE>

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

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

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

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

"TBW-1" - This designation represents Thomson 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-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

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

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

"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the

A-4
<PAGE>

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

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

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. Examples include obligations linked or indexed to
equities, currencies or commodities; obligations exposed to severe prepayment
risk - such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse floaters.

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

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

A-5
<PAGE>

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

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

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

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

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

A-6
<PAGE>

"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.

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

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

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

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

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

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. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved, and
"D" represents the lowest potential for recovery.

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

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

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

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

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

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

A-8
<PAGE>

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

MUNICIPAL NOTE RATINGS

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

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

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

A-9
<PAGE>

"SG" - This designation denotes speculative quality and lack of
margins of protection.

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

A-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
___________________, independent auditors, contained in the annual reports to
the Funds' shareholders for the fiscal year ended _______________ are
incorporated herein by reference in the section entitled "Financial Statements."
No other parts of the annual 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
----
CLASSIFICATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS . . . . . . . . . . . . . . . . .1
Additional Investment Policies. . . . . . . . . . . . . . . . . . . . . 1
Additional Information on Portfolio Instruments . . . . . . . . . . . . 3
Additional 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 . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . .30
Investment Advisory and Administration Agreements . . . . . . . . . . .36
Banking Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Shareholder Organizations . . . . . . . . . . . . . . . . . . . . . . .40
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . .41
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .42
PORTFOLIO VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . 45
Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Tax-Exempt Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . .47
PERFORMANCE AND YIELD INFORMATION . . . . . . . . . . . . . . . . . . . . . 48
Yields and Performance. . . . . . . . . . . . . . . . . . . . . . . . .48
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
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 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 guaranteed by the U.S.
government and its agencies or instrumentalities. The Funds are also

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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 time to time on a temporary defensive basis due to market
conditions, each Fund may hold

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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

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

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

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

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

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

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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.

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

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

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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

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 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

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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.

WHEN-ISSUED AND FORWARD TRANSACTIONS

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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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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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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 being hedged.
In

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<PAGE>

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.

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 exchange markets, or by entering into forward
currency contracts. A forward foreign currency

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<PAGE>

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

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

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

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<PAGE>

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

MONEY MARKET INSTRUMENTS

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

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

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

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<PAGE>

VARIABLE AND FLOATING RATE INSTRUMENTS

Securities purchased by the 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 above. 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.")

ADDITIONAL 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.

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<PAGE>

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

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

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

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

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

The following investment limitations are fundamental with respect to
the Managed Income Fund, but are operating policies with respect to the IT
Managed Income and ST Government Funds. A Fixed-Income Fund may not:

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

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<PAGE>

12. Purchase foreign securities; provided that subject to the limit
described below, the IT Managed Income and Managed Income Funds may purchase (a)
dollar-denominated debt obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the United States in
an amount not to exceed 25% of its total assets at time of purchase; and (b)
certificates of deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches of U.S. banks,
in an amount not to exceed 20% of its total net assets; and

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

The following investment limitations are fundamental with respect to
the IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds. The IT Tax-Exempt,
LT Tax-Exempt and Managed Income Funds may not:

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

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

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

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

The following investment limitations are fundamental with respect to
the IT Tax-Exempt and LT Tax-Exempt Funds. Each of the IT Tax-Exempt and LT
Tax-Exempt Funds may not:

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

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

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<PAGE>

The following investment limitations are fundamental with respect to
the Managed Income Fund. The Managed Income Fund may not:

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

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

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

* * *

In addition to the investment limitations described above, as a matter
of fundamental policy for each Fund, which may not be changed without the vote
of the holders of a majority of the Fund's outstanding shares, a Fund may not
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.

The Managed Income, IT Tax-Exempt and LT Tax-Exempt Funds will not
invest more than 25% of the value of their respective total assets in domestic
bank obligations.

In Investment Limitation No. 6 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the United States government, its agencies or
instrumentalities (including securities backed by the full faith and credit of
the United States) are deemed to be U.S. government obligations.

In addition to the above investment limitations, Excelsior Fund
currently intends to limit the IT Managed Income and Managed Income Funds'
investments in warrants so that,

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<PAGE>

valued at the lower of cost or market value, they do not exceed 5% of a Fund's
net assets. For the purpose of this limitation, warrants acquired by the IT
Managed Income or Managed Income Fund in units or attached to securities will be
deemed to be without value.

The IT Tax-Exempt, LT Tax-Exempt and Managed Income Funds may not
purchase or sell commodities.

The Funds' transactions in futures contracts and futures options
(including the margin posted by the Funds in connection with such transactions)
are excluded from the Funds' prohibitions: against the purchase of securities
on margin, short sales of securities and the maintenance of a short position;
the issuance of senior securities; writing or selling puts, calls, straddles,
spreads, or combinations thereof; and the mortgage, pledge or hypothecation of
the Funds' assets.

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

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

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

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<PAGE>

The net asset value of each Fund is determined and the shares of each
Fund are priced at the close of regular trading hours on the New York Stock
Exchange (the "Exchange"), currently 4:00 p.m. (Eastern time). Net asset value
and pricing for each Fund are determined on each day the Exchange and the
Adviser are open for trading (a "Business Day"). Currently, the holidays which
the Funds observe are New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas. A Fund's net asset value per
share for purposes of pricing sales and redemptions is calculated by dividing
the value of all securities and other assets allocable to the Fund, less the
liabilities allocable to the Fund, by the number of its outstanding shares.

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

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.

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<PAGE>

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:

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

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

REDEMPTION PROCEDURES

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

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<PAGE>

procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

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

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

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

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

-24-
<PAGE>

proceeds for Direct Investors must be paid to the same bank and account as
designated on the Application or in written instructions subsequently received
by CGFSC.

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

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

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

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

OTHER REDEMPTION INFORMATION

The Companies may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is

-25-
<PAGE>

restricted by applicable rules and regulations of the SEC; (b) the Exchange is
closed for other than customary weekend and holiday closings; (c) the SEC has by
order permitted such suspension; or (d) an emergency exists as determined by the
SEC.

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

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

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

(4) A declining-balance withdrawal.

-26-
<PAGE>

of shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and procedures and fees relating to, the Systematic Withdrawal
Plan directly from their Shareholder Organizations.

EXCHANGE PRIVILEGE

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

-27-
<PAGE>

RETIREMENT PLANS

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

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

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

Keogh Plans for self-employed individuals.

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

AUTOMATIC INVESTMENT PROGRAM

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

The Automatic Investment Program is one means by which an Investor may
use "Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, Dollar Cost Averaging should
usually be followed on a sustained, consistent basis. Investors should be
aware, however, that shares bought using Dollar Cost Averaging are purchased
without regard to their price on the day of investment or to market trends. In
addition, while Investors may find Dollar Cost Averaging to be beneficial, it
will not prevent a loss if an Investor ultimately redeems his shares at a price
which is lower than their purchase price. The Companies may modify or terminate
this privilege at any time or charge a

-28-
<PAGE>

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.

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

-29-
<PAGE>

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

The Companies' Charters authorize the Boards of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a)
sell and convey the assets of a Fund to another management investment company
for consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares to be
redeemed at their net asset value; or (c) combine the assets belonging to a Fund
with the assets belonging to another portfolio of the Company involved, if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
any portfolio to be redeemed at their net asset value or converted into shares
of another class of the Company's capital stock at net asset value. The
exercise of such authority by the Boards of Directors will be subject to the
provisions of the 1940 Act, and the Boards of Directors will not take any action
described in this paragraph unless the proposed action has been disclosed in
writing to the particular Fund's shareholders at least 30 days prior thereto.

Notwithstanding any provision of Maryland law requiring a greater vote
of 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.

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

-30-
<PAGE>

addresses, ages, principal occupations during the past five years, and other
affiliations are as follows:

-31-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation During
Position with Past 5 Years and Other
Name and Address the Companies Affiliations
---------------- ------------- ---------------------------
<S> <C> <C>
Frederick S. Wonham(1) Chairman of the Retired; Director of the
238 June Road Board, President Companies (since 1995); Trustee
Stamford, CT 06903 and Treasurer of Excelsior Funds and Excelsior
Age: 67 Institutional Trust (since
1995); Vice Chairman of U.S.
Trust Corporation and U.S. Trust
New York (from February 1990
until September 1995); and
Chairman, U.S. Trust Company
(from March 1993 to May 1997).

Donald L. Campbell Director Retired; Director of the
333 East 69th Street Companies (since 1984); Director
Apt. 10-H of UST Master Variable Series,
New York, NY 10021 Inc. (from 1994 to June 1997);
Age: 72 Trustee of Excelsior
Institutional Trust (since
1995); and Director, Royal Life
Insurance Co. of New York (since
1991).

Rodman L. Drake Director Director of the Companies (since
Continuation Investments 1996); Trustee of Excelsior
Group, Inc. Institutional Trust and
1251 Avenue of the Excelsior Funds (since 1994);
Americas, Director, Parsons Brinkerhoff
9th Floor Energy Services Inc. (since
New York, NY 10020 1996); Director, Parsons
Age: 55 Brinkerhoff, Inc. (engineering
firm) (since 1995); President,
Continuation Investments Group,
Inc. (since 1997); President,
Mandrake Group (investment and
consulting firm) (1994-1997);
Director, Hyperion Total Return
Fund, Inc. and four other funds
for which Hyperion Capital
Management, Inc. serves as
investment adviser (since 1991);
Co-Chairman, KMR Power
Corporation (power plants) (form
1993 to 1996); Director, The
Latin America Smaller Companies
Fund, Inc. (since 1993); Member
of Advisory Board, Argentina
Private Equity Fund L.P. (from
1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996);
and Director, Mueller
Industries, Inc. (from 1992 to
1994).

Joseph H. Dugan Director Retired; Director of the
913 Franklin Lake Road Companies (since 1984); Director
Franklin Lakes, NJ 07417 of UST Master Variable Series,
Age: 73 Inc. (from 1994 to June 1997);
and Trustee of Excelsior
Institutional Trust (since
1995).

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

-32-
<PAGE>

Principal Occupation During
Position with Past 5 Years and Other
Name and Address the Companies Affiliations
- ----------------- ------------- ---------------------------
<S> <C> <C>
Wolfe J. Frankl Director Retired; Director of the
2320 Cumberland Road Companies (since 1986); Director
Charlottesville, VA of UST Master Variable Series,
22901 Inc. (from 1994 to June 1997);
Age: 77 Trustee of Excelsior
Institutional Trust (since
1995); Director, Deutsche Bank
Financial, Inc. (since 1989);
Director, The Harbus Corporation
(since 1951); and Trustee, HSBC
Funds Trust and HSBC Mutual
Funds Trust (since 1988).

W. Wallace McDowell, Jr. Director Director of the Companies (since
c/o Prospect Capital 1996); Trustee of Excelsior
Corp. Institutional Trust and
43 Arch Street Excelsior Funds (since 1994);
Greenwich, CT 06830 Private Investor (since 1994);
Age: 61 Managing Director, Morgan Lewis
Githens & Ahn (from 1991 to
1994); and Director, U.S.
Homecare Corporation (since
1992), Grossmans, Inc. (from
1993 to 1996), Children's
Discovery Centers (since 1984),
ITI Technologies, Inc. (since
1992) and Jack Morton
Productions (since 1987).

Jonathan Piel Director Director of the Companies (since
558 E. 87th Street 1996); Trustee of Excelsior
New York, NY 10128 Institutional Trust and
Age: 59 Excelsior Funds (since 1994);
Vice President and Editor,
Scientific American, Inc. (from
1986 to 1994); Director, Group
for The South Fork,
Bridgehampton, New York (since
1993); and Member, Advisory
Committee, Knight Journalism
Fellowships, Massachusetts
Institute of Technology
(since 1984).

-33-
<PAGE>

Principal Occupation During
Position with Past 5 Years and Other
Name and Address the Companies Affiliations
- ----------------- ------------- ---------------------------
<S> <C> <C>
Robert A. Robinson Director Director of the Companies (since
Church Pension Fund 1987); Director of UST Master
800 Second Avenue Variable Series, Inc. (from 1994
New York, NY 10017 to June 1997); Trustee of
Age: 72 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. (1974-1998); Trustee, HSBC
Funds Trust and HSBC Mutual
Funds Trust (since 1982); and
Director, Infinity Funds, Inc.
(since 1995).

Alfred C. Tannachion(2) Director Retired; Director of the
26549 Pine Meadows Drive Companies (since 1985);
Spring Hill, FL 34606 Chairman of the Board of the
Age: 72 Companies (1991-1997) and
Excelsior Institutional Trust
(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
Philadelphia National Drinker Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 55

Michael P. Malloy Assistant Partner of the law firm of
Philadelphia National Secretary Drinker Biddle & Reath LLP.
Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Age: 40

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

-34-

<PAGE>

Principal Occupation During
Position with Past 5 Years and Other
Name and Address the Companies Affiliations
- ----------------- ------------- ---------------------------
<S> <C> <C>
Edward Wang Assistant Manager of Blue Sky Compliance,
Chase Global Funds Secretary Chase Global Funds Services
Services Company Company (November 1996 to
73 Tremont Street present); and Officer and
Boston, MA 02108-3913 Manager of Financial Reporting,
Age: 37 Investors Bank & Trust Company
(January 1991 to November 1996).

John M. Corcoran Assistant Vice President, Director of Fund
Chase Global Funds Treasurer Administration, Chase Global
Services Company Funds Services Company (since
73 Tremont Street April 1998); Vice President,
Boston, MA 02108-3913 Senior Manager of Fund
Age: 33 Administration, Chase Global
Funds Services Company (from
July 1996 to April 1998); Second
Vice President, Manager of Fund
Administration, Chase Global
Funds Services Company (from
October 1993 to July 1996); and
Audit Manager, Ernst & Young LLP
(from August 1987 to September
1993).
</TABLE>

Each director 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 __________, 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.

-35-
<PAGE>

<TABLE>
<CAPTION>
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 $______ None $______(3)**
Director

Rodman L. Drake $______ None $______(4)**
Director

Joseph H. Dugan $______ None $______(3)**
Director

Wolfe J. Frankl $______ None $______(3)**
Director

W. Wallace McDowell, Jr. $______ None $______(4)**
Director

Jonathan Piel $______ None $______(4)**
Director

Robert A. Robinson $______ None $______(3)**
Director

Alfred C. Tannachion $______ None $______(3)**
Director

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

- --------------------
* The "Fund Complex" consists of 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.

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 Prospectuses. The Adviser has also agreed
to pay all expenses incurred by it in connection with

-36-
<PAGE>

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 $_____, $____, $____, $____, $____ and $____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 $____, $____, $____, $____, $____ and $____
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.

-37-
<PAGE>

duty with respect to the receipt of compensation for advisory services or a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of their duties or from reckless disregard by them of their duties
and obligations thereunder. In addition, the Adviser has undertaken in the
Investment Advisory 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:

<TABLE>
<CAPTION>
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)
-------------------------------------------------

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

Administration fees payable to the Administrators by each portfolio of
the Companies and Excelsior Institutional Trust are allocated in proportion to
their relative average

-38-
<PAGE>

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 waiver may be terminated at any time.

For the fiscal year ended March 31, 1999, Excelsior Tax-Exempt Fund
paid the Administrators $____, $____ and $____ 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 $____, $____ and $____ 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 $____, $____, $____, $____, $____ and $____ 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

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

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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 change in connection with a Customer's investment. Until
further notice, the Adviser and Administrators have agreed to waive fees payable
by a Fund in an aggregate amount equal to administrative service fees payable by
that Fund.

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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 $____, $24,462 and $28,304;
$____, $134,309 and $141,258; $____, $94,008 and $70,956; $____, $19,835 and
$21,479; $____, $42,650 and $36,495; and $____, $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,
$____, $24,157 and $28,304; $____, $131,684 and $139,275; $____, $78,373 and
$68,722; $____, $19,800 and $21,479; $____, $41,041 and $36,495; and $____,
$48,468 and $77,550 were paid to affiliates of U.S. Trust with respect to the ST
Tax-Exempt, IT Tax-Exempt, LT Tax-Exempt, ST Government, IT Managed Income and
Managed Income Funds, respectively.

EXPENSES

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

CUSTODIAN AND TRANSFER AGENT

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

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<PAGE>

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

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

PORTFOLIO TRANSACTIONS

Subject to the general control of the Companies' Boards of Directors,
the Adviser is responsible for, makes decisions with respect to and places
orders for all purchases and sales of all portfolio securities of each of the
Funds. Purchases and sales of portfolio securities will usually be principal
transactions without brokerage commissions.

The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. It is expected that the Funds' turnover rates may
remain higher than those of many other investment companies with similar
investment objectives and policies. However, since brokerage commissions are
not normally paid on instruments purchased by the Funds, portfolio turnover is
not expected to have a material effect on the net income of any of the Funds.
The Funds' portfolio turnover rates may also be affected by cash requirements
for redemptions of shares and by regulatory provisions which enable the Funds to
receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making portfolio decisions. See "Financial Highlights" in
the Prospectuses for the Funds' portfolio turnover rates.

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<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.

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<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 following Funds held the following securities of the
Companies' regular brokers or dealers or their parents: __________.

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 affect on days when
investors can neither purchase nor redeem a Fund's shares.

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<PAGE>

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

INDEPENDENT AUDITORS

_________________, independent auditors, ________________________,
serve as auditors of the Companies. The Funds' Financial Highlights included in
the Prospectuses and the financial statements for the fiscal year ended
______________ incorporated by reference in this Statement of Additional
Information have been audited by __________________ for the periods included in
their reports thereon which appear therein.

COUNSEL

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Companies, and Mr. Malloy, Assistant Secretary of the Companies, are partners),
One Logan Square, 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

The following supplements the tax information contained in the
Prospectuses.

Each of the Funds is treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to qualify
as a regulated investment company. Qualification as a regulated investment
company requires, among other things, that a Fund distribute to its shareholders
an amount equal to at least the sum of 90% of its investment company taxable
income and 90% of its exempt-interest income (if any), net of certain deductions
for each taxable year. In general, a Fund's investment company taxable income
will be its income (including interest) subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year over
the net short-term capital loss, if any, for such year. (Federal income taxes
for distributions to IRAs and qualified pension plans are deferred under the
Code.) The dividends received deduction for corporations will apply to such
distributions to the extent of the total qualifying dividends received by a Fund
from domestic corporations for the taxable year. It is anticipated that only a
small part (if any) of the dividends paid by a Fund will be eligible for the
dividends received deduction.

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

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<PAGE>

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.

Each Fund intends to designate any distribution of the excess of net
long-term capital gain over net short-term capital loss as a capital gain
dividend in a written notice mailed to shareholders within 60 days after the
close of the Fund's taxable year. Shareholders should note that, upon the sale
or exchange of shares, if the shareholder has not held such shares for at least
six months, any loss on the sale or exchange of those shares will be treated as
long-term capital loss to the extent of the capital gain dividends received with
respect to the shares.

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 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.

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

Dividends payable by the Funds which are derived from taxable income
or from long-term or short-term capital gains will be subject to federal income
tax, whether such dividends are paid in the form of cash or additional shares.

If a shareholder holds shares for six months or less and during that
time receives a capital gain dividend on those shares, any loss recognized on
the sale or exchange of those shares will be treated as a long-term capital loss
to the extent of the capital gain dividend. If a shareholder holds shares for
six months or less and during that time receives an exempt-interest dividend on
those shares, any loss recognized on the sale or exchange of those shares will
be disallowed to the extent of the exempt-interest dividend. Generally, a
shareholder may include sales charges incurred upon the purchase of shares in
his tax basis for such shares for the purpose of determining gain or loss on a
redemption, transfer or exchange of such shares. However, if the shareholder
effects an exchange of such shares for shares of another Fund within 90 days of
the purchase and is able to reduce the sales charges otherwise applicable to the
new shares (by virtue of the exchange privilege), the amount equal to reduction
may not be included in the tax basis of the shareholder's exchanged shares for
the purpose of determining gain or loss, but may be included (subject to the
limitation) in the tax basis of the new shares.

Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who

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<PAGE>

have failed to provide a correct tax identification number in the manner
required, who are subject to withholding by the Internal Revenue Service for
failure properly to include on their return payments of taxable interest or
dividends, or who have failed to certify to the Fund when required to do so
either that they are not subject to backup withholding or that they are "exempt
recipients."

TAX-EXEMPT FUNDS

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.

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.

Each Fund's policy is to pay dividends each year equal to at least the
sum of 90% of its net exempt-interest income and 90% of its investment company
taxable income, if any. Some dividends derived form exempt-interest income
("exempt-interest dividends") may be treated by a Fund's shareholders as items
of interest excludable from their gross income under Section 103(a) of the Code,
unless, under the circumstances applicable to the particular shareholder,
exclusion would be disallowed.

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<PAGE>

If a Fund should hold certain "private activity bonds" issued after
August 7, 1986, the portion of dividends paid by the Fund which is attributable
to interest on such bonds must be included in a shareholder's federal
alternative minimum taxable income, as an item of tax preference, for the
purpose of determining liability (if any) for the 26% to 28% alternative minimum
tax applicable to individuals and the 20% alternative minimum tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for federal
alternative minimum tax purposes. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.

Interest on indebtedness incurred by a shareholder to purchase or
carry a Tax-Exempt Fund's shares generally is not deductible for Federal income
tax purposes. In addition, 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 discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information. It
summarizes some of the important tax considerations generally affecting the
Funds and their shareholders and is not intended as a substitute for careful tax
planning. The current federal tax laws and regulations may be changed by
legislative or administrative action. Accordingly, potential investors in the
Funds should consult their tax advisers with their own tax situations.
Shareholders will be advised annually as to the federal tax consequences of
distributions made each year. Shareholders are advised to consult their tax
advisers concerning their specific situations and the application of state and
local taxes.

PERFORMANCE 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 6
Yield = 2 [(-------- + 1) - 1]
cd

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<PAGE>

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).

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
____%, ____%, ____%, ____%, ____% and ____%, 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

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<PAGE>

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 ____%, ____% and ____%, 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

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

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<PAGE>

Income Funds for the one year period ended March 31, 1999 were ____%, ____%,
____%, ____%, ____% and ____%, 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 ____%, ____%, ____%, ____%, ____% and ____%, 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 ____%, ____% and ____%,
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.

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

-51-
<PAGE>

(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'
Charters, determinations by the Boards of Directors as to the direct and
allocable liabilities and the allocable portion of any general assets with
respect to a particular Fund are conclusive.

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

As of May 19, 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, 6.78%; and President and Director of
Conzoga College, 19 I Street NW, Washington, D.C. 20001, 6.6%; 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, 38.53%; and United States
Trust Company of New York Trustee FBO U.S. Trust Plan, U.S. Trust Company of
the Pacific Northwest, Attn: Sandra Woodcock, 4380 S.W. Macadam Avenue, Suite
2700, Portland, Oregon 97201, 6.64%; SHORT-TERM TAX-EXEMPT SECURITIES FUND:
Donald C. Opountry, Jr., c/o United States Trust Company of New York, 114
West 47th Street, New York, New York 10036, 11.66%; and LONG-TERM TAX-EXEMPT
FUND: Charles Schwab & Co., Inc., Special Custody A/C For Benefit of
Customers, Attn: Mutual Funds, 101 Montgomery Street, San Francisco,
California 94104, 8.00%.

-52-
<PAGE>

FINANCIAL STATEMENTS

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

-53-
<PAGE>

APPENDIX A

COMMERCIAL PAPER RATINGS

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

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

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

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 has failed to meet scheduled principal and/or interest
payments.

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

"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.

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

A-3
<PAGE>

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

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

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS

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

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

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

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

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

A-4
<PAGE>

"B" - An obligation rated "B" 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 similar action if
payments on an obligation are jeopardized.

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

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. Examples include obligations linked or indexed to
equities, currencies or commodities; obligations exposed to severe prepayment
risk- such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest 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>

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 "Aaa" securities.

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

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

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

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

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

A-6
<PAGE>

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

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 very unlikely to be adversely affected
by foreseeable events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of 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.

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

A-7
<PAGE>

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

"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved, and
"D" represents the lowest potential for recovery.

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

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

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

A-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

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

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

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

A-9
<PAGE>

"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.

IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:

"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.

"A1" - Obligations are supported by the highest capacity for timely
repayment.

"A2" - Obligations are supported by a good capacity for timely
repayment.

"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.

"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.

"C" - Obligations for which there is a high risk of default or which
are currently in default.

A-10
<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

FORM N-1A

PART C. OTHER INFORMATION

Item 23. Exhibits

(a) (1) Articles of Incorporation of Registrant dated as of August
7, 1984 (4).

(2) Articles Supplementary of Registrant dated as of April 27,
1990 (4).

(3) Articles Supplementary of Registrant dated as of December
23, 1992 (4).

(4) Articles Supplementary of Registrant dated as of December
27, 1995 (1).

(5) Articles Supplementary of Registrant dated as of July 31,
1998 (5).

(6) Articles Supplementary of Registrant dated as of November
13, 1998 (5).

(b) (1) Amended and Restated Bylaws of Registrant dated February 10,
1995 (4).

(2) Amendment No. 1 to Amended and Restated Bylaws of Registrant
dated May 16, 1997 (4).

(2) Articles I, II, IV and VI of Registrant's Amended and
Restated By-Laws dated February 10, 1995 (4).

(d) (1) Investment Advisory Agreement among Registrant, U.S. Trust
Company of Connecticut and United States Trust Company of
New York dated May 16, 1997 with respect to the Tax-Exempt
Money Fund, Intermediate-Term Tax-Exempt Fund and Long-Term
Tax-Exempt Fund (3).

(2) Investment Advisory Agreement among Registrant, U.S. Trust
Company of Connecticut and United States Trust Company of
New York

<PAGE>

dated May 16, 1997 with respect to the New York
Intermediate-Term Tax-Exempt Fund, Short-Term Tax-Exempt
Securities Fund and California Tax-Exempt Income Fund (3).

(3) Amendment No. 1 dated July 31, 1998 to Investment Advisory
Agreement among Registrant, U.S Trust Company of Connecticut
and United States Trust Company of New York with respect to
the New York Tax-Exempt Money Fund (5).

(4) Sub-Advisory Agreement among U.S. Trust Company of
Connecticut, United States Trust Company of New York and
United States Trust Company of California dated May 16, 1997
with respect to the California Tax-Exempt Income Fund (4).

(e) Amended and Restated Distribution Contract dated July 31,
1998 between Registrant and Edgewood Services, Inc. (5).

(f) None.

(g) (1) Custody Agreement dated September 1, 1995 (as amended and
restated on August 1, 1997) between Registrant and The Chase
Manhattan Bank (4).

(2) Amended Exhibit A dated July 31, 1998 to Custody Agreement
between Registrant and The Chase Manhattan Bank (5).

(3) Amendment No. 1 dated July 31, 1998 to Custody Agreement
between Registrant and The Chase Manhattan Bank (5).

(h) (1) Amended and Restated Administrative Services Plan and
Related Form of Shareholder Servicing Agreement dated
February 21, 1994, as amended as of May 16, 1997 (4).

(2) Amended and Restated Administration Agreement dated July 31,
1998 among Registrant, Chase Global Funds Services Company,
Federated Administrative Services and U.S. Trust Company of
Connecticut (5).

(3) Amended and Restated Mutual Funds Transfer Agency Agreement
dated as of July 31, 1998 by and between Registrant and
United States Trust Company of New York (5).

(4) Amended and Restated Mutual Funds Sub-Transfer Agency
Agreement dated as of July 31, 1998 by and between United
States Trust Company of New York and Chase Global Funds
Services Company (5).

<PAGE>

(i) Opinion of counsel (5).

(j) Consent of Drinker Biddle & Reath LLP (5).

(k) None.

(l) (1) Purchase Agreement between Registrant and Shearson Lehman
Brothers Inc. dated February 6, 1985 (4).

(2) Purchase Agreement between Registrant and Edgewood Services,
Inc. dated September 25, 1996 (2).

(3) Purchase Agreement between Registrant and Edgewood Services,
Inc. dated August 3, 1998 (5).

(m) None.

(n) To be filed by Amendment.

(o) None.

NOTES:

(1) Incorporated by reference to Registrant's Post-Effective Amendment No. 19
to its Registration Statement on Form N-1A filed July 18, 1996.

(2) Incorporated by reference to Registrant's Post-Effective Amendment No. 21
to its Registration Statement on Form N-1A filed March 31, 1997.

(3) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
to its Registration Statement on Form N-1A filed July 31, 1997.

(4) Incorporated by reference to Registrant's Post-Effective Amendment No. 24
to its Registration Statement on Form N-1A filed May 15, 1998.

(5) Filed herewith.

Item 24. PERSONS CONTROLLED BY OR UNDER
COMMON CONTROL WITH REGISTRANT

Registrant is controlled by its Board of Directors.

Item 25. INDEMNIFICATION

<PAGE>

Article VII, Section 3 of Registrant's Articles of Incorporation,
incorporated herein by reference to Exhibit (a)(1) hereto, and Article VI,
Section 2 of Registrant's Bylaws, incorporated herein by reference to Exhibit
(b)(1) hereto, provide for the indemnification of Registrant's directors and
officers. Indemnification of Registrant's principal underwriter, custodian,
transfer agent and co-administrators is provided for, respectively, in Section
1.11 of the Distribution Contract incorporated herein by reference to Exhibit
(e) hereto, Section 12 of the Custody Agreement incorporated herein by reference
to Exhibit (g)(1) hereto, Section 7 of the Mutual Funds Transfer Agency
Agreement incorporated herein by reference to Exhibit (h)(3) hereto, and Section
6 of the Administration Agreement incorporated herein by reference to Exhibit
(h)(2) hereto. Registrant has obtained from a major insurance carrier a
directors' and officers' liability policy covering certain types of errors and
omissions. In no event will Registrant indemnify any of its directors, officers,
employees, or agents against any liability to which such person would otherwise
be subject by reason of his willful misfeasance, bad faith, gross negligence in
the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office or arising under his agreement with
Registrant. Registrant will comply with Rule 484 under the Securities Act of
1933 and Release No. 11330 under the Investment Company Act of 1940 in
connection with any indemnification.

Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER

(a) U.S. Trust Company of Connecticut:

U.S. Trust Company of Connecticut ("U.S. Trust CT") is a
Connecticut state bank and trust company located in Stamford, Connecticut. Set
forth below are the names and principal businesses of the directors and certain
senior executive officers of U.S. Trust CT, including those who are engaged in
any other business, profession, vocation or employment of a substantial nature.

<PAGE>

<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust CT Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director John N. Irwin Lawyer
1133 Avenue of the
Americas
New York, NY 10035

Director June Noble Larkin Foundation Not-for-Profit
Edward John Noble Director Organization
Foundation, Inc.
32 East 57th Street
New York, NY 10022

Director Tucker H. Warner Co-Founder, Consulting Firm
The Nutmeg Financial Partner &
Group, LLC Director
1157 Highland Avenue
West
Cheshire, CT 06903

Director Thomas C. Clark Managing Director, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
11 West 54th Street
New York, NY 10019

Director Maribeth S. Rahe Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036

Director Frederick B. Taylor Vice Chairman, Asset Management,
United States Trust United States Trust Investment and
Company of New York Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036

<PAGE>

Position
with U.S. Principal Type of
Trust CT Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Kenneth G. Walsh Executive Vice Asset Management,
United States Trust President, United Investment and
Company of New York States Trust Company Fiduciary Services
114 West 47th Street of New York
New York, NY 10036

Director, William V. Ferdinand Managing Director Asset Management,
Managing U.S. Trust Company & CIO Fiduciary Services
Director & of Connecticut & Private Banking
CIO 225 High Ridge Road
Stamford, CT 06905

Director, W. Michael Funck President & CEO Asset Management,
President & U.S. Trust Company Fiduciary Services
CEO of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905

Vice Presi- Neil M. McDonnell Vice President & Asset Management,
dent & U.S. Trust Company Treasurer Fiduciary Services
Treasurer of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905

Vice Presi- Alberto Rodriguez Vice President & Asset Management,
dent & U.S. Trust Company Secretary Fiduciary Services
Secretary of Connecticut & Private Banking
225 High Ridge Road
Stamford, CT 06905
</TABLE>

(b) United States Trust Company of New York:

United States Trust Company of New York ("U.S. Trust NY") is a
full-service state-chartered bank located in New York, New York. Set forth below
are the names and principal businesses of the directors and certain senior
executive officers of U.S. Trust NY, including those who are engaged in any
other business, profession, vocation, or employment of a substantial nature.

<PAGE>

Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Eleanor Baum Dean of School Academic
The Cooper Union for of Engineering
the Advancement
of Science & Art
51 Astor Place
New York, NY 10003

Director Samuel C. Butler Partner in Cravath, Law Firm
Cravath, Swaine Swaine & Moore
& Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019

Director Peter O. Crisp Chairman Venture
Venrock Inc. Capital
Room 5600
30 Rockefeller Plaza
New York, NY 10112

Director Antonia M. Grumbach Partner in Patterson, Law Firm
Patterson, Belknap, Belknap, Webb & Tyler
Webb & Tyler LLP
1133 Avenue of the
Americas
New York, NY 10036

Director, H. Marshall Schwarz Chairman of the Asset Management,
Chairman United States Trust Board & Chief Executive Investment and
of the Board Company of New York Officer of U.S. Trust Fiduciary Services
and Chief 114 West 47th Street Corp. and U.S. Trust N.Y.
Executive New York, NY 10036
Officer

<PAGE>

Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Philippe de Montebello Director of the Art Museum
The Metropolitan Museum Metropolitan
of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198

Director Paul W. Douglas Retired Chairman of Coal Mining,
250 Park Avenue The Pittston Company Transportation
Suite 1800 and Security
New York, NY 10177 Services

Director Frederic C. Hamilton Chairman of the Investment and
The Hamilton Companies Board Venture Capital
1560 Broadway
Suite 2000
Denver, CO 80202

Director John H. Stookey Corporate Director
Per Scholas Inc. and Trustee
131 Walnut Avenue
Bronx, New York 10454

Director Robert N. Wilson Vice Chairman of Health Care
Johnson & Johnson the Board of Johnson Products
One Johnson & & Johnson
Johnson Plaza
New Brunswick, NJ 08933

Director Peter L. Malkin Chairman of Law Firm
Wein, Malkin LLP Wein, Malkin & Bettex
Lincoln Building
60 East 42nd Street
New York, NY 10165

Director David A. Olsen Vice Chairman Risk & Insurance
Marsh & McLennan, Inc. Services
125 Broad Street
New York, NY 10004

Director Richard F. Tucker Retired Vice Chairman- Petroleum
P.O. Box 2072 Mobil Oil Corporation and Chemicals
New York, NY 10163

<PAGE>

Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Director Carroll L. Wainright, Jr. Consulting Partner Law Firm
Milbank, Tweed, Hadley of Milbank, Tweed,
& McCloy Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005

Director Ruth A. Wooden President & CEO Not for
The Advertising Profit Public
Council, Inc. Service
261 Madison Avenue Advertising
11th Floor
New York, NY 10016

Executive Paul K. Napoli Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036

Director and Maribeth S. Rahe Vice Chairman Asset Management,
Vice United States Trust Investment and
Chairman Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10036

Director, Frederick B. Taylor Vice Chairman and Asset Management,
Vice United States Trust Chief Investment Investment and
Chairman and Company of New York Officer of U.S. Trust Fiduciary Services
Chief 114 West 47th Street Corporation and U.S.
Investment New York, NY 10036 Trust N.Y.
Officer

Director, Jeffrey S. Maurer President and Asset Management,
President United States Trust Chief Operating Investment and
and Chief Company of New York Officer Fiduciary Services
Operating 114 West 47th Street
Officer New York, NY 10036

<PAGE>

Position
with U.S. Principal Type of
Trust NY Name Occupation Business
- -------- ---- ---------- --------
<S> <C> <C> <C>
Trustee/ Daniel P. Davison Chairman, Christie, Fine Art
Director Christie, Manson Manson & Woods Auctioneer
& Woods International Inc. International, Inc.
502 Park Avenue
New York, NY 10021

Trustee/ Orson D. Munn Chairman and Investment
Director Munn, Bernhard & Director of Munn, Advisory
Associates, Inc. Bernhard & Firm
6 East 43rd Street Associates, Inc.
28th Floor
New York, NY 10017

Executive John L. Kirby Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030

Executive Kenneth G. Walsh Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030

Director Philip L. Smith Corporate Director and
P.O. Box 386 Trustee
Ponte Verde Beach, FL 32004

Executive John C. Hover, II Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030

Executive John M. Deignan Executive Asset Management,
Vice United States Trust Vice President Investment and
President Company of New York Fiduciary Services
114 West 47th Street
New York, NY 10030
</TABLE>

<PAGE>

U.S. Trust Company, N.A. ("U.S. Trust N.A.") is a national bank
located in Los Angeles, California. Set forth below are the names and
principal businesses of the directors and certain senior executive officers
of U.S. Trust N.A., including those who are engaged in any other business,
profession, vocation, or employment of a substantial nature.

<TABLE>
<CAPTION>
Position
with U.S. Principal Type of
Trust N.A. Name Occupation Business
- ---------- ---- ---------- --------
<S> <C> <C> <C>
Director and William R. Barrett, Jr. Managing Director Asset
Managing Director Management,
Investment and
Fiduciary Services

Director Thomas C. Clark Managing Director Asset Management,
Investment

Director Jeffrey S. Maurer President and Asset Management,
Chief Operating Investment and
Officer Fiduciary Services

Director/Managing Robert M. Raney Managing Director Asset Management,
Director and Chief and Chief Investment and
Investment Officer Investment Officer Fiduciary Services

Director/President Gregory F. Sanford President and Chief Asset Management,
and Chief Operating Operating Officer Investment and
Officer Fiduciary Services

Director/Chairman Franklin E. Ulf Chairman of the Asset Management,
of the Board Board Investment and
Fiduciary Services

Director and Charles E. Wert Executive Vice Asset Management,
Executive Vice President Investment and
President Fiduciary Services

Director Maribeth S. Rahe Vice Chairman Asset Management,
Investment and
Fiduciary Services
</TABLE>

Item 27. PRINCIPAL UNDERWRITER

<PAGE>

(a) Edgewood Services, Inc., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: Deutsche Portfolios, Deutsche Funds, Inc., Excelsior
Funds, Inc., Excelsior Institutional Trust, Excelsior Funds, FTI Funds, Fund
Manager Portfolios, Great Plains Funds, Old Westbury Funds, Inc., The Riverfront
Funds, Robertsons Stephens Investment Trust, WesMark Funds and WCT Funds.

<TABLE>
<CAPTION>
(b) Names and Principal Positions and Offices with Offices with
Business Addresses the Distributor Registrant
------------------- -------------------------- ------------
<S> <C> <C>
Lawrence Caracciolo Director and President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Arthur L. Cherry Director, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

J. Christopher Donahue Director, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Thomas P. Scholes Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Ernest L. Linane Assistant Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

S. Elliott Cohan Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Christine T. Johnson Assistant Vice President, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Denis McAuley Treasurer, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
(b) Names and Principal Positions and Offices with Offices with
Business Addresses the Distributor Registrant
------------------- -------------------------- ------------
<S> <C> <C>
Leslie K. Ross Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829

Amanda J. Reed Assistant Secretary, --
5800 Corporate Drive Edgewood Services, Inc.
Pittsburgh, PA 15237-5829
</TABLE>

Item 28. LOCATION OF ACCOUNTS AND RECORDS

(1) United States Trust Company of New York, 114 W. 47th Street,
New York, NY 10036 (records relating to its functions as investment adviser and
transfer agent).

(2) U.S. Trust Company of Connecticut, 225 High Ridge Road, East
Building, Stamford, Connecticut 06905 (records relating to its function as
investment adviser and co-administrator).

(3) U.S. Trust Company, N.A. 515 South Flower Street, Los Angeles,
CA 90071 (records relating to its function as sub-adviser to the California
Tax-Exempt Income Fund).

(4) Edgewood Services, Inc., Clearing Operations, 5800 Corporate
Drive, Pittsburgh, PA 15237-5829 (records relating to its function as
distributor).

(5) Chase Global Funds Services Company, 73 Tremont Street,
Boston, Massachusetts 02108-3913 (records relating to its function as
co-administrator and sub-transfer agent).

(6) Federated Administrative Services, Federated Investors Tower,
Pittsburgh, PA 15222-3779 (records relating to its function as
co-administrator).

(7) The Chase Manhattan Bank, 3 Chase MetroTech Center, 8th Floor,
Brooklyn, NY 11245 (records relating to its function as custodian).

(8) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496
(Registrants' Articles of Incorporation, Bylaws, and Minute Books).

Item 29. MANAGEMENT SERVICES

Not Applicable.

<PAGE>

Item 30. UNDERTAKINGS

Not Applicable.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 (the "1933
Act") and the Investment Company Act of 1940, Excelsior Tax-Exempt Funds, Inc.
has duly caused this Post-Effective Amendment No. 26 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Philadelphia and
the Commonwealth of Pennsylvania on the 28th day of May, 1999.

EXCELSIOR TAX-EXEMPT FUNDS, INC.
Registrant

*Frederick S. Wonham
---------------------------
Frederick S. Wonham, President and Treasurer
(Signature and Title)

Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 26 to Excelsior Tax-Exempt Funds, Inc.'s Registration Statement on
Form N-1A has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
*Frederick S. Wonham Chairman of the May 28, 1999
- ------------------------- Board, President
Frederick S. Wonham and Treasurer

*Joseph H. Dugan
- -------------------------
Joseph H. Dugan Director May 28, 1999

- -------------------------
Donald L. Campbell Director

*Wolfe J. Frankl
- -------------------------
Wolfe J. Frankl Director May 28, 1999

*Robert A. Robinson
- -------------------------
Robert A. Robinson Director May 28, 1999

*Alfred Tannachion
- -------------------------
Alfred Tannachion Director May 28, 1999

*Jonathan Piel
- -------------------------
Jonathan Piel Director May 28, 1999

- -------------------------
Rodman L. Drake Director
</TABLE>

<PAGE>

* By: /s/ W. Bruce McConnel, III
----------------------------------------
W. Bruce McConnel, III, Attorney-in-Fact

<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and said attorney
shall have full power and authority, to do and perform in the name and on behalf
of the undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Alfred C. Tannachion
------------------------
Alfred C. Tannachion

<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Joseph H. Dugan
-------------------
Joseph H. Dugan

<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Robert A. Robinson
----------------------
Robert A. Robinson

<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s and Excelsior Institutional Trust's
(collectively, the "Companies") respective Registration Statements on Form N-1A
pursuant to the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended (the "Acts") and all instruments necessary or incidental
in connection therewith pursuant to said Acts and any rules, regulations, or
requirements of the Securities and Exchange Commission in respect thereof, and
to file the same with the Securities and Exchange Commission, and either of said
attorneys shall have full power and authority, to do and perform in the name and
on behalf of the undersigned in any and all capacities, every act whatsoever
requisite or necessary to be done, as fully and to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that either
of said attorneys may lawfully do or cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Wolfe J. Frankl
-------------------
Wolfe J. Frankl

<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
W. Bruce McConnel, III his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in his capacity as director/trustee or officer, or both, to execute
amendments to Excelsior Funds, Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s,
Excelsior Institutional Trust's and Excelsior Funds' (collectively, the
"Companies") respective Registration Statements on Form N-1A pursuant to the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended (the "Acts") and all instruments necessary or incidental in connection
therewith pursuant to said Acts and any rules, regulations, or requirements of
the Securities and Exchange Commission in respect thereof, and to file the same
with the Securities and Exchange Commission, and said attorney shall have full
power and authority, to do and perform in the name and on behalf of the
undersigned in any and all capacities, every act whatsoever requisite or
necessary to be done, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney may
lawfully do or cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Frederick S. Wonham
------------------------
Frederick S. Wonham
<PAGE>

EXCELSIOR FUNDS, INC.
EXCELSIOR TAX-EXEMPT FUNDS, INC.
EXCELSIOR INSTITUTIONAL TRUST
EXCELSIOR FUNDS

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby appoints
Frederick S. Wonham and W. Bruce McConnel, III, and either of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in his capacity as
director/trustee or officer, or both, to execute amendments to Excelsior Funds,
Inc.'s, Excelsior Tax-Exempt Funds, Inc.'s, Excelsior Institutional Trust's and
Excelsior Funds' (collectively, the "Companies") respective Registration
Statements on Form N-1A pursuant to the Investment Company Act of 1940, as
amended, and the Securities Act of 1933, as amended (the "Acts") and all
instruments necessary or incidental in connection therewith pursuant to said
Acts and any rules, regulations, or requirements of the Securities and Exchange
Commission in respect thereof, and to file the same with the Securities and
Exchange Commission, and either of said attorneys shall have full power and
authority, to do and perform in the name and on behalf of the undersigned in any
and all capacities, every act whatsoever requisite or necessary to be done, as
fully and to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that either of said attorneys may lawfully do or
cause to be done by virtue hereof.

Dated: May 21, 1999 /s/ Jonathan Piel
-----------------
Jonathan Piel
<PAGE>

EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------

(a) (5) Articles Supplementary of Registrant dated as of July 31, 1998.

(6) Articles Supplementary of Registrant dated as of November 13,
1998.

(d) (3) Amendment No. 1 dated July 31, 1998 to Investment Advisory
Agreement among Registrant, U.S. Trust Company of Connecticut
and United States Trust Company of New York with respect to the
New York Tax-Exempt Money Fund.

(e) Amended and Restated Distribution Contract dated July 31, 1998
between Registrant and Edgewood Services, Inc.

(g) (2) Amended Exhibit A dated July 31, 1998 to Custody Agreement
between Registrant and The Chase Manhattan Bank.

(3) Amendment No. 1 dated July 31, 1998 to Custody Agreement between
Registrant and The Chase Manhattan Bank.

(h) (2) Amended and Restated Administration Agreement dated July 31,
1998 among Registrant, Chase Global Funds Services Company,
Federated Administrative Services and U.S. Trust Company of
Connecticut.

(3) Amended and Restated Mutual Funds Transfer Agency Agreement dated
as of July 31, 1998 by and between Registrant and United States
Trust Company of New York.

(4) Amended and Restated Mutual Funds Sub-Transfer Agency Agreement
dated as of July 31, 1998 by and between United States Trust
Company of New York and Chase Global Funds Services Company.

(i) Opinion of Counsel.

(j) Consent of Drinker Biddle & Reath LLP.

(l) (3) Purchase Agreement between Registrant and Edgewood Services, Inc.
dated August 3, 1998.

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

ARTICLES SUPPLEMENTARY

Excelsior Tax-Exempt Funds, Inc., a Maryland Corporation having its
principal office in the City of Baltimore, Maryland (hereinafter called the
"Company"), hereby certifies to the State Department of Assessments and Taxation
of Maryland that:

FIRST: Pursuant to Section 2-208 of the Maryland General Corporation Law,
the Board of Directors of the Company (the "Board") has classified Five Hundred
Million (500,000,000) shares of the Company's authorized but unissued and
unclassified shares of capital stock, of the par value of One Mill ($.001) per
share, as Class G Common Stock, of the par value of One Mill ($.001) per share,
pursuant to the following resolutions adopted at a regular meeting of the Board
held on July 31, 1998:

RESOLVED, that pursuant to the authority expressly given to the Board
in Article VI of the Company's Charter, the Board hereby classifies Five
Hundred Million (500,000,000) of the Company's authorized but unissued and
unclassified shares as Class G Common Stock (with an aggregate par value of
Five Hundred Thousand Dollars ($500,000));

FURTHER RESOLVED, that shares of Class G Common Stock shall represent
interests in the New York Tax-Exempt Money Fund;

FURTHER RESOLVED, that each share of Class G Common Stock shall
have all the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms
and conditions of redemption as set forth in the Company's Charter;
and

FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized and empowered to execute, seal, deliver and file
any and all documents, instruments, papers and writings, including but not
limited to Articles Supplementary to be filed with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of Company counsel prior to filing said Articles Supplementary, in the name
of the Company and on its behalf, as any officer determines is necessary or
desirables in connection with or in furtherance of the foregoing
resolutions, such determination to be conclusively evidenced by said
officer taking any such actions.

<PAGE>

SECOND: The shares of capital stock of the Company classified pursuant
to the resolutions set forth herein have been classified by the Board under the
authority contained in the Charter of the Company.

THIRD: These Articles Supplementary do not increase the total number of
shares that the Company is authorized to issue or the aggregate par value
thereof. The total number of shares of capital stock which the Company is
presently authorized to issue remains Fourteen Billion (14,000,000,000) shares
of capital stock of the par value of One Mill ($0.001) per share and of the
aggregate par value of Fourteen Million Dollars ($14,000,000), classified or
remaining unclassified as follows:

CLASS A COMMON STOCK: One Billion Five Hundred Million
(1,500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of One Million
Five Hundred Thousand Dollars ($1,500,000);

CLASS A COMMON STOCK -- SPECIAL SERIES 1: One Billion (1,000,000,000)
shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of One Million Dollars
($1,000,000);

CLASS A COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five
Hundred Thousand Dollars ($500,000);

CLASS B COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);

CLASS B COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS B COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS C COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);

CLASS C COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000)

<PAGE>

shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);

CLASS C COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five
Hundred Thousand Dollars ($500,000);

CLASS D COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);

CLASS D COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS D COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars;

CLASS E COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);

CLASS E COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS E COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS F COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000);

CLASS F COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS F COMMON STOCK -- SPECIAL SERIES 2:

<PAGE>

Five Hundred Million (500,000,000) shares of capital stock of the Company
of the par value of One Mill ($0.001) per share and of the aggregate par
value of Five Hundred Thousand Dollars ($500,000);

CLASS G COMMON STOCK: Five Hundred Million (500,000,000) shares of
capital stock of the Company of the par value of One Mill ($0.001) per
share and of the aggregate par value of Five Hundred Thousand Dollars
($500,000).

The total number of authorized and unclassified shares of capital stock of
the Company remaining after the actions described above is Three Billion
(3,000,000,000) shares of capital stock of the par value of One Mill ($0.001)
per share and of the aggregate par value of Three Million Dollars ($3,000,000).

<PAGE>

IN WITNESS WHEREOF, Excelsior Tax-Exempt Funds, Inc. has caused these
presents to be signed in its name and on its behalf by its President and its
Corporate Seal to be herewith affixed and attested to by its Secretary as of
July 31, 1998.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

[SEAL]

Attest:

/s/ W. Bruce McConnel, III By: /s/ Frederick S. Wonham
- -------------------------- -----------------------
W. Bruce McConnel, III Frederick S. Wonham
Secretary President

<PAGE>

CERTIFICATE

THE UNDERSIGNED, President of Excelsior Tax-Exempt Funds, Inc., who
executed on behalf of said Corporation the attached Articles Supplementary of
said Corporation, of which this Certificate is made a part, hereby acknowledges,
in the name and on behalf of said Corporation, the attached Articles
Supplementary to be the corporate act of said Corporation, and certifies that to
the best of his knowledge, information and belief the matters and facts set
forth in the attached Articles Supplementary with respect to authorization and
approval are true in all material respects, under the penalties for perjury.

/s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham
President

Dated as of: July 31, 1998

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

ARTICLES SUPPLEMENTARY

FIRST: Pursuant to Section 2-208 of the Maryland General Corporation Law,
the Board of Directors of the Company (the "Board") has classified an additional
Five Hundred Million (500,000,000) shares of the Company's authorized but
unissued and unclassified shares of capital stock, of the par value of One Mill
($.001) per share, as Class A Common Stock, of the par value of One Mill ($.001)
per share; and an additional One Billion Five Hundred Million (1,500,000,000)
shares of the Company's authorized but unissued and unclassified shares of
capital stock, of the par value of One Mill ($.001) per share, as Class G Common
Stock, of the par value of One Mill ($.001) per share, pursuant to the following
resolutions adopted at a regular meeting of the Board held on November 13, 1998:

RESOLVED, that pursuant to the authority expressly given to the Board
in Article VI of the Company's Charter, the Board hereby classifies an
additional Five Hundred Million (500,000,000) of the Company's authorized
but unissued and unclassified shares as Class A Common Stock (with an
aggregate par value of Five Hundred Thousand Dollars ($500,000));

FURTHER RESOLVED, that each share of Class A Common Stock shall have
all the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in the Company's Charter;

FURTHER RESOLVED, that pursuant to the authority expressly given to
the Board in Article VI of the Company's Charter, the Board hereby
classifies an additional One Billion Five Hundred Million (1,500,000,000)
of the Company's authorized but unissued and unclassified shares as Class G
Common Stock (with an aggregate par value of One Million Five Hundred
Thousand Dollars ($1,500,000));

FURTHER RESOLVED, that each share of Class G Common Stock shall have
all the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as set forth in the Company's Charter; and

<PAGE>

FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized and empowered to execute, seal, deliver and file
any and all documents, instruments, papers and writings, including but not
limited to Articles Supplementary to be filed with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of Company counsel prior to filing said Articles Supplementary, in the name
of the Company and on its behalf, as any officer determines is necessary or
desirable in connection with or in furtherance of the foregoing
resolutions, such determination to be conclusively evidenced by said
officer taking any such actions.

SECOND: The shares of capital stock of the Company classified pursuant to
the resolutions set forth herein have been classified by the Board under the
authority contained in the Charter of the Company.

CLASS A COMMON STOCK: Two Billion (2,000,000,000) shares of capital
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000);

CLASS B COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share

<PAGE>

and of the aggregate par value of Five Hundred Thousand Dollars ($500,000);

CLASS C COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000);

CLASS F COMMON STOCK -- SPECIAL SERIES 1: Five Hundred Million
(500,000,000)

<PAGE>

shares of capital stock of the Company of the par value of One Mill
($0.001) per share and of the aggregate par value of Five Hundred Thousand
Dollars ($500,000);

CLASS F COMMON STOCK -- SPECIAL SERIES 2: Five Hundred Million
(500,000,000) shares of capital stock of the Company of the par value of
One Mill ($0.001) per share and of the aggregate par value of Five Hundred
Thousand Dollars ($500,000); and

CLASS G COMMON STOCK: Two Billion (2,000,000,000) shares of capital
stock of the Company of the par value of One Mill ($0.001) per share and of
the aggregate par value of Two Million Dollars ($2,000,000).

The total number of authorized and unclassified shares of capital stock of
the Company remaining after the actions described above is One Billion
(1,000,000,000) shares of capital stock of the par value of One Mill ($0.001)
per share and of the aggregate par value of One Million Dollars ($1,000,000).

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.

[SEAL]

Attest:

/s/ Michael P. Malloy By: /s/ Frederick S. Wonham
- --------------------- -----------------------
Michael P. Malloy Frederick S. Wonham
Assistant Secretary President

<PAGE>

CERTIFICATE

/s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham
President

Dated as of: November 13, 1998

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.
AMENDMENT NO. 1
TO
INVESTMENT ADVISORY AGREEMENT

WHEREAS, Excelsior Tax-Exempt Funds, Inc. (the "Company"), U.S. Trust
Company of Connecticut ("USTCT") and United States Trust Company of New York
("USTNY") desire to amend the Investment Advisory Agreement of May 16, 1997 (the
"Agreement") by and among them to include the New York Tax-Exempt Money Fund as
an investment portfolio for which USTCT and USTNY render investment advisory and
other services; and

WHEREAS, USTCT and USTNY are willing to render such services to the Company
with respect to the New York Tax-Exempt Money Fund;

The parties hereto, intending to be legally bound hereby, agree that the
Agreement is amended as follows:

1. The third paragraph of the preamble to the Agreement shall henceforth
read:

WHEREAS, the Company desires to retain the Investment Adviser to
render investment advisory and other services to the Company for its
Tax-Exempt Money Fund, Intermediate-Term Tax-Exempt Fund, Long-Term
Tax-Exempt Fund and New York Tax-Exempt Money Fund portfolios
(collectively, the "Funds"), and the Investment Adviser is willing to so
render such services;

2. Paragraph No. 7 shall henceforth read:

7. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement, the Company will pay the Investment Adviser and
the Investment Adviser will accept as full compensation therefor a fee,
computed daily and payable monthly, at the following annual rates: .25% of
the average daily net assets of the Tax-Exempt Money Fund; .35% of the
average daily net assets of the Intermediate-Term Tax-Exempt Fund; and .50%
of the average daily net assets of each of the Long-Term Tax-Exempt and New
York Tax-Exempt Money Funds.

<PAGE>

IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have caused this instrument to be executed by their officers designated
below as of July 31, 1998.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ F.S. Wonham
---------------
Title: President & Treasurer
---------------------

UNITED STATES TRUST COMPANY OF
NEW YORK

By: /s/ Kenneth Walsh
-----------------
Title: Executive Vice President
------------------------

U.S. TRUST COMPANY OF
CONNECTICUT

By: /s/ W. Michael Funck
--------------------
Title: President & CEO
----------------

<PAGE>

AMENDED AND RESTATED
DISTRIBUTION CONTRACT

Edgewood Services, Inc.
Clearing Operations
P.O. Box 897
Pittsburgh, Pennsylvania 15230-0897

Gentlemen:

This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, EXCELSIOR TAX-EXEMPT FUNDS, INC. (the "Company"), a
Maryland corporation, has agreed that EDGEWOOD SERVICES, INC. (the
"Distributor"), a subsidiary of Federated Investors ("Federated"), shall be, for
the period of this Contract, a distributor of shares (the "Shares") of the
Company's Common Stock of one or more classes and series representing interests
in the Company's investment portfolios (individually, a "Fund," collectively,
"Funds"), as described and set forth on one or more exhibits to this Contract.
In the event that the Company establishes one or more additional investment
portfolios other than the Funds with respect to which it decides to retain the
Distributor to act as a distributor hereunder, the Company shall so notify the
Distributor in writing. If the Distributor is willing to render such services to
a new investment portfolio, it will notify the Company in writing whereupon such
investment portfolio will become a Fund under this Contract.

1. SERVICES AS DISTRIBUTOR.

1.1 The Distributor will act as agent for the distribution of Shares
in accordance with the instructions of the Company's Board of Directors and the
Company's registration statement and prospectuses then in effect under the
Securities Act of 1933, as amended, and will transmit promptly any orders
received by it for the purchase or redemption of Shares to the Company's
transfer agent or to any qualified broker/dealer for transmittal to said agent.

1.2 The Distributor agrees to use its best efforts to solicit orders
for the sale of Shares and will undertake such advertising and promotion as it
believes appropriate in connection with such solicitation. The Company
understands that the Distributor may in the future be the distributor of shares
of other investment company portfolios ("Portfolios") including Portfolios
having investment objectives similar to those of the Funds. The Company further
understands that existing and future investors in the Funds may invest in shares
of such other Portfolios. The Company agrees that the Distributor's duties to
such Portfolios shall not be deemed in conflict with its duties to the Company
under this Paragraph 1.2.

Page 1
<PAGE>

1.3 Except to the extent that any plan adopted by the Company pursuant
to Rule 12b-1 under the Investment Company Act of 1940 provides otherwise, the
Distributor shall, at its own expense, finance such activities as it deems
reasonable and which are primarily intended to result in the sale of Shares,
including, but not limited to, advertising, compensation of underwriters,
dealers and sales personnel, the printing and mailing of prospectuses to other
than current shareholders, and the printing and mailing of sales literature. In
addition, the Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Funds. It
is contemplated that the Distributor will enter into selling agreements with
qualified broker/dealers and other persons with respect to the offering of
Shares to the public, and in so doing will act only on its own behalf as
principal.

1.4 All Shares offered for sale by the Distributor shall be offered
for sale to the public at a price per share (the "offering price") equal to (a)
their net asset value (determined in the manner set forth in the Company's
charter documents and the then current prospectus) plus, except to those classes
of persons or transactions described in the then current Prospectus, (b) a sales
charge which shall be the percentage of the offering price of such Shares as set
forth in the Company's then current prospectus. The offering price, if not an
exact multiple of one cent, shall be adjusted to the nearest cent. Concessions
by the Distributor to broker/dealers and other persons shall be set forth in
either the selling agreements between the Distributor and such broker/dealers
and persons, as from time to time amended, or if such concessions are described
in the Company's then current prospectus, shall be as so set forth. No
broker/dealer or other person who enters into a selling agreement with the
Distributor shall be authorized to act as agent for the Company in connection
with the offering or sale of the Shares to the public or otherwise.

1.5 If any Shares sold by the Company are redeemed or repurchased by
the Company or by the Distributor as agent or are tendered for redemption within
seven business days after the date of confirmation of the original purchase of
said Shares, the Distributor shall forfeit the amount above the net asset value
received by the Distributor in respect of such Shares, provided that the
portion, if any, of such amount re-allowed by the Distributor to broker/dealers
or other persons shall be repayable to the Company only to the extent recovered
by the Distributor from the broker/dealer or other person involved. The
Distributor shall include in each selling agreement with such broker/dealers and
other persons a corresponding provision for the forfeiture by them of their
concession with respect to Shares sold by them or their principals and redeemed
or repurchased by the Company or by the Distributor as agent (or tendered for
redemption) within seven business days after the date of confirmation of such
initial purchases.

1.6 All activities by the Distributor and its agents and employees

Page 2
<PAGE>

as distributor of Shares shall comply with all applicable laws, rules
and regulations, including, without limitation, all rules and regulations made
or adopted pursuant to the Investment Company Act of 1940 by the Securities and
Exchange Commission or any securities association registered under the
Securities Exchange Act of 1934.

1.7 Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Company's officers may decline to accept any orders for or make any
sales of Shares until such time as those officers deem it advisable to accept
such orders and to make such sales.

1.8 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
Shares for sale in such states as the Company may approve, and the Company shall
pay all fees and other expenses incurred in connection with such qualification.
The Distributor agrees to pay all expenses related to its own qualification as a
broker or dealer required by any federal or state law or self-regulatory
organization and, except as otherwise specifically provided in this Contract,
all other expenses incurred by the Distributor in connection with the offering
of Shares as contemplated by this Contract.

1.9 The Company shall timely furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the Funds
and Shares as the Distributor may reasonably request; and the Company warrants
that the statements contained in any such information shall fairly show or
represent what they purport to show or represent. The Company shall also furnish
the Distributor upon request with : (a) audited annual and unaudited semi-annual
statements of the Company's books and accounts with respect to each Fund, and,
(b) from time to time such additional information regarding the Funds' financial
condition as the Distributor may reasonably request.

1.10 The Company represents to the Distributor that all registration
statements and prospectuses filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, with respect
to Shares have been prepared in conformity with the requirements of said Act and
rules and regulations of the Securities and Exchange Commission thereunder. As
used in this Contract, the terms "registration statement" and "prospectus" shall
mean any registration statement, prospectus (together with the related statement
of additional information) filed with respect to Shares with the Securities and
Exchange Commission, and any amendments and supplements thereto which at any
time shall have been filed with said Commission. The Company represents and
warrants to the Distributor that any registration statement and prospectus, when
such become effective, will contain

Page 3
<PAGE>

all statements required to be stated therein in conformity with said Act and the
rules and regulations of said Commission; that all statements of fact contained
in any such registration statement and prospectus will be true and correct when
such registration statement and prospectus become effective; and that neither
any registration statement nor any prospectus, when they become effective, will
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of Shares. The Company may but shall not be obligated
to propose from time to time such amendment or amendments to any registration
statement and such supplement or supplements to any prospectus which, in the
light of future developments, may, in the opinion of the Company's counsel, be
necessary or advisable. The Company shall promptly notify the Distributor of any
advice given to it by the Company's counsel regarding the necessity or
advisability so to amend or supplement such registration statement or
prospectus. If the Company shall not propose such amendment or amendments and/or
supplement or supplements within fifteen days after receipt by the Company of a
written request from the Distributor to do so, the Distributor may, at its
option, terminate this Contract. The Company shall not file any amendment to any
registration statement or supplement to any prospectus without giving the
Distributor reasonable notice thereof in advance; provided, however, that
nothing contained in this Contract shall in any way limit the Company's right to
file at any time such amendments to any registration statements and/or
supplements to any prospectus, of whatever character, as the Company may deem
advisable, such right being in all respects absolute and unconditional.

1.11 The Company authorizes the Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of Shares. The Company agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
reasonable expenses (as those expenses are incurred) (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers and
directors, or any such controlling person may incur under the Securities Act of
1933, as amended, or under common law or otherwise, arising out of or based upon
any untrue statement, or alleged untrue statement, of a material fact contained
in any registration statement or any prospectus or arising out of or based upon
any omission, or alleged omission, to state a material fact required to be
stated in any registration statement or prospectus or necessary to make any
statement in such documents not misleading; PROVIDED, HOWEVER, that the
Company's agreement to indemnify the Distributor, its officers or directors, and
any such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of any untrue statement or alleged untrue

Page 4
<PAGE>

statement or omission or alleged omission made in any registration statement or
prospectus or in any financial or other statements in reliance upon and in
conformity with any information furnished to the Company by the Distributor and
used in the preparation thereof; and FURTHER PROVIDED that the Company's
agreement to indemnify the Distributor and the Company's representations and
warranties herein set forth shall not be deemed to cover any liability to the
Company or its shareholders to which the Distributor would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of the Distributor's reckless disregard
of its obligations and duties under this Contract. The Company's agreement to
indemnify the Distributor, its officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Company's being notified
of any action brought against the Distributor, its officers or directors, or any
such controlling person, such notification to be given by letter or by telegram
addressed to the Company at its principal office in Boston, Massachusetts and
sent to the Company by the person against whom such action is brought within 20
days after the summons or other first legal process shall have been served. The
failure to so notify the Company of any such action shall not relieve the
Company from any liability which the Company may have to the person against whom
such action is brought by reason of any such untrue, or allegedly untrue,
statement or omission, or alleged omission, otherwise than on account of the
Company's indemnity agreement contained in this paragraph 1.11. The Company will
be entitled to assume the defense of any suit brought to enforce any such claim,
demand or liability, but, in such case, such defense shall be conducted by
counsel of good standing chosen by the Company and approved by the Distributor,
which approval shall not unreasonably be withheld. In the event the Company
elects to assume the defense of any such suit and retain counsel of good
standing approved by the Distributor, the defendant or defendants in such suit
shall bear the fees and expenses of any additional counsel retained by any of
them; but in case the Company does not elect to assume the defense of any such
suit, or in case the Distributor reasonably does not approve of counsel chosen
by the Company, the Company will reimburse the Distributor, its officers and
directors, or the controlling person or persons named as defendant or defendants
in such suit, for the reasonable fees and expenses of any counsel retained by
the Distributor or them. The Company's indemnification agreement contained in
this paragraph 1.11 and the Company's representations and warranties in this
Contract shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Distributor, its officers and
directors, or any controlling person and shall survive the delivery of any
Shares. This agreement of indemnity will inure exclusively to the Distributor's
benefit, to the benefit of its several officers and directors, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Company agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the issue and sale of any Shares.

Page 5
<PAGE>

1.12 The Distributor agrees to indemnify, defend and hold the Company,
its several officers and directors, and any person who controls the Company
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
reasonable expenses (as those expenses are incurred) (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Company, its officers or
directors or any such controlling person may incur under the Securities Act of
1933, as amended, or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Company, its officers or directors, or
such controlling person resulting from such claims or demands, shall arise out
of or be based upon any untrue, or alleged untrue, statement of a material fact
contained in information furnished by the Distributor to the Company or its
counsel and used in the Company's registration statement or corresponding
statement made in the prospectus, or shall arise out of or be based upon any
omission, or alleged omission, to state a material fact in connection with such
information furnished by the Distributor to the Company or its counsel required
to be stated in such answers or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Company, its officers
and directors, and any such controlling person, as aforesaid, is expressly
conditioned upon the Distributor being notified of any action brought against
the Company, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Distributor at
its principal office in Pittsburgh, Pennsylvania and sent to the Distributor by
the person against whom such action is brought, within 20 days after the summons
or other first legal process shall have been served. The failure to so notify
the Distributor of any such action shall not relieve the Distributor from any
liability which the Distributor may have to the Company, its officers or
directors, or to such controlling person by reason of any such untrue or alleged
untrue statement, or omission or alleged omission, otherwise than on account of
the Distributor's indemnity agreement contained in this paragraph 1.12. The
Distributor shall have the right to control the defense of such action, with
counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on the Distributor's
part, and in any other event the Company, its officers or directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. In the event the Distributor
elects to assume the defense of any such suit and retain counsel of good
standing approved by the Company, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them;
but in case the Distributor does not elect to assume the defense of any such
suit, or in case the Company reasonably does not approve of counsel chosen by
the Distributor, the Distributor will reimburse the Company, its officers and
directors, or the controlling person or persons named as defendant or defendants
in such

Page 6
<PAGE>

suit, for the reasonable fees and expenses of any counsel retained by
the Company or them. The Distributor's indemnification agreement contained in
this paragraph 1.12 and the Distributor's representations and warranties in this
Contract shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, its officers and directors,
or any controlling person and shall survive the delivery of any Shares. This
agreement of indemnity will inure exclusively to the Company's benefit, to the
benefit of its several officers and directors, and their respective estates, and
to the benefit of the controlling persons and their successors. The Distributor
agrees promptly to notify the Company of the commencement of any litigation or
proceedings against the Distributor or any of its officers or directors in
connection with the issue and sale of any Shares.

1.13 No Shares shall be offered by either the Distributor or the
Company under any of the provisions of this Contract and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the Securities Act of 1933, as amended, or if and so long as a current
prospectus, as required by Section 10(b) of said Act, as amended, is not on file
with the Securities and Exchange Commission; provided, however, that nothing
contained in this paragraph 1.13 shall in any way restrict or have any
application to or bearing upon the Company's obligation to repurchase Shares
from any shareholder in accordance with the provisions of the Company's
prospectus or charter documents.

1.14 The Company agrees to advise the Distributor as soon as
reasonably practical:

(a) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect;

(b) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the
registration statement or prospectus then in effect or the initiation
of any proceeding for that purpose;

(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement or prospectus
then in effect or which requires the making of a change in such
registration statement or prospectus in order to make the statements
therein not misleading; and

(d) of all actions of the Securities and Exchange

Page 7
<PAGE>

Commission with respect to any amendment to any registration
statement or prospectus which may from time to time be filed with
the Securities and Exchange Commission.

For purposes of this section, informal requests by or acts of the
Staff of the Securities and Exchange Commission shall not be deemed actions of
or requests by the Securities and Exchange Commission.

1.15 The Distributor agrees on behalf of itself and its employees to
treat confidentially and as proprietary information of the Company all records
and other information relative to the Funds and its prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be withheld where the Distributor
may be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities, or
when so requested by the Company.

2. TERM.

This Contract shall become effective on July 31, 1998 and, unless
sooner terminated as provided herein, shall continue until July 31, 1999, and
thereafter shall continue automatically with respect to each Fund for successive
annual periods ending on July 31 of each year, provided such continuance is
specifically approved at least annually by (i) the Company's Board of Directors
or (ii) by a vote of a majority (as defined in the Investment Company Act of
1940) of the outstanding voting securities of the Fund, and PROVIDED that in
either event the continuance is also approved by the majority of the Company's
directors who are not parties to this Contract or interested persons (as defined
in the Investment Company Act 1940) of any such party, by vote cast in person at
a meeting called for the purpose of voting on such approval. This Contract is
not assignable and is terminable with respect to each Fund, without penalty, on
not less than forty-five days' notice by the Company's Board of Directors or by
vote of a majority (as defined in the Investment Company Act 1940) of the
outstanding voting securities of such Fund, or, on not less than ninety days'
notice, by the Distributor. This Contract will terminate automatically in the
event of its "assignment" (as defined in the Investment Company Act 1940). The
parties agree that an assignment includes the transfer of "control" of more than
25% of the outstanding voting securities of the Distributor to a company that is
not a subsidiary of Federated.

3. MISCELLANEOUS.

3.1 No provision of this Contract may be changed, waived,

Page 8
<PAGE>

discharged or terminated orally, but only by an instrument in writing signed by
the party against which an enforcement of the change, waiver, discharge or
termination is sought. This Contract may be executed in one or more counterparts
and all such counterparts will constitute one and the same instrument.

3.2 This Contract shall be governed by the laws of the Commonwealth of
Pennsylvania.

Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.

Yours very truly,

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ F. S. Wonham
----------------
Name: Frederick S. Wonham
Title: President and Treasurer

Accepted:
EDGEWOOD SERVICES, INC.

By: /s/ Kenneth W. Pegher, Jr.
--------------------------
Name: Kenneth W. Pegher, Jr.
Title: Treasurer

Page 9
<PAGE>

Exhibit A to the
Distribution Contract

EXCELSIOR TAX-EXEMPT FUNDS, INC.
--------------------------------
Short-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
New York Tax-Exempt Money Fund

In consideration of the mutual covenants set forth in the Distribution
Contract dated as of August 1, 1995, as amended and restated on July 31, 1998,
between UST MASTER TAX-EXEMPT FUNDS, INC. and Edgewood Services, Inc., UST
MASTER TAX-EXEMPT FUNDS, INC. executes and delivers this Exhibit on behalf of
the Funds, and with respect to any classes or series thereof, first set forth in
this Exhibit.

Witness the due execution hereof this 31st day of July, 1998.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ F. S. Wonham
----------------
Name: Frederick S. Wonham
Title: President and Treasurer

EDGEWOOD SERVICES, INC.

By: /s/ Kenneth W. Pegher, Jr.
--------------------------
Name: Kenneth W. Pegher, Jr.
Title: Treasurer

Page 10
<PAGE>

<PAGE>

AMENDED EXHIBIT A
------------------

Portfolios covered by the Custody Agreement effective as of September 1, 1995,
as amended, between The Chase Manhattan Bank and Excelsior Tax-Exempt Funds,
Inc.

Tax-Exempt Money Fund
New York Intermediate-Term Tax-Exempt Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
New York Tax-Exempt Money Fund

THE CHASE MANHATTAN BANK, N.A.

By: /s/ Donald P. Hearn
-------------------
Donald P. Hearn

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ Frederick S. Wonham
-----------------------
Frederick S. Wonham

Dated: July 31, 1998

<PAGE>

EXCELSIOR TAX-EXEMPT FUNDS, INC.
AMENDMENT NO. 1
TO
CUSTODY AGREEMENT

WHEREAS, Excelsior Tax-Exempt Funds, Inc. ("the Fund") and The Chase
Manhattan Bank ("the Bank") desire to amend the Custody Agreement (the
"Agreement") dated as of September 1, 1995 (as amended and restated on August 1,
1997) by and between them to change the time period required for notice of
termination of the Agreement from 60 to 45 days.

NOW THEREFORE, the parties hereto, intending to be legally bound hereby,
agree that the Agreement is amended as follows:

1. Paragraph No. 17 shall henceforth read:

"17. TERMINATION. This Agreement may be terminated by the Fund or the
Bank by 45 days' written notice to the other, sent by registered mail. If
notice of termination is given by the Bank, the Fund shall, within 60 days
following the giving of such notice, deliver to the Bank a certified copy of a
resolution of the Board of Directors of the Fund specifying the names of the
persons to whom the Bank shall deliver such Securities and cash, after deducting
therefrom any amounts which the Bank determines to be owed to it under Section
15 hereof. If within 60 days following the giving of a notice of termination by
the Bank, the Bank does not receive from the Fund a certified copy of a
resolution of the Board of Directors of the Fund specifying the names of the
persons to whom the cash in each Deposit Account shall be paid and to whom the
Securities in each Custody Account shall be delivered, the Bank, at its
election, may deliver such Securities and pay such cash to a bank or trust
company doing business in the State of New York and qualified as a custodian
under the Investment Company Act of 1940 and other applicable rules and
regulations to be held and disposed of pursuant to the provisions of this
Agreement, or to Authorized Persons, or may continue to hold such Securities and
cash until a certified copy of one or more resolutions as aforesaid is delivered
to the Bank. The obligations of the parties hereto regarding the use of
reasonable care, indemnities and payment of fees and expenses shall survive the
termination of this Agreement, and the obligations of each Portfolio of the Fund
to indemnify and/or hold harmless other persons or entities under this Agreement
shall be the several (and not the joint or joint and several) obligation of each
Portfolio of the Fund."

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of July 31, 1998.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ F. S. Wonham
---------------------------

Title: President and Treasurer
------------------------

THE CHASE MANHATTAN BANK

By: /s/ Donald P. Hearn
---------------------------

Title: Senior Vice President
-------------------------

<PAGE>
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT

This AGREEMENT made as of July 31, 1998 by and among EXCELSIOR
TAX-EXEMPT FUNDS, INC., a Maryland corporation (the "Company"), CHASE GLOBAL
FUNDS SERVICES COMPANY, a Delaware corporation ("CGFSC"), FEDERATED
ADMINISTRATIVE SERVICES ("FAS"), a Delaware trust, and U.S. TRUST COMPANY OF
CONNECTICUT ("U.S. Trust"), a Connecticut state bank and trust company (CGFSC,
FAS and U.S. Trust are collectively referred to as the "Administrators").

WITNESSETH:

WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and

WHEREAS, the Company wishes to retain the Administrators to provide,
as co-administrators, certain administration services with respect to one or
more of the Company's investment portfolios (individually, a "Fund," and
collectively, the "Funds"), as described and set forth on one or more exhibits
to this Agreement, and the Administrators are willing to furnish such services;

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:

1. APPOINTMENT. The Company hereby appoints the Administrators to
provide administration services to the Funds for the period and on the terms set
forth in this Agreement. The Administrators accept such appointment and agree
to furnish the services herein set forth in return for the compensation as
provided in Section 4 of this Agreement. In the event that the Company
establishes one or more investment portfolios other than the Funds with respect
to which it decides to retain the Administrators to act as co-administrators
hereunder, the Company shall notify the Administrators in writing. If the
Administrators are willing to render such services to a new investment
portfolio, they shall so notify the Company in writing whereupon such investment
portfolio shall become a Fund hereunder and shall be subject to the provisions
of this Agreement to the same extent as the Funds, except to the extent that
said provisions (including those relating to the compensation payable by the
Company) may be modified with respect to such investment portfolio in writing by
the Company and the Administrators at the time of the addition of such new
investment portfolio.

2. DELIVERY OF DOCUMENTS. The Company has furnished each of the
Administrators with copies, properly certified or authenticated, of each of the
following:

(a) Resolutions of the Company's Board of Directors authorizing
the appointment of the Administrators to provide certain administration services
to the Company and approving this Agreement;

(b) The Company's Articles of Incorporation ("Charter");

<PAGE>

(d) The Company's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange Commission ("SEC")
on August 31, 1984;

(e) The Company's most recent Post-Effective Amendment to its
Registration Statement on Form N-1A (No. 2-93068) (the "Registration Statement")
under the Securities Act of 1933 and the 1940 Act, as filed with the SEC;

(f) The Company's Amended and Restated Administrative Services
Plan; and

(g) The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, herein
called the "Prospectus").

The Company will timely furnish each of the Administrators from
time to time with copies, properly certified or authenticated, of all amendments
of or supplements to the foregoing, if any.

3. SERVICES AND DUTIES. Subject to the supervision and control of the
Company's Board of Directors, and as delineated on one or more Exhibit to the
Agreement, the Administrators agree to assist in supervising various aspects of
each Fund's administrative operations, including the performance of the
following specific services for each Fund:

(a) Providing office facilities (which may be in the offices of
any of the Administrators or a corporate affiliate of any of them, but shall be
in such location as the Company shall reasonably approve);

(b) Furnishing statistical and research data, clerical services,
and stationery and office supplies;

(c) Keeping and maintaining all financial accounts and records
(other than those required to be maintained by the Company's Custodian and
Transfer Agent);

(d) Computing each Fund's net asset value, net income and net
capital gain (loss) in accordance with the Company's Prospectus and resolutions
of its Board of Directors;

(e) Compiling data for and preparing for execution and filing
with the SEC required reports and notices to shareholders of record and the SEC
including, without limitation, Semi-Annual and Annual Reports to Shareholders,
Semi-Annual Reports on Form N-SAR and timely Rule 24f-2 Notices;

(f) Compiling data for, and preparing for execution and filing,
all reports or other documents required by Federal, state and other applicable
laws and regulations, including those required by applicable laws and
regulations, including those required by applicable Federal and state tax laws

<PAGE>

(other than those required to be filed by the Company's Custodian or Transfer
Agent);

(g) Reviewing and providing advice with respect to all sales
literature (advertisements, brochures and shareholder communications) for each
of the Funds and any class or series thereof;

(h) Assisting in developing and monitoring compliance procedures
for each Fund and any class or series thereof, including, without limitation,
procedures to monitor compliance with applicable law and regulations, each
Fund's investment objectives, policies and restrictions, its continued
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended, and other tax matters;

(i) Monitoring the Company's arrangements with respect to
services provided by certain organizations ("Service Organizations") under its
Amended and Restated Administrative Services Plan, provided that each
Administrator will only be responsible for monitoring arrangements with Service
Organizations with whom the Administrator has established the servicing
relationship on behalf of the Company. With respect to such Service
Organizations, the Administrators shall specifically monitor and review the
services rendered by Service Organizations to their customers who are the
beneficial owners of shares, pursuant to agreements between the Company and such
Service Organizations ("Servicing Agreements"), including, without limitation,
reviewing the qualifications of financial institutions wishing to be Service
Organizations, assisting in the execution and delivery of Servicing Agreements,
reporting to the Company's Board of Directors with respect to the amounts paid
or payable by the Company from time to time under the Servicing Agreements and
the nature of the services provided by Service Organizations, and maintaining
appropriate records in connection with such duties;

(j) Determining, together with the Company's Board of Directors,
the jurisdictions in which the Company's shares shall be registered or qualified
for sale and, in connection therewith, maintaining the registration or
qualification of shares for sale under the securities laws of any state.
Payment of share registration fees and any fees for qualifying or continuing the
qualification of any Fund as a dealer or broker, if applicable, shall be made by
that Fund;

(k) Assisting to the extent requested by the Company and its
outside counsel with the preparation of the Company's Registration Statement on
Form N-1A or any replacement therefor; and

(l) Assisting in the monitoring of regulatory and legislative
developments which may affect the Company and, in response to such developments,
counseling and assisting the Company in routine regulatory examinations or
investigations of the Company, and working with outside counsel to the Company
in connection with regulatory matters or litigation.

In performing their duties as co-administrators of the Company, the
Administrators (a) will act in accordance with the Company's Charter, Bylaws,
Prospectus and the instructions and directions of the Company's Board of
Directors and will conform to, and comply with, the requirements of the 1940 Act
and all other applicable Federal or state laws and regulations, and (b) will
consult with outside legal counsel to the Company, as necessary or appropriate.

<PAGE>

The Administrators will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under said Act in connection with the services required to be performed
hereunder. The Administrators further agree that all such records which they
maintain for the Company are the property of the Company and further agree to
surrender promptly to the Company any of such records upon the Company's
request.

4. FEES; EXPENSES; EXPENSE REIMBURSEMENT.

For the services rendered pursuant to this Agreement for all Funds,
the Administrators shall be entitled jointly to a fee based on the average net
assets of the Company, determined at the following annual rates applied to the
average combined daily net assets of all of the Funds and all of the investment
portfolios of Excelsior Institutional Trust (the "Trust") and Excelsior Funds,
Inc. ("Excelsior Fund")(except the International, Pacific/Asia, Pan European,
Latin America and Emerging Markets Funds of Excelsior Fund and the International
Equity Fund of the Trust): .20% of the first $200 million; .175% of the next
$200 million; and .15% of any amount in excess of $400 million. Each Fund will
pay a portion of the total fee payable by the Company in an amount equal to the
proportion that such Fund's average daily net assets bears to the total average
daily net assets of all the Funds of the Company. The fee attributable to each
Fund shall be the several (and not joint or joint and several) obligation of
each Fund. Such fees are to be computed daily and paid monthly on the first
business day of the following month. Upon any termination of this Agreement
before the end of any month, the fee for such part of the month shall be
pro-rated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement.

For purposes of determining fees payable to the Administrators, the
value of each Fund's net assets shall be computed as required by its Prospectus,
generally accepted accounting principles, and resolutions of the Company's Board
of Directors.

The Administrators will from time to time employ or associate with
themselves such person or persons as they may believe to be fitted to assist
them in the performance of this Agreement. Such person or persons may be
officers and employees who are employed by both the Administrators and the
Company. The compensation of such person or persons for such employment shall
be paid by the Administrators and no obligation may be incurred on behalf of the
Company in such respect.

The Administrators will bear all expenses in connection with the
performance of their services under this Agreement except as otherwise expressly
provided herein. Other expenses to be incurred in the operation of the Funds,
including taxes, interest, brokerage fees and commissions, if any, salaries and
fees of officers and directors who are not officers, directors, shareholders or
employees of the Administrators, or the Company's investment adviser or
distributor for the Funds, Securities and Exchange Commission fees and state
Blue Sky qualification fees, advisory and administration fees, charges of
custodians, transfer and dividend disbursing agents' fees, certain insurance
premiums, outside auditing and legal expenses, payments to Service
Organizations, costs of maintenance of corporate existence, typesetting and
printing of prospectuses for regulatory purposes and for distribution to current
shareholders of the Funds, costs of shareholders' reports and corporate meetings
and any extraordinary

<PAGE>

expenses, will be borne by the Company, PROVIDED, HOWEVER, that, except pursuant
to a distribution plan, the Company will not bear, directly or indirectly, the
cost of any activity which is primarily intended to result in the distribution
of shares of the Funds, and FURTHER PROVIDED that the Administrators may utilize
one or more independent pricing services, approved from time to time by the
Board of Directors of the Company, to obtain securities prices in connection
with determining the net asset value of each Fund and that each Fund will
reimburse the Administrators for its share of the cost of such services based
upon its actual use of the services.

If in any fiscal year any Fund's aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Fund)
exceed the expense limitations of any such state, the Administrators agree to
reimburse such Fund for a portion of any such excess expenses in an amount equal
to the proportion that the fees otherwise payable to the Administrators bears to
the total amount of investment advisory and administration fees otherwise
payable by the Fund. The expense reimbursement obligation of the Administrators
is limited to the amount of their fees hereunder for such fiscal year, PROVIDED,
HOWEVER, that notwithstanding the foregoing, the Administrators shall reimburse
such Fund for a portion of any such excess expenses in an amount equal to the
proportion that the fee otherwise payable to the Administrators bears to the
total amount of investment advisory and administration fees otherwise payable by
the Fund regardless of the amount of fees paid to the Administrators during such
fiscal year to the extent that the securities regulations of any state having
jurisdiction over the Funds so require. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis. With respect to the
amounts required to be reimbursed under this Section 4 in any fiscal year, the
parties to this Agreement agree that U.S. Trust alone shall reimburse such
amounts up to the amount of fees received by CGFSC and U.S. Trust under this
Agreement for such year. FAS shall only be obligated to reimburse expenses to
the extent that the amounts required to be reimbursed under this Section 4 in
any fiscal year exceed the amount of fees received by CGFSC and U.S. Trust under
this Agreement for such year and to the extent that U.S. Trust makes
reimbursements equaling the amount of all such fees received by CGFSC and U.S.
Trust, provided that the reimbursement obligation of FAS shall be limited to the
amount of fees received by it under this Agreement for such year.

5. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Administrators
agree on behalf of themselves and their employees to treat confidentially and as
proprietary information of the Company all records and other information
relative to the Funds and prior, present or potential shareholders, and not to
use such records and information for any purpose other than performance of their
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Company, which approval shall not be unreasonably
withheld and may not be withheld where the Administrators may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Company.

6. LIMITATION OF LIABILITY. Each Administrator shall not be liable
for any error of judgment or mistake of law or for any loss or expense suffered
by the Company in connection with the matters to which this Agreement relates,
except for a loss or expense resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, partner,

<PAGE>

employee or agent of any of the Administrators, who may be or become an officer,
director, employee or agent of the Company shall be deemed when rendering
services to the Company or acting on any business of the Company (other than
services or business in connection with the Administrators' duties hereunder) to
be rendering such services to or acting solely for the Company and not as an
officer, partner, employee or agent or one under the control or direction of the
Administrators even though paid by any of them. The Administrators agree that
this Agreement shall not create any joint and/or several liability among the
Administrators with respect to services provided by any particular Administrator
as set forth herein.

7. TERM. This Agreement shall become effective on July 31, 1998
and, unless sooner terminated as provided herein, shall continue until July 31,
1999, and thereafter shall continue automatically with respect to each Fund for
successive annual periods ending on July 31 of each year, provided such
continuance is specifically approved at least annually by the Company's Board of
Directors. This Agreement is terminable with respect to each Fund, without
penalty, on not less than forty-five (45) days' notice by the Company's Board of
Directors or by CGFSC, FAS or U.S. Trust. This Agreement will terminate
automatically in the event of its "assignment" (as defined in the Investment
Company Act 1940). The parties agree that an assignment includes the transfer
of "control" of more than 25% of the outstanding voting securities of FAS to a
company that is not a subsidiary of Federated Investors, Inc. The parties also
agree that the merger between The Chase Manhattan Corporation and Chemical
Banking Corporation and the merger between The Chase Manhattan Bank, N.A. and
Chemical Bank will not constitute an assignment under this Agreement.

8. GOVERNING LAW. This Agreement shall be governed by New York law.

9. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to an internationally
recognized overnight courier service, in each case properly addressed to the
party entitled to receive such notice at the address or telecopier number stated
below or to such other address or telecopier number as may hereafter be
furnished in writing by notice similarly given by one party to the other party
hereto:

If to the Company:

Excelsior Tax-Exempt Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913
Telecopier Number: (617) 557-8617

With copies to:

W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath LLP
1345 Chestnut Street, Suite 1100
Philadelphia, Pennsylvania 19107

<PAGE>

Telecopier Number: (215) 988-2757

If to CGFSC:

Chase Global Funds Services Company
73 Tremont Street
Boston, Massachusetts 02108-3913
Telecopier Number: (617) 557-8617

If to FAS:

Federated Administrative Services
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Telecopier Number: (412) 288-8141

If to U.S. Trust:

U.S. Trust Company of Connecticut
225 High Ridge Road
East Building
Stamford, CT 06905
Telecopier Number: (203) 352-4488

10. MISCELLANEOUS. No provisions of this Agreement may be changed,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, discharge or termination is
sought. If a change or discharge is sought against the Company, the instrument
must be signed by each Administrator. This Agreement may be executed in one or
more counterparts and all such counterparts will constitute one and the same
instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date indicated above.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

/s/ F. S. Wonham
-----------------------------------
Name: Frederick S. Wonham

<PAGE>

Title: President and Treasurer

CHASE GLOBAL FUNDS SERVICES COMPANY

/s/ Donald P. Hearn
-----------------------------------
Name: Donald P. Hearn
Title: Vice Chairman

FEDERATED ADMINISTRATIVE SERVICES

/s/ Joseph A. Machi
-----------------------------------
Name: Joseph A. Machi

U.S. TRUST COMPANY
OF CONNECTICUT

/s/ W. Michael Funck
-----------------------------------
Name: W. Michael Funck
Title: President and CEO

<PAGE>

Exhibit A
to the
Amended and Restated Administration Agreement

EXCELSIOR TAX-EXEMPT FUNDS, INC.
--------------------------------
Tax-Exempt Money Fund
Short-Term Tax-Exempt Securities Fund
Intermediate-Term Tax-Exempt Fund
Long-Term Tax-Exempt Fund
New York Intermediate-Term Tax-Exempt Fund
California Tax-Exempt Income Fund
New York Tax-Exempt Money Fund

In consideration of the mutual covenants set forth in the Amended and
Restated Administration Agreement dated as of July 31, 1998 among Excelsior
Tax-Exempt Funds, Inc. (the "Company"), Chase Global Funds Services Company
("CGFSC"), Federated Administrative Services ("FAS") and U.S. Trust Company of
Connecticut ("U.S. Trust"), Excelsior Tax-Exempt Funds, Inc. executes and
delivers this Exhibit on behalf of the Funds, and with respect to any class or
series thereof, first set forth in this Exhibit.

Pursuant to Section 3 of the Agreement, FAS agrees to provide facilities,
equipment, and personnel to carry out the following administrative services to
the Funds, with the understanding that CGFSC will provide all other services and
duties set forth in said Section 3 but not otherwise listed below:

(a) Performing a due diligence review of SEC required reports
and notices to shareholders of record and to the SEC including, without
limitation, Semi-Annual and Annual Reports to Shareholders, Semi-Annual Reports
on Form N-SAR, Proxy Statements and SEC share registration notices;

(b) Reviewing the Company's Registration Statement on Form N-1A
or any replacement therefor;

(c) Reviewing and filing with the National Association of
Securities Dealers, Inc. all sales literature (advertisements, brochures and
shareholder communications) for each of the Funds and any class or series
thereof;

(d) Preparing distributor's reports to the Company's Board of
Directors;

(e) Performing internal audit examinations in accordance with a
charter to be adopted by FAS and the Company;

(f) Upon request, providing individuals reasonably acceptable to
the Company's Board of Directors for nomination, appointment, or election as
officers of the Company, who will be

<PAGE>

responsible for the management of certain of the Funds' affairs as determined by
the Company;

(g) Consulting with the Funds and the Company's Board of
Directors, as appropriate, on matters concerning the distribution of Funds;

(h) Monitoring the Company's arrangements with respect to
services provided by certain organizations ("Service Organizations") under its
Amended and Restated Administrative Services Plan, provided that FAS will only
be responsible for monitoring arrangements with Service Organizations with whom
FAS has established the servicing relationship on behalf of the Company. With
respect to such Service Organizations, FAS shall specifically monitor and review
the services rendered by Service Organizations to their customers who are the
beneficial owners of shares, pursuant to agreements between the Company and such
Service Organizations ("Servicing Agreements"), including, without limitation,
reviewing the qualifications of financial institutions wishing to be Service
Organizations, assisting in the execution and delivery of Servicing Agreements,
reporting to the Company's Board of Directors with respect to the amounts paid
or payable by the Company from time to time under the Servicing Agreements and
the nature of the services provided by Service Organizations, and maintaining
appropriate records in connection with such duties; and

(i) Consulting with CGFSC and the Company regarding the
jurisdictions in which the Company's shares shall be registered or qualified for
sale and, in connection therewith, reviewing and monitoring the actions of CGFSC
in maintaining the registration or qualification of shares for sale under the
securities laws of any state. Payment of share registration fees and any fees
for qualifying or continuing the qualification of any Fund as a dealer or
broker, if applicable, shall be made by that Fund.

Witness the due execution hereof this 31st day of July, 1998.

EXCELSIOR TAX-EXEMPT
FUNDS, INC.

/s/ Frederick S. Wonham
------------------------------------
Name: Frederick S. Wonham
Title: President and Treasurer

FEDERATED ADMINISTRATIVE
SERVICES

/s/ Joseph A. Machi
-----------------------------------
Name: Joseph A. Machi

<PAGE>

CHASE GLOBAL FUNDS SERVICES COMPANY

/s/ Donald P. Hearn
-----------------------------------
Name: Donald P. Hearn
Title: Vice Chairman

<PAGE>

Exhibit B
to the
Amended and Restated Administration Agreement

Pursuant to Section 3 of the Agreement, U.S. Trust agrees to provide
facilities, equipment, and personnel to carry out the following administrative
services to the Funds:

(a) Providing guidance and assistance in the preparation of SEC
required reports and notices to shareholders of record and to the SEC including,
without limitation, Semi-Annual and Annual Reports to Shareholders, Semi-Annual
Reports on Form N-SAR, Proxy Statements and SEC share registration notices;

(b) Reviewing the Company's Registration Statement on Form N-1A
or any replacement therefor;

(c) Consulting with the Funds and the Company's Board of
Directors, as appropriate, on matters concerning the administration and
operation of the Funds;

(d) Monitoring the Company's arrangements with respect to
services provided by certain organizations ("Service Organizations") under its
Amended and Restated Administrative Services Plan, provided that U.S. Trust will
only be responsible for monitoring arrangements with Service Organizations with
whom U.S. Trust has established the servicing relationship on behalf of the
Company. With respect to such Service Organizations, U.S. Trust shall
specifically monitor and review the services rendered by Service Organizations
to their customers who are the beneficial owners of shares, pursuant to
agreements between the Company and such Service Organizations ("Servicing
Agreements"), including, without limitation, reviewing the qualifications of
financial institutions wishing to be Service Organizations, assisting in the
execution and delivery of Servicing Agreements, reporting to the Company's Board
of Directors with respect to the amounts paid or payable by the

<PAGE>

Company from time to time under the Servicing Agreements and the nature of the
services provided by Service Organizations, and maintaining appropriate records
in connection with such duties.

Witness the due execution hereof this 31st day of July, 1998.

EXCELSIOR TAX-EXEMPT
FUNDS, INC.

/s/ F. S. Wonham
-------------------------------------
Name: Frederick S. Wonham
Title: President and Treasurer

U.S. TRUST COMPANY
OF CONNECTICUT

/s/ W. Michael Funck
-------------------------------------
Name: W. Michael Funck
Title: President and CEO

<PAGE>

AMENDED AND RESTATED MUTUAL FUNDS
TRANSFER AGENCY AGREEMENT

AGREEMENT made as of July 31, 1998 by and between Excelsior Tax-Exempt
Funds, Inc. (the "Company") a Maryland corporation, and United States Trust
Company of New York ("U.S. Trust"), a New York state-chartered bank and trust
company.

W I T N E S S E T H:

WHEREAS, the Company is registered as an open-end investment company
under the Investment Company Act of 1940, as amended (the "1940 Act");

WHEREAS, the Company is authorized to issue shares of Common Stock in
separate series and classes representing interests in separate portfolios of
securities and other assets;

WHEREAS, the Company wishes to retain U.S. Trust to serve as the
Company's transfer agent, registrar and dividend disbursing agent;

WHEREAS, U.S. Trust desires to assign its duties and obligations with
respect to the provision of such services to Chase Global Funds Services Company
("CGFSC"), and the Company acknowledges the right of U.S. Trust to make such
assignment provided U.S. Trust shall be as fully responsible to the Company for
the acts and omissions of CGFSC as U.S. Trust is for its own acts and omissions;

NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:

1. APPOINTMENT. The Company hereby appoints U.S. Trust to serve as
transfer agent, registrar and dividend disbursing agent for each class and/or
series of Common Stock of the

<PAGE>

Company with respect to its existing Funds (as hereinafter defined) for the
period and on the terms set forth in this Agreement. In the event that the
Company establishes additional classes or series other than the Common Stock of
the Funds covered by this Agreement with respect to which it desires to retain
U.S. Trust to serve as transfer agent, registrar and dividend disbursing agent
hereunder, the Company shall notify U.S. Trust in writing, whereupon such fund
shall become a Fund hereunder and shall be subject to the provisions of this
Agreement to the same extent as the Funds (except to the extent that said
provisions, including the compensation payable on behalf of such new Fund, may
be modified in writing by the Company and U.S. Trust at the time). U.S. Trust
accepts such appointment and agrees to furnish the services herein set forth in
return for the compensation as provided in Paragraph 5 of this Agreement.

2. REPRESENTATIONS AND WARRANTIES.

(a) U.S. Trust represents and warrants to the Company that:

(i) U.S. Trust is a state chartered bank and trust company
organized and existing under the laws of the State of New York;

(ii) U.S. Trust is empowered under applicable laws and by its
charter and by-laws to enter into and perform this Agreement;

(iii) all requisite corporate proceedings have been taken to
authorize U.S. Trust to enter into and perform this Agreement;

(iv) U.S. Trust is duly registered as a transfer agent under
Section 17A of the Securities Exchange Act of 1934, as amended (the "1934 Act").
U.S. Trust shall promptly give written notice to the Company in the event that
its registration is revoked or a proceeding is commenced that could result in
such revocation;

<PAGE>

(v) U.S. Trust has been in, and shall continue to be in,
compliance with all provisions of law, including Section 17A(c) of the 1934 Act,
required in connection with the performance of its duties under this Agreement;

(vi) U.S. Trust has, and will continue to have, access to the
facilities, personnel and equipment required to fully perform its duties and
obligations hereunder;

(vii) no legal or administrative proceedings have been
instituted or threatened which would impair U.S. Trust's ability to perform its
duties and obligations under this Agreement; and

(viii) U.S. Trust's entrance into this Agreement shall not cause
a material breach or be in material conflict with any other agreement or
obligation of U.S. Trust or any law or regulation applicable to U.S. Trust;

(b) The Company represents and warrants to U.S. Trust that:

(i) the Company is a Maryland corporation, duly organized and
existing and in good standing under the laws of Maryland;

(ii) the Company is empowered under applicable laws and by its
Articles of Incorporation, as supplemented ("Charter"), and By-Laws, as amended
("By-Laws"), to enter into and perform this Agreement;

(iii) all requisite proceedings have been taken to authorize
the Company to enter into and perform this Agreement;

(iv) the Company is an investment company properly registered
under the 1940 Act;

(v) a registration statement under the Securities Act of
1933, as amended (the

<PAGE>

"1933 Act") and the 1940 Act on Form N-1A has been filed
and will be effective and will remain effective during the term of this
Agreement, and all necessary filings under the laws of the states will have been
made and will be current during the term of this Agreement;

(vi) no legal or administrative proceedings have been
instituted or threatened which would impair the Company's ability to perform its
duties and obligations under this Agreement;

(vii) the Company's registration statement complies in all
material respects with the 1933 Act and the 1940 Act (including the rules and
regulations thereunder) and none of the Company's prospectuses contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements therein not misleading; and

(viii) the Company's entrance into this Agreement shall not
cause a material breach or be in material conflict with any other agreement or
obligation of the Company or any law or regulation applicable to it.

3. DELIVERY OF DOCUMENTS. The Company has furnished U.S. Trust with
copies properly certified or authenticated of each of the following:

(a) Resolutions of the Company's Board of Directors authorizing the
appointment of U.S. Trust as transfer agent, registrar and dividend disbursing
agent for each class and/or series of Common Stock of the Company and approving
this Agreement;

(b) Incumbency and signature certificates identifying and containing
the signatures of the Company's officers and/or the persons authorized to sign
Written Instructions, as hereafter defined, on behalf of the Company;

<PAGE>

(d) The Company's By-Laws;

(e) Resolutions of the Company's Board of Directors appointing U.S.
Trust as the investment adviser to the Company's Tax-Exempt Money,
Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt, New York Intermediate-Term
Tax-Exempt, California Intermediate-Term Tax-Exempt and Short-Term Tax-Exempt
Securities Funds (herein "the Funds") and resolutions of the Company's Board of
Directors and Fund shareholders ("Shareholders") approving an Investment
Advisory Agreement between U.S. Trust and the Company dated as of February 6,
1985, as amended; and an Investment Advisory Agreement between U.S. Trust and
the Company dated as of May 11, 1990, as amended (the "Advisory Agreements");

(f) Resolutions of the Company's Board of Directors appointing
Edgewood Services, Inc. (the "Distributor") as the Company's distributor for the
Funds and approving a Distribution Agreement between the Distributor and the
Company dated as of August 1, 1995 (the "Distribution Agreement");

(g) Resolutions of the Company's Board of Directors appointing
Federated Administrative Services ("Federated") and Mutual Funds Service Company
("MFSC") as the administrators for the Funds and approving an Administration
Agreement among Federated, MFSC and the Company dated as of August 1, 1995 (the
"Administration Agreement");

(h) The Advisory Agreements, the Distribution Agreement and the
Administration Agreement;

(i) The Company's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act on Form N-8A with the Securities and Exchange
Commission ("SEC") on August 31, 1984;

(j) Post-Effective Amendment No. 18 to the Company's Registration
Statement on Form N-1A under the 1940 Act and the 1933 Act, as filed with the
SEC on August 1, 1995 (File No. 2-

<PAGE>

93068) relating to shares of the Company's Class A Common Stock,
$.001 par value per share, which represent interests in the Tax-Exempt Money
Fund; Class B Common Stock, $.001 par value per share, which represent interests
in the Intermediate-Term Tax-Exempt Fund; Class C Common Stock, $.001 par value
per share, which represent interests in the Long-Term Tax-Exempt Fund; Class D
Common Stock, $.001 par value per share, which represent interests in the New
York Intermediate-Term Tax-Exempt Fund; Class E Common Stock, $.001 par value
per share, which represent interests in the California Intermediate-Term
Tax-Exempt Fund; and Class F Common Stock, $.001 par value per share, which
represent interests in the Short-Term Tax-Exempt Securities Fund; (such shares
and shares of the Company hereafter classified by the Company's Board of
Directors are hereinafter collectively called "Shares"), and all amendments
thereto; and

(k) The Company's most recent prospectuses (such prospectuses, as
currently in effect, and all amendments and supplements thereto and future
versions thereof are herein called the "Prospectuses").

The Company will furnish U.S. Trust from time to time with copies of
all amendments of or supplements to the foregoing, if any, and with comparable
documents with respect to any Fund of the Company organized after the date of
this Agreement that is covered by this Agreement. The Company shall also
deliver to U.S. Trust the following documents on or before the effective date of
any increase or decrease in the total number of Shares authorized to be issued
by the Company: (a) a certified copy of the amendment of the Articles of
Incorporation giving effect to such increase or decrease, and (b) in the case of
an increase, if the appointment of U.S. Trust was theretofore expressly limited,
a certified copy of a resolution of

<PAGE>

the Board of Directors of the Company increasing the authority of U.S. Trust.

4. SERVICES PROVIDED

(a) U.S. Trust will provide the following services subject to the
control, direction and supervision of the Board of Directors and in compliance
with the objectives, policies and limitations set forth in the Company's
Registration Statement, Charter and By-Laws; applicable laws and regulations;
and all resolutions and policies implemented by the Board of Directors.

The following is a general description of the transfer agency services
U.S. Trust shall provide to the Company.

A. SHAREHOLDER RECORDKEEPING. Maintain records showing for each Fund
shareholder the following: (i) name, address, appropriate tax
certification and tax identifying number; (ii) number of shares of
each Fund; (iii) historical information including, but not limited to,
dividends paid and date and price of all transactions including
individual purchase and redemptions and appropriate supporting
documents; and (iv) any dividend reinvestment order, application,
dividend to a specific address and correspondence relating to the
current maintenance of the account.

B. SHARE ISSUANCE. Record the issuance of shares of each Fund. Except
as specifically agreed in writing between U.S. Trust and the Company,
U.S. Trust shall have no obligation when countersigning and issuing
and/or crediting shares to take cognizance of any other laws relating
to the issue and sale of such shares except insofar as

<PAGE>

policies and procedures of the Stock Transfer Association recognize
such laws. U.S. Trust shall notify the Company in case any proposed
issue of shares by the Company shall result in an over-issuance. In
case any issue of shares would result in such an over-issue, U.S.
Trust shall refuse to issue said shares and shall not countersign and
issue certificates (if any) for such shares.

C. PURCHASE ORDERS. Process all orders for the purchase of shares of the
Company in accordance with the Company's Prospectuses, including
electronic transmissions, which the Company acknowledges it has
authorized. Upon receipt of any check or other payment for purchase
of shares of the Company from an investor, U.S. Trust will (i) stamp
the order or other documentation with the date and time of receipt,
(ii) forthwith process the same for collection, (iii) determine the
amounts thereof due the Company, and notify the Company of such
determination and deposit, such notification to be given on a daily
basis of the total amounts determined and deposited to the Company's
custodian bank account during such day. U.S. Trust shall then credit
the share account of the investor with the number of Fund shares to be
purchased made on the date such payment is received by U.S. Trust, as
set forth in the Company's Prospectus and shall promptly mail a
confirmation of said purchase to the investor, all subject to any
instructions which the Company may give to U.S. Trust with respect to
the timing or manner of acceptance of orders for shares

<PAGE>

relating to payments so received by it. Any purchase order
received by U.S. Trust, which is not in good order will be rejected
immediately.

D. REDEMPTION ORDERS. Receive and stamp with the date and time of
receipt all requests for redemptions or repurchase of shares held in
certificate or non-certificate form, and process redemptions and
repurchase requests as follows: (i) if such certificate or redemption
request complies with the applicable standards approved by the
Company, U.S. Trust shall on each business day notify the Company of
the total number of shares presented and covered by such requests
received by U.S. Trust on such day; (ii) within the time specified in
the Prospectus and if not so specified on or prior to the seventh
calendar day succeeding any such requests received by U.S. Trust,
shall notify The Chase Manhattan Bank, N.A. (the "Custodian"), subject
to instructions from the Company, to transfer monies to such account
as designated by U.S. Trust for such payment to the redeeming
shareholder of the applicable redemption or repurchase price; (iii) if
any such certificate or request for redemption of repurchase does not
comply with applicable standards, U.S. Trust shall promptly notify the
investor of such fact, together with the reason therefor, and shall
effect such redemption at the Company's price next determined after
receipt of documents complying with said standards.

<PAGE>

E. TELEPHONE ORDERS. Process redemptions, exchanges and transfers of
Fund shares upon telephone instructions from qualified shareholders in
accordance with the procedures set forth in the Company's
Prospectuses. The administrator shall be permitted to redeem,
exchange and/or transfer Fund shares from any account for which such
services have been authorized, including electronic transmissions.

F. TRANSFER OF SHARES. Upon receipt by U.S. Trust of documentation in
proper form to effect a transfer of shares, including in the case of
shares for which certificates have been issued the share certificates
in proper form for transfer, U.S. Trust will register such transfer on
the Company's shareholder records maintained by U.S. Trust pursuant to
instructions received from the transferor, cancel the certificates
representing such shares, if any, and if so requested, countersign,
register, issue and mail by first class mail new certificates for the
same or a smaller whole number of shares.

G. SHAREHOLDER COMMUNICATIONS. Address and mail all communications by
the Company to its shareholders promptly following the delivery by the
Company of the material to be mailed.

H. PROXY MATERIALS. Prepare shareholder lists, mail and certify as to
the mailing of proxy materials, receive the tabulated proxy cards,
render periodic reports to the Company on the progress of such

<PAGE>

tabulation, and provide the Company with inspectors of election at any
meeting of shareholders.

I. SHARE CERTIFICATES. If a shareholder of the Company requests a
certificate representing his shares, U.S. Trust as Transfer Agent or
CGFSC as sub-transfer agent, will countersign and mail, a share
certificate to the investor at his/her address as it appears on the
Company's transfer books. U.S. Trust shall supply, at the expense of
the Company a supply of blank share certificates. The certificates
shall be properly signed, manually or by facsimile, as authorized by
the Company, and shall bear the Company's seal or facsimile; and
notwithstanding the death, resignation or removal of any officers of
the Company authorized to sign certificates, U.S. Trust and/or CGFSC
may, until otherwise directed by the Company, continue to countersign
certificates which bear the manual or facsimile signature of such
officer.

J. RETURNED CHECKS. In the event that any check or other order for the
payment of money is returned unpaid for any reason, U.S. Trust will
take such steps, including redepositing the check for collection or
returning the check to the investor, as U.S. Trust may, at its
discretion, deem appropriate and notify the Company of such action, or
as the Company may instruct. However, subject to Paragraph 7(b)
below, the Company remains ultimately liable for any returned checks
of its shareholders.

<PAGE>

K. SHAREHOLDER CORRESPONDENCE. Acknowledge all correspondence from
shareholders relating to their share accounts and undertake such other
shareholder correspondence as may from time to time be mutually agreed
upon.

L. TAX REPORTING. U.S. Trust shall issue appropriate shareholder tax
forms on an annual basis.

M. DIVIDEND DISBURSING. U.S. Trust will serve as the Company's dividend
disbursing agent. U.S. Trust will prepare and mail checks, place wire
transfers of credit income and capital gain payments to shareholders.
The Company will advise U.S. Trust of the declaration of any dividend
or distribution and the record and payable date thereof at least five
(5) days prior to the record date. U.S. Trust will, on or before the
payment date of any such dividend or distribution, notify the
Company's Custodian of the estimated amount required to pay any
portion of such dividend or distribution payable in cash, and on or
before the payment date of such distribution, the Company will
instruct its Custodian to make available to U.S. Trust sufficient
funds for the cash amount to be paid out. If a shareholder is
entitled to receive additional shares by virtue of any such
distribution or dividend, appropriate credits will be made to each
shareholder's account.

(b) U.S. Trust will also:

<PAGE>

(i) provide office facilities with respect to the provision
of the services contemplated herein (which may be in the offices of U.S. Trust
or a corporate affiliate of U.S. Trust);

(ii) provide the services of individuals to serve as officers
of the Company who will be designated by U.S. Trust and elected by the Board of
Directors subject to reasonable Board approval;

(iii) provide or otherwise obtain personnel sufficient, in U.S.
Trust's sole discretion, for provision of the services contemplated herein;

(iv) furnish equipment and other materials, which U.S. Trust,
in its sole discretion, believes are necessary or desirable for provision of the
services contemplated herein; and

(v) keep records relating to the services provided hereunder
in accordance with the 1940 Act and the rules thereunder. To the extent
required by the 1940 Act and the rules thereunder, U.S. Trust agrees that all
such records prepared or maintained by U.S. Trust relating to the services
provided hereunder are the property of the Company and will be preserved for the
periods prescribed under the 1940 Act and the rules thereunder, maintained at
the Company's expense, and made available in accordance with such Act and rules.
U.S. Trust further agrees to surrender promptly to the Company upon its request
and cease to retain in its records and files those records and documents created
and maintained by U.S. Trust pursuant to this Agreement.

5. FEES; EXPENSES; EXPENSE REIMBURSEMENT.

(a) As compensation for the services rendered to the Company pursuant
to this Agreement, the Company shall pay U.S. Trust monthly $15.00 per account
and subaccount of each Fund of the

<PAGE>

Company per year or for any portion of a year plus U.S. Trust's out-of-pocket
expenses relating to such services, including, but not limited to, expenses of
postage, telephone, TWX rental and line charges, communication forms, and checks
and check processing. Such fees are to be billed monthly and shall be due and
payable upon receipt of the invoice. The Company shall also pay U.S. Trust
monthly any fees and expenses charged by any sub-transfer agent other than CGFSC
provided that the sub-transfer agent and the fees and expenses charged by that
sub-transfer agent have been approved by the Company's Board of Directors. Upon
any termination of this Agreement before the end of any month, the fee for the
part of the month before such termination shall be prorated according to the
proportion which such part bears to the full monthly period and shall be payable
upon the date of termination of this Agreement.

(b) For the purpose of determining fees calculated as a function of
the Company's assets, the value of the Company's assets and net assets shall be
computed as required by its Prospectuses, generally accepted accounting
principles, and resolutions of the Board of Directors.

(c) U.S. Trust may, in its sole discretion, from time to time employ
or associate with such person or persons as may be appropriate to assist U.S.
Trust in the performance of this Agreement. Such person or persons may be
officers and employees who are employed or designated as officers by both U.S.
Trust and the Company. The compensation of such person or persons for such
employment shall be paid by U.S. Trust and no obligation will be incurred by or
on behalf of the Company in such respect.

(d) The Company may request additional services, additional
processing, or special reports. The Company shall submit such requests in
writing together with such specifications and documentation as may be reasonably
required by U.S. Trust. If U.S. Trust elects to provide such

<PAGE>

services or arrange for their provision, it shall be entitled to additional fees
and expenses at its customary rates and charges as approved by the Company's
Board of Directors.

(e) U.S. Trust will bear all of its own expenses in connection with
the performance of the services under this Agreement except as otherwise
expressly provided herein. The Company agrees to promptly reimburse U.S. Trust
for any equipment and supplies specially ordered by or for the Company through
U.S. Trust, and for any other expenses not contemplated by this Agreement that
U.S. Trust may incur on the Company's behalf, as consented to by the Company
from time to time. Expenses to be incurred in the operation of the Company and
to be borne by the Company, include, but are not limited to: taxes; interest;
brokerage fees and commissions, salaries and fees of officers and directors who
are not officers, directors, shareholders or employees of U.S. Trust, or the
Company's investment adviser, or distributor or other service providers; SEC and
state Blue Sky registration and qualification fees, levies, fines and other
charges; EDGAR filing fees, processing services and related fees; advisory and
administration fees; charges and expenses of pricing and data services,
independent public accountants and custodians; insurance premiums including
fidelity bond premiums; legal expenses; costs of maintenance of corporate
existence; expenses of typesetting and printing of prospectuses for regulatory
purposes and for distribution to current shareholders of the Company (the
Company's distributor to bear the expense of all other printing, production, and
distribution of prospectuses, statements of additional information, and
marketing materials except as otherwise approved by the Board of Directors of
the Company); expenses of printing and production costs of shareholders' reports
and proxy statements and materials; costs and expenses of Fund stationery and
forms; costs and expenses of special telephone and data lines and devices; costs
associated

<PAGE>

with corporate, shareholder, and Board meetings; trade association dues and
expenses; and any extraordinary expenses and other customary Fund expenses. In
addition, U.S. Trust may utilizeone or more independent pricing services,
approved from time to time by the Board, to obtain securities prices and to act
as backup to the primary pricing services, in connection with determining the
net asset values of the Company, and the Company will reimburse U.S. Trust for
the Company's share of the cost of such services based upon the actual usage, or
a pro rata estimate of the use, of the services for the benefit of the Company.

(f) All fees, out-of-pocket expenses, or additional charges of U.S.
Trust shall be billed on a monthly basis and shall be due and payable upon
receipt of the invoice.

U.S. Trust will render, after the close of each month in which
services have been furnished, a statement reflecting all of the charges for such
month.

6. PROPRIETARY AND CONFIDENTIAL INFORMATION. U.S. Trust agrees on behalf
of itself and its employees to treat confidentially and as proprietary
information of the Company, all records and other information relative to the
Company's prior, present or potential shareholders, and to not use such records
and information for any purpose other than performance of U.S. Trust's
responsibilities and duties hereunder. U.S. Trust may seek a waiver of such
confidentiality provisions by furnishing reasonable prior notice to the Company
and obtaining approval in writing from the Company, which approval shall not be
unreasonably withheld and may not be withheld where U.S. Trust may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities. Waivers of
confidentiality are automatically effective without further action by U.S. Trust
with respect to Internal Revenue Service levies, subpoenas and similar

<PAGE>

actions, or with respect to any request by the Company.

7. DUTIES, RESPONSIBILITIES, AND LIMITATION OF LIABILITY.

(a) In the performance of its duties hereunder, U.S. Trust shall be
obligated to act in good faith in performing the services provided for under
this Agreement. In performing its services hereunder, U.S. Trust shall be
entitled to rely on any oral or written instructions, notices or other
communications, including electronic transmissions, from the Company and its
custodians, officers and directors, investors, agents and other service
providers which U.S. Trust reasonably believes to be genuine, valid and
authorized. U.S. Trust shall also be entitled to consult with and rely on the
advice and opinions of outside legal counsel retained by the Company, as
necessary or appropriate.

(b) Except as provided herein, U.S. Trust shall not be liable for any
error of judgment or mistake of law or for any loss or expense suffered by the
Company, in connection with the matters to which this Agreement relates, except
for a loss or expense caused by or resulting from willful misfeasance, bad faith
or negligence on U.S. Trust's part in the performance of its duties or from
reckless disregard by U.S. Trust of its obligations and duties under this
Agreement. Any person, even though also an officer, director, partner, employee
or agent of U.S. Trust, who may be or become an officer, director, partner,
employee or agent of the Company, shall be deemed when rendering services to the
Company in that capacity or acting on any business of the Company in that
capacity (other than services or business in connection with U.S. Trust's duties
hereunder) to be rendering such services to or acting solely for the Company and
not as an officer, director, partner, employee or agent or person under the
control or direction of U.S. Trust even though paid by U.S. Trust.

<PAGE>

(c) Subject to Paragraphs 7(b) and (d), U.S. Trust shall not be
responsible for, and the Company shall indemnify and hold U.S. Trust harmless
from and against, any and all losses, damages, costs, reasonable attorneys' fees
and expenses, payments, expenses and liabilities arising out of or attributable
to:

(i) all actions of U.S. Trust or its officers or agents
required to be taken pursuant to this Agreement;

(ii) the reliance on or use by U.S. Trust or its officers or
agents of information, records, or documents which are received by U.S. Trust or
its officers or agents and furnished to it or them by or on behalf of the
Company, and which have been prepared or maintained by the Company or any third
party on behalf of the Company other than U.S. Trust or any of its affiliates;

(iii) the Company's refusal or failure to comply with the terms
of this Agreement or the Company's lack of good faith, or its actions, or lack
thereof, involving gross negligence or willful misfeasance;

(iv) the material breach of any representation or warranty of
the Company hereunder;

(v) the legal taping or other form of legal recording of
telephone conversations or other legal forms of electronic communications with
investors and shareholders, or reliance by U.S. Trust or its officers or agents
on telephone or other electronic instructions of any person acting on behalf of
a shareholder or shareholder account for which telephone or other electronic
services have been authorized;

(vi) the reliance on or the carrying out by U.S. Trust or its
officers or agents of

<PAGE>

any proper instructions reasonably believed to be duly authorized, or
requests of the Company or recognition by U.S. Trust or its officers or
agents of any share certificates which are reasonably believed to bear the
proper signatures of the officers of the Company and the proper
countersignature of any transfer agent or registrar of the Company;

(vii) any delays, inaccuracies, errors in or omissions from
data provided to U.S. Trust or its officers or agents by data and pricing
services;

(viii) the offer or sale of shares by the Company in violation
of any requirement under the Federal securities laws or regulations or the
securities laws or regulations of any state, or in violation of any stop order
or other determination or ruling by any Federal agency or any state agency with
respect to the offer or sale of such shares in such state (1) resulting from
activities, actions, or omissions by the Company or its other service providers
and agents other than U.S. Trust or its officers or agents or any of their
affiliates, or (2) existing or arising out of activities, actions or omissions
by or on behalf of the Company other than by U.S. Trust or its officers or
agents or any of their affiliates prior to the effective date of this Agreement;

(ix) any failure of the Company's registration statement to
comply with the 1933 Act and the 1940 Act (including the rules and regulations
thereunder) and any other applicable laws, or any untrue statement of a material
fact or omission of a material fact necessary to make any statement therein not
misleading in a Fund's prospectus, unless such failure, misstatement or omission
relates to, results from or otherwise arises in connection with, actions,
inactions and/or information provided by U.S. Trust or its officers or agents;
and

(x) the actions taken by the Company, its investment adviser
(other than U.S. Trust or its officers or agents or any of their affiliates),
and its distributor in compliance with

<PAGE>

applicable securities, tax, commodities and other laws, rules and
regulations, or the failure to so comply.

(d) Notwithstanding anything herein to the contrary, U.S. Trust shall
be as fully responsible to the Company for the acts and omissions of any
sub-transfer agent as U.S. Trust is for its own acts and omissions.

8. TERM. This Agreement shall become effective on the date first
hereinabove written. This Agreement may be modified or amended from time to
time by mutual agreement between the parties hereto. This Agreement shall
continue in effect unless terminated by either party on forty-five (45) days'
prior written notice provided that should U.S. Trust fail to be registered
pursuant to Section 17A of the 1934 Act as a transfer agent at any time, the
Company may, on written notice to U.S. Trust, immediately terminate this
Agreement. Upon termination of this Agreement, the Company shall pay to U.S.
Trust such compensation and any out-of-pocket or other reimbursable expenses
which may become due or payable under the terms hereof as of the date of
termination or after the date that the provision of services ceases, whichever
is later.

9. NOTICES. Any notice required or permitted hereunder shall be in
writing and shall be deemed to have been given when delivered in person or by
certified mail, return receipt requested, to the parties at the following
address (or such other address as a party may specify by notice to the other):

If to the Company:

Excelsior Tax-Exempt Funds, Inc.
73 Tremont Street
Boston, MA 02108-3913
Attn: Assistant Treasurer
Fax: (617) 557-8816

<PAGE>

With a copy to:

Drinker Biddle & Reath LLP
1345 Chestnut Street, Suite 1100
Philadelphia, PA 19107
Attn: W. Bruce McConnel, III
Fax: (215) 988-2757

If to U.S. Trust:

United States Trust Company of New York
114 West 47th Street
New York, NY 10036
Attn: Francis J. Hearn, Jr., Esq.
Fax: (212) 852-1310

Notice shall be effective upon receipt if by mail, on the date of personal
delivery (by private messenger, courier service or otherwise) or upon confirmed
receipt of telex or facsimile, whichever occurs first.

10. ASSIGNMENT AND DELEGATION. This Agreement shall not be assigned and
the rights, duties and obligations of the parties hereunder may not be
subcontracted or delegated by either of the parties hereto without the prior
consent in writing of the other party.

11. WAIVER. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.

12. FORCE MAJEURE. U.S. Trust shall not be responsible or liable for any
failure or delay in performance of its obligations under this Agreement arising
out of or caused, directly or indirectly, by circumstances beyond its control,
including without limitation, acts of God,

<PAGE>

earthquakes, fires, floods, wars, acts of civil or military authorities, or
governmental actions, nor shall any such failure or delay give the Company the
right to terminate this Agreement. During the term of this Agreement, at no
additional cost to the Company, U.S. Trust shall provide a facility capable of
safeguarding the transfer agency and dividend disbursing records of the Company
in case of damage to the primary facility providing those services (the "Back-Up
Facility"). Transfer of the transfer agency and dividend records of the Company
to the Back-Up Facility shall be at U.S. Trust's expense, shall commence
immediately after damage to the primary facility results in an inability to
provide the transfer agency and dividend disbursing services, and shall be
completed within 72 hours of commencement. After the primary facility has
recovered, U.S. Trust shall again utilize it to provide the transfer agency and
dividend disbursing services to the Company at no additional cost to the
Company. U.S. Trust shall use reasonable efforts to provide the services
described in this Agreement from the Back-Up Facility.

13. USE OF NAME. The Company and U.S. Trust agree not to use the other's
name nor the names of such other's affiliates, designees, or assignees in any
prospectus, sales literature, or other printed material written in a manner not
previously approved by the other or such other's affiliates, designees, or
assignees except where required by the SEC or other regulatory authorities.

14. AMENDMENTS. This Agreement may be modified or amended from time to
time by mutual written agreement between the parties. No provision of this
Agreement may be changed, discharged, or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, discharge or termination is sought.

15. SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, the

<PAGE>

balance of the Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance it shall nevertheless remain
applicable to all other persons and circumstances.

16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE
LAWS OF THE STATE OF NEW YORK, INCLUDING THE DETERMINATION OF WHEN AN
"ASSIGNMENT" HAS OCCURRED.

This Agreement may be executed in one or more counterparts and all
such counterparts will constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first written
above.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

/s/ F. S. Wonham
-----------------------------------
Name: Frederick S. Wonham
Title: President and Treasurer

UNITED STATES TRUST COMPANY
OF NEW YORK

/s/ Kenneth G. Walsh
----------------------------------------
Name: Kenneth G. Walsh
Title: Executive Vice President

<PAGE>

AMENDED AND RESTATED MUTUAL FUNDS
SUB-TRANSFER AGENCY AGREEMENT

AGREEMENT made as of July 31, 1998 by and between United States Trust
Company of New York ("U.S. Trust"), and Chase Global Funds Services Company
("Sub-Transfer Agent").

W I T N E S S E T H:

WHEREAS, Excelsior Tax-Exempt Funds, Inc. (the "Company"), a Maryland
corporation, is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act");

WHEREAS, the Company is authorized to issue shares of Common Stock in
separate series and classes representing interests in separate portfolios of
securities and other assets;

WHEREAS, the Company has retained U.S. Trust to serve as the Company's
transfer agent, registrar and dividend disbursing agent;

WHEREAS, U.S. Trust desires to assign its duties and obligations with
respect to the provision of such services to Sub-Transfer Agent, and the Company
has acknowledged the right of U.S. Trust to make such assignment provided U.S.
Trust shall be as fully responsible to the Company for the acts and omissions of
Sub-Transfer Agent as U.S. Trust is for its own acts and omissions;

NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:

<PAGE>

1. APPOINTMENT. U.S. Trust hereby appoints Sub-Transfer Agent to serve as
sub-transfer agent, sub-registrar and sub-dividend disbursing agent for each
class and/or series of Common Stock of the Company with respect to its existing
Funds (as hereinafter defined) for the period and on the terms set forth in this
Agreement. In the event that the Company establishes additional classes or
series other than the Common Stock of the Funds covered by this Agreement with
respect to which U.S. Trust desires to retain Sub-Transfer Agent to serve as
sub-transfer agent, sub-registrar and sub-dividend disbursing agent hereunder,
U.S. Trust shall notify Sub-Transfer Agent in writing, whereupon such fund shall
become a Fund hereunder and shall be subject to the provisions of this Agreement
to the same extent as the Funds (except to the extent that said provisions,
including the compensation payable on behalf of such new Fund, may be modified
in writing by U.S. Trust and Sub-Transfer Agent at the time). Sub-Transfer Agent
accepts such appointment and agrees to furnish the services herein set forth in
return for the compensation as provided in Paragraph 5 of this Agreement.

2. REPRESENTATIONS AND WARRANTIES.

(a) U.S. Trust and Sub-Transfer Agent represent and warrant to each
other that:

(i) it is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement;

(ii) all requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;

(iii) it is duly registered as a transfer agent under Section 17A
of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Each shall
promptly give written notice to the other and the Company in the event that its
registration is revoked or a proceeding is

<PAGE>

commenced that could result in such revocation;

(iv) it has been in, and shall continue to be in, compliance with
all provisions of law, including Section 17A(c) of the 1934 Act, required in
connection with the performance of its duties under this Agreement;

(v) it has, and will continue to have, access to the facilities,
personnel and equipment required to fully perform its duties and obligations
hereunder;

(vi) no legal or administrative proceedings have been instituted
or threatened which would impair its ability to perform its duties and
obligations under this Agreement; and

(vii) its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation of it
or any law or regulation applicable to it;

U.S. Trust represents and warrants to Sub-Transfer Agent that:

(i) U.S. Trust is a state chartered bank and trust company
organized and existing under the laws of the State of New York;

(b) Sub-Transfer Agent represents and warrants to U.S. Trust that:

(i) Sub-Transfer Agent is a Delaware corporation, duly organized
and existing and in good standing under the laws of Delaware;

3. DELIVERY OF DOCUMENTS. U.S. Trust has furnished Sub-Transfer Agent with
copies properly certified or authenticated of each of the following:

(a) Resolutions of the Company's Board of Directors authorizing the
appointment of U.S. Trust as transfer agent, registrar and dividend
disbursing agent for each class and/or series of Common Stock of the Company
and approving the Mutual Funds Transfer Agency Agreement made as of September
1, 1995 by and between the Company and U.S. Trust;

<PAGE>

(b) Incumbency and signature certificates identifying and containing
the signatures of the Company's officers and/or the persons authorized to
sign Written Instructions, as hereafter defined, on behalf of the Company;

(d) The Company's By-Laws;

(e) Resolutions of the Company's Board of Directors appointing U.S.
Trust as the investment adviser to the Company's Tax-Exempt Money,
Intermediate-Term Tax-Exempt, Long-Term Tax-Exempt, New York
Intermediate-Term Tax-Exempt, California Intermediate-Term Tax-Exempt and
Short-Term Tax-Exempt Securities Funds (herein "the Funds") and resolutions
of the Company's Board of Directors and Fund shareholders ("Shareholders")
approving an Investment Advisory Agreement between U.S. Trust and the Company
dated as of February 6, 1985, as amended; and an Investment Advisory
Agreement between U.S. Trust and the Company dated as of May 11, 1990, as
amended (the "Advisory Agreements");

(f) Resolutions of the Company's Board of Directors appointing
Edgewood Services, Inc. (the "Distributor") as the Company's distributor for
the Funds and approving a proposed Distribution Agreement between the
Distributor and the Company dated as of August 1, 1995 (the "Distribution
Agreement");

(g) Resolutions of the Company's Board of Directors appointing
Federated Administrative Services ("Federated") and Mutual Funds Service
Company ("MFSC") as the administrators for the Funds and approving a proposed
Administration Agreement among Federated, MFSC and the Company dated as of
August 1, 1995 (the "Administration Agreement");

(h) The Advisory Agreements, the Distribution Agreement and the
Administration Agreement;

<PAGE>

(i) The Company's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act on Form N-8A with the Securities and Exchange
Commission ("SEC") on August 31, 1984;

(j) Post-Effective Amendment No. 18 to the Company's Registration
Statement on Form N-1A under the 1940 Act and the 1933 Act, as filed with the
SEC on August 1, 1995 (File No. 2-93068) relating to shares of the Company's
Class A Common Stock, $.001 par value per share, which represent interests in
the Tax-Exempt Money Fund; Class B Common Stock, $.001 par value per share,
which represent interests in the Intermediate-Term Tax-Exempt Fund; Class C
Common Stock, $.001 par value per share, which represent interests in the
Long-Term Tax-Exempt Fund; Class D Common Stock, $.001 par value per share,
which represent interests in the New York Intermediate-Term Tax-Exempt Fund;
Class E Common Stock, $.001 par value per share, which represent interests in
the California Intermediate-Term Tax-Exempt Fund; and Class F Common Stock,
$.001 par value per share, which represent interests in the Short-Term
Tax-Exempt Securities Fund; (such shares and shares of the Company hereafter
classified by the Company's Board of Directors are hereinafter collectively
called "Shares"), and all amendments thereto; and

(k) The Company's most recent prospectuses (such prospectuses, as
currently in effect, and all amendments and supplements thereto and future
versions thereof are herein called the "Prospectuses").

U.S. Trust will furnish Sub-Transfer Agent from time to time with copies
of all amendments of or supplements to the foregoing, if any, and with
comparable documents with respect to any Fund of the Company organized after
the date of this Agreement that is covered by this Agreement. U.S. Trust
shall also deliver to Sub-Transfer Agent the following documents on

<PAGE>

or before the effective date of any increase or decrease in the total number of
Shares authorized to be issued by the Company: (a) a certified copy of the
amendment of the Articles of Incorporation giving effect to such increase or
decrease, and (b) in the case of an increase, if the appointment of U.S. Trust
was theretofore expressly limited, a certified copy of a resolution of the Board
of Directors of the Company increasing the authority of U.S. Trust.

4. SERVICES PROVIDED

(a) Sub-Transfer Agent will provide the following services subject
to the control, direction and supervision of U.S. Trust and in compliance
with the objectives, policies and limitations set forth in the Company's
Registration Statement, Charter and By-Laws; applicable laws and regulations;
and all resolutions and policies implemented by the Board of Directors.

The following is a general description of the transfer agency services
Sub-Transfer Agent shall provide to the Company.

A. SHAREHOLDER RECORDKEEPING. Maintain records showing for each
Fund shareholder the following: (i) name, address,
appropriate tax certification and tax identifying number;
(ii) number of shares of each Fund; (iii) historical
information including, but not limited to, dividends paid
and date and price of all transactions including individual
purchase and redemptions and appropriate supporting
documents; and (iv) any dividend reinvestment order,
application, dividend to a specific address and
correspondence relating to the current maintenance of the
account.

B. SHARE ISSUANCE. Record the issuance of shares of each Fund.
Except as specifically agreed in writing between U.S. Trust
and Sub-Transfer

<PAGE>

Agent, Sub-Transfer Agent shall have no obligation when
countersigning and issuing and/or crediting shares to
take cognizance of any other laws relating to the issue
and sale of such shares except insofar as policies and
procedures of the Stock Transfer Association recognize such
laws. Sub-Transfer Agent shall notify U.S. Trust and the
Company in case any proposed issue of shares by the
Company shall result in an over-issuance. In case any issue
of shares would result in such an over-issue, Sub-Transfer
Agent shall refuse to issue said shares and shall not
countersign and issue certificates (if any) for such shares.

C. PURCHASE ORDERS. Process all orders for the purchase of
shares of the Company in accordance with the Company's
Prospectuses, including electronic transmissions, which the
Company has acknowledged it has authorized. Upon receipt of
any check or other payment for purchase of shares of the
Company from an investor, Sub-Transfer Agent will (i) stamp
the order or other documentation with the date and time of
receipt, (ii) forthwith process the same for collection,
(iii) determine the amounts thereof due the Company, and
notify U.S Trust and the Company of such determination and
deposit, such notification to be given on a daily basis
of the total amounts determined and deposited to the
Company's custodian bank account during such day.
Sub-Transfer Agent shall then credit the share account of
the investor with the number of Fund shares to be purchased
made on the date such payment is received by Sub-Transfer
Agent, as set forth in the

<PAGE>

Company's Prospectus and shall promptly mail a confirmation
of said purchase to the investor, all subject to any
instructions which the Company or U.S. Trust may give to
Sub-Transfer Agent with respect to the timing or manner of
acceptance of orders for shares relating to payments so
received by it. Any purchase order received by Sub-Transfer
Agent, which is not in good order will be rejected
immediately.

D. REDEMPTION ORDERS. Receive and stamp with the date and time
of receipt all requests for redemptions or repurchase of
shares held in certificate or non-certificate form, and
process redemptions and repurchase requests as follows: (i)
if such certificate or redemption request complies with the
applicable standards approved by the Company, Sub-Transfer
Agent shall on each business day notify the Company of the
total number of shares presented and covered by such
requests received by Sub-Transfer Agent on such day; (ii)
within the time specified in the Prospectus and if not so
specified on or prior to the seventh calendar day succeeding
any such requests received by Sub-Transfer Agent, shall
notify The Chase Manhattan Bank, N.A. (the "Custodian"),
subject to instructions from the Company or U.S. Trust, to
transfer monies to such account as designated by
Sub-Transfer Agent for such payment to the redeeming
shareholder of the applicable redemption or repurchase
price; (iii) if any such certificate or request for
redemption of repurchase does not comply with applicable

<PAGE>

standards, Sub-Transfer Agent shall promptly notify the
investor of such fact, together with the reason therefor,
and shall effect such redemption at the Company's price
next determined after receipt of documents complying with
said standards.

E. TELEPHONE ORDERS. Process redemptions, exchanges and
transfers of Fund shares upon telephone instructions from
qualified shareholders in accordance with the procedures set
forth in the Company's Prospectuses. The administrator shall
be permitted to redeem, exchange and/or transfer Fund shares
from any account for which such services have been
authorized, including electronic transmissions.

F. TRANSFER OF SHARES. Upon receipt by Sub-Transfer Agent of
documentation in proper form to effect a transfer of shares,
including in the case of shares for which certificates have
been issued the share certificates in proper form for
transfer, Sub-Transfer Agent will register such transfer on
the Company's shareholder records maintained by Sub-Transfer
Agent pursuant to instructions received from the transferor,
cancel the certificates representing such shares, if any,
and if so requested, countersign, register, issue and mail
by first class mail new certificates for the same or a
smaller whole number of shares.

G. SHAREHOLDER COMMUNICATIONS. Address and mail all
communications by the Company to its shareholders promptly
following the delivery

<PAGE>

by the Company or U.S. Trust of the material to be mailed.

H. PROXY MATERIALS. Prepare shareholder lists, mail and certify
as to the mailing of proxy materials, receive the tabulated
proxy cards, render periodic reports to the Company and U.S.
Trust on the progress of such tabulation, and provide the
Company with inspectors of election at any meeting of
shareholders.

I. SHARE CERTIFICATES. If a shareholder of the Company requests
a certificate representing his shares, Sub-Transfer Agent as
sub-transfer agent will countersign and mail, a share
certificate to the investor at his/her address as it appears
on the Company's transfer books. Sub-Transfer Agent shall
supply, at the expense of the Company a supply of blank
share certificates. The certificates shall be properly
signed, manually or by facsimile, as authorized by the
Company, and shall bear the Company's seal or facsimile; and
notwithstanding the death, resignation or removal of any
officers of the Company authorized to sign certificates,
Sub-Transfer Agent may, until otherwise directed by the
Company or U.S. Trust, continue to countersign certificates
which bear the manual or facsimile signature of such
officer.

J. RETURNED CHECKS. In the event that any check or other order
for the payment of money is returned unpaid for any reason,
Sub-Transfer Agent will take such steps, including
redepositing the check for

<PAGE>

collection or returning the check to the investor, as
Sub-Transfer Agent may, at its discretion, deem appropriate
and notify the Company and U.S. Trust of such action, or as
the Company or U.S. Trust may instruct. However, subject to
Paragraph 7(b) below, the Company remains ultimately liable
for any returned checks of its shareholders.

K. SHAREHOLDER CORRESPONDENCE. Acknowledge all correspondence
from shareholders relating to their share accounts and
undertake such other shareholder correspondence as may from
time to time be mutually agreed upon.

L. TAX REPORTING. Sub-Transfer Agent shall issue appropriate
shareholder tax forms on an annual basis.

M. DIVIDEND DISBURSING. Sub-Transfer Agent will serve as the
Company's dividend disbursing agent. Sub-Transfer Agent will
prepare and mail checks, place wire transfers of credit
income and capital gain payments to shareholders. The
Company or U.S. Trust will advise Sub-Transfer Agent of the
declaration of any dividend or distribution and the record
and payable date thereof at least five (5) days prior to the
record date. Sub-Transfer Agent will, on or before the
payment date of any such dividend or distribution, notify
the Company's Custodian of the estimated amount required to
pay any portion of such dividend or distribution payable in
cash, and on or before the payment date of such
distribution, the Company will instruct its Custodian to
make available to Sub-

<PAGE>

Transfer Agent sufficient funds for the cash amount to be
paid out. If a shareholder is entitled to receive additional
shares by virtue of any such distribution or dividend,
appropriate credits will be made to each shareholder's
account.

(b) Sub-Transfer Agent will also:

(i) provide office facilities with respect to the provision of
the services contemplated herein (which may be in the offices of Sub-Transfer
Agent or a corporate affiliate of Sub-Transfer Agent);

(ii) provide the services of individuals to serve as officers of
the Company who will be designated by Sub-Transfer Agent and elected by the
Company's Board of Directors subject to reasonable Board approval;

(iii) provide or otherwise obtain personnel sufficient, in
Sub-Transfer Agent's sole discretion, for provision of the services contemplated
herein;

(iv) furnish equipment and other materials, which Sub-Transfer
Agent, in its sole discretion, believes are necessary or desirable for provision
of the services contemplated herein; and

(v) keep records relating to the services provided hereunder in
accordance with the 1940 Act and the rules thereunder. To the extent required by
the 1940 Act and the rules thereunder, Sub-Transfer Agent agrees that all such
records prepared or maintained by Sub-Transfer Agent relating to the services
provided hereunder are the property of the Company and will be preserved for the
periods prescribed under the 1940 Act and the rules thereunder, maintained at
the Company's expense, and made available in accordance with such Act and rules.
Sub-Transfer Agent further agrees to surrender promptly to the Company upon its
request and cease to retain in its records and files those records and documents
created and maintained by

<PAGE>

Sub-Transfer Agent pursuant to this Agreement.

5. FEES; EXPENSES; EXPENSE REIMBURSEMENT.

(a) As compensation for the services rendered to the Company for
U.S. Trust pursuant to this Agreement, U.S. Trust shall pay Sub-Transfer
Agent monthly $15.00 per account and subaccount of each Fund of the Company
per year or for any portion of a year plus Sub-Transfer Agent's out-of-pocket
expenses relating to such services, including, but not limited to, expenses
of postage, telephone, TWX rental and line charges, communication forms, and
checks and check processing. Such fees are to be billed monthly and shall be
due and payable upon receipt of the invoice. Upon any termination of this
Agreement before the end of any month, the fee for the part of the month
before such termination shall be prorated according to the proportion which
such part bears to the full monthly period and shall be payable upon the date
of termination of this Agreement.

(b) For the purpose of determining fees calculated as a function of
the Company's assets, the value of the Company's assets and net assets shall
be computed as required by its Prospectuses, generally accepted accounting
principles, and resolutions of the Board of Directors.

(c) Sub-Transfer Agent may, in its sole discretion, from time to
time employ or associate with such person or persons as may be appropriate to
assist Sub-Transfer Agent in the performance of this Agreement. Such person
or persons may be officers and employees who are employed or designated as
officers by both Sub-Transfer Agent and the Company. The compensation of such
person or persons for such employment shall be paid by Sub-Transfer Agent and
no obligation will be incurred by or on behalf of the Company or U.S. Trust
in such respect.

(d) U.S. Trust may request additional services, additional
processing, or special reports. U.S. Trust shall submit such requests in
writing together with such specifications and documentation as may

<PAGE>

be reasonably required by Sub-Transfer Agent. If Sub-Transfer Agent elects to
provide such services or arrange for their provision, it shall be entitled to
additional fees and expenses at its customary rates and charges as approved by
U.S. Trust.

(e) Sub-Transfer Agent will bear all of its own expenses in
connection with the performance of the services under this Agreement except
as otherwise expressly provided herein. U.S. Trust agrees to promptly
reimburse Sub-Transfer Agent for any equipment and supplies specially ordered
by or for the Company through Sub-Transfer Agent, and for any other expenses
not contemplated by this Agreement that Sub-Transfer Agent may incur on the
Company's behalf, as consented to by U.S. Trust and the Company from time to
time. Expenses to be incurred in the operation of the Company and to be borne
by the Company, include, but are not limited to: taxes; interest; brokerage
fees and commissions, salaries and fees of officers and directors who are not
officers, directors, shareholders or employees of U.S. Trust, or the
Company's investment adviser, or distributor or other service providers; SEC
and state Blue Sky registration and qualification fees, levies, fines and
other charges; EDGAR filing fees, processing services and related fees;
advisory and administration fees; charges and expenses of pricing and data
services, independent public accountants and custodians; insurance premiums
including fidelity bond premiums; legal expenses; costs of maintenance of
corporate existence; expenses of typesetting and printing of prospectuses for
regulatory purposes and for distribution to current shareholders of the
Company (the Company's distributor to bear the expense of all other printing,
production, and distribution of prospectuses, statements of additional
information, and marketing materials except as otherwise approved by the
Board of Directors of the Company); expenses of printing and production costs
of shareholders' reports and proxy statements and materials; costs and
expenses

<PAGE>

of Fund stationery and forms; costs and expenses of special telephone and
data lines and devices; costs associated with corporate, shareholder, and
Board meetings; trade association dues and expenses; and any extraordinary
expenses and other customary Fund expenses. In addition, Sub-Transfer Agent
may utilize one or more independent pricing services, approved from time to
time by the Board, to obtain securities prices and to act as backup to the
primary pricing services, in connection with determining the net asset values
of the Company, and U.S. Trust will reimburse Sub-Transfer Agent for the
Company's share of the cost of such services based upon the actual usage, or
a pro rata estimate of the use, of the services for the benefit of the
Company.

(f) All fees, out-of-pocket expenses, or additional charges of
Sub-Transfer Agent shall be billed on a monthly basis and shall be due and
payable upon receipt of the invoice.

Sub-Transfer Agent will render, after the close of each month in which
services have been furnished, a statement reflecting all of the charges for such
month.

6. PROPRIETARY AND CONFIDENTIAL INFORMATION. Sub-Transfer Agent agrees on
behalf of itself and its employees to treat confidentially and as proprietary
information of the Company, all records and other information relative to the
Company's prior, present or potential shareholders, and to not use such records
and information for any purpose other than performance of Sub-Transfer Agent's
responsibilities and duties hereunder. Sub-Transfer Agent may seek a waiver of
such confidentiality provisions by furnishing reasonable prior notice to the
Company and obtaining approval in writing from the Company, which approval shall
not be unreasonably withheld and may not be withheld where Sub-Transfer Agent
may be exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities.
Waivers of confidentiality are automatically

<PAGE>

effective without further action by Sub-Transfer Agent with respect to Internal
Revenue Service levies, subpoenas and similar actions, or with respect to any
request by the Company.

7. DUTIES, RESPONSIBILITIES, AND LIMITATION OF LIABILITY.

(a) In the performance of its duties hereunder, Sub-Transfer Agent
shall be obligated to act in good faith in performing the services provided
for under this Agreement. In performing its services hereunder, Sub-Transfer
Agent shall be entitled to rely on any oral or written instructions, notices
or other communications, including electronic transmissions, from the Company
and its custodians, officers and directors, investors, agents and other
service providers which Sub-Transfer Agent reasonably believes to be genuine,
valid and authorized. Sub-Transfer Agent shall also be entitled to consult
with and rely on the advice and opinions of outside legal counsel retained by
the Company, as necessary or appropriate.

(b) Sub-Transfer Agent shall not be liable for any error of judgment
or mistake of law or for any loss or expense suffered by the Company or U.S.
Trust, in connection with the matters to which this Agreement relates, except
for a loss or expense caused by or resulting from willful misfeasance, bad
faith or negligence on Sub-Transfer Agent's part in the performance of its
duties or from reckless disregard by Sub-Transfer Agent of its obligations
and duties under this Agreement. Any person, even though also an officer,
director, partner, employee or agent of Sub-Transfer Agent, who may be or
become an officer, director, partner, employee or agent of the Company, shall
be deemed when rendering services to the Company in that capacity or acting
on any business of the Company in that capacity (other than services or
business in connection with Sub-Transfer Agent's duties hereunder) to be
rendering such services to or acting solely for the Company and not as an
officer, director, partner, employee or agent or person under the control

<PAGE>

or direction of Sub-Transfer Agent even though paid by Sub-Transfer Agent.

(c) Subject to Paragraphs 7(b) and (d), Sub-Transfer Agent shall not
be responsible for, and U.S. Trust shall indemnify and hold Sub-Transfer
Agent harmless from and against, any and all losses, damages, costs,
reasonable attorneys' fees and expenses, payments, expenses and liabilities
arising out of or attributable to:

(i) all actions of Sub-Transfer Agent or its officers or agents
required to be taken pursuant to this Agreement;

(ii) the reliance on or use by Sub-Transfer Agent or its officers
or agents of information, records, or documents which are received by
Sub-Transfer Agent or its officers or agents and furnished to it or them by or
on behalf of the Company, and which have been prepared or maintained by the
Company or any third party on behalf of the Company other than Sub-Transfer
Agent or any of its affiliates;

(iii) U.S. Trust's refusal or failure to comply with the terms of
this Agreement or U.S. Trust's lack of good faith, or its actions, or lack
thereof, involving gross negligence or willful misfeasance;

(iv) the material breach of any representation or warranty of
U.S. Trust hereunder;

(v) the legal taping or other form of legal recording of
telephone conversations or other legal forms of electronic communications with
investors and shareholders, or reliance by Sub-Transfer Agent or its officers or
agents on telephone or other electronic instructions of any person acting on
behalf of a shareholder or shareholder account for which telephone or other
electronic services have been authorized;

<PAGE>

(vi) the reliance on or the carrying out by Sub-Transfer Agent
or its officers or agents of any proper instructions reasonably believed to
be duly authorized, or requests of U.S. Trust or the Company or recognition
by Sub-Transfer Agent or its officers or agents of any share certificates
which are reasonably believed to bear the proper signatures of the officers
of the Company and the proper countersignature of any transfer agent or
registrar of the Company;

(vii) any delays, inaccuracies, errors in or omissions from
data provided to Sub-Transfer Agent or its officers or agents by data and
pricing services;

(viii) the offer or sale of shares by the Company in violation
of any requirement under the Federal securities laws or regulations or the
securities laws or regulations of any state, or in violation of any stop
order or other determination or ruling by any Federal agency or any state
agency with respect to the offer or sale of such shares in such state (1)
resulting from activities, actions, or omissions by the Company or its other
service providers and agents other than Sub-Transfer Agent or its officers or
agents or any of their affiliates, or (2) existing or arising out of
activities, actions or omissions by or on behalf of the Company other than by
Sub-Transfer Agent or its officers or agents or any of their affiliates prior
to the effective date of this Agreement;

(ix) any failure of the Company's registration statement to
comply with the 1933 Act and the 1940 Act (including the rules and
regulations thereunder) and any other applicable laws, or any untrue
statement of a material fact or omission of a material fact necessary to make
any statement therein not misleading in a Fund's prospectus, unless such
failure, misstatement or omission relates to, results from or otherwise
arises in connection with, actions, inactions and/or information provided by
Sub-Transfer Agent or its officers or agents;

<PAGE>

and

(x) the actions taken by the Company, its investment adviser,
and its distributor in compliance with applicable securities, tax,
commodities and other laws, rules and regulations, or the failure to so
comply.

(d) Notwithstanding anything herein to the contrary, U.S. Trust
shall be as fully responsible to the Company for the acts and omissions of
any sub-transfer agent as U.S. Trust is for its own acts and omissions.

8. TERM. This Agreement shall become effective on the date first
hereinabove written. This Agreement may be modified or amended from time to time
by mutual agreement between the parties hereto. This Agreement shall continue in
effect unless terminated by either party on forty-five (45) days' prior written
notice provided that should Sub-Transfer Agent fail to be registered pursuant to
Section 17A of the 1934 Act as a transfer agent at any time, the Company or U.S.
Trust may, on written notice to Sub-Transfer Agent, immediately terminate this
Agreement. Upon termination of this Agreement, U.S. Trust shall pay to
Sub-Transfer Agent such compensation and any out-of-pocket or other reimbursable
expenses which may become due or payable under the terms hereof as of the date
of termination or after the date that the provision of services ceases,
whichever is later.

9. NOTICES. Any notice required or permitted hereunder shall be in writing
and shall be deemed to have been given when delivered in person or by certified
mail, return receipt requested, to the parties at the following address (or such
other address as a party may specify by notice to the other):

If to the Company:

Excelsior Tax-Exempt Funds, Inc.

<PAGE>

73 Tremont Street
Boston, MA 02108-3913
Attn: Assistant Treasurer
Fax: (617) 557-8816

With a copy to:

Drinker Biddle & Reath LLP
1345 Chestnut Street, Suite 1100
Philadelphia, PA 19107
Attn: W. Bruce McConnel, III
Fax: (215) 988-2757

If to U.S. Trust:

United States Trust Company of New York
114 West 47th Street
New York, NY 10036
Attn: Francis J. Hearn, Jr., Esq.
Fax: (212) 852-1310

If to Sub-Transfer Agent:

Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108-3913
Attn: President
Fax: (617) 557-8616

10. ASSIGNMENT AND DELEGATION. This Agreement shall not be assigned and the
rights, duties and obligations of the parties hereunder may not be subcontracted
or delegated by either of the parties hereto without the prior consent in
writing of the other party.

11. WAIVER. The failure of a party to insist upon strict adherence to any
term of this

<PAGE>

Agreement on any occasion shall not be considered a waiver nor shall it deprive
such party of the right thereafter to insist upon strict adherence to that term
or any term of this Agreement. Any waiver must be in writing signed by the
waiving party.

12. FORCE MAJEURE. Sub-Transfer Agent shall not be responsible or liable
for any failure or delay in performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
control, including without limitation, acts of God, earthquakes, fires, floods,
wars, acts of civil or military authorities, or governmental actions, nor shall
any such failure or delay give the Company the right to terminate this
Agreement. During the term of this Agreement, at no additional cost to the
Company or U.S. Trust, Sub-Transfer Agent shall provide a facility capable of
safeguarding the transfer agency and dividend disbursing records of the Company
in case of damage to the primary facility providing those services (the "Back-Up
Facility"). Transfer of the transfer agency and dividend records of the Company
to the Back-Up Facility shall be at Sub-Transfer Agent's expense, shall commence
immediately after damage to the primary facility results in an inability to
provide the transfer agency and dividend disbursing services, and shall be
completed within 72 hours of commencement. After the primary facility has
recovered, Sub-Transfer Agent shall again utilize it to provide the transfer
agency and dividend disbursing services to the Company at no additional cost to
the Company. Sub-Transfer Agent shall use reasonable efforts to provide the
services described in this Agreement from the Back-Up Facility.

13. USE OF NAME. Sub-Transfer Agent and U.S. Trust agree not to use the
other's name nor the name of the Company nor the names of such other's nor the
Company's affiliates, designees, or assignees in any prospectus, sales
literature, or other printed material written in a

<PAGE>

manner not previously approved by the other or the Company or such other's or
the Company's affiliates, designees, or assignees except where required by the
SEC or other regulatory authorities.

14. AMENDMENTS. This Agreement may be modified or amended from time to time
by mutual written agreement between the parties. No provision of this Agreement
may be changed, discharged, or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought.

15. SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance it shall nevertheless
remain applicable to all other persons and circumstances.

16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS
OF THE STATE OF NEW YORK, INCLUDING THE DETERMINATION OF WHEN AN "ASSIGNMENT"
HAS OCCURRED.

17. THIRD PARTY BENEFICIARY. U.S. Trust and Sub-Transfer Agent expressly
agree that the Company is a third party beneficiary hereof and expressly agree
that the Company may enforce the provisions hereof.

This Agreement may be executed in one or more counterparts and all
such counterparts will constitute one and the same instrument.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first written
above.

CHASE GLOBAL FUNDS SERVICES
COMPANY

/s/ Donald P. Hearn
--------------------
Name: Donald P. Hearn
Title: Vice Chairman

UNITED STATES TRUST COMPANY
OF NEW YORK

/s/ Kenneth G. Walsh
--------------------
Name: Kenneth G. Walsh
Title: Executive Vice President

<PAGE>

LAW OFFICES
DRINKER BIDDLE & REATH LLP
1345 CHESTNUT STREET
PHILADELPHIA, PA 19107-3496
TELEPHONE: (215) 988-2700
FAX: (215) 988-2757

May 28, 1999

Excelsior Tax-Exempt Funds, Inc.
73 Tremont Street
Boston, Massachusetts 02108-3913

Re: Excelsior Tax-Exempt Funds, Inc. - Shares of Common Stock
---------------------------------------------------------

Ladies and Gentlemen:

We have acted as counsel to Excelsior Tax-Exempt Funds, Inc., a
Maryland corporation (the "Company"), in connection with the registration by the
Company of its shares of common stock, par value $.001 per share, under the
Securities Act of 1933, as amended (the "1933 Act").

The Articles of Incorporation of the Company, as amended and
supplemented (the "Articles of Incorporation") authorize the issuance of
14,000,000,000 shares of common stock. The Board of Directors of the Company has
the power to classify or reclassify any authorized but unissued shares of common
stock into one or more classes of shares and to divide and classify shares of
any class into one or more series of such class. Pursuant to such authority, the
Board of Directors (i) has previously classified 13,000,000,000 of such
authorized shares into 7 classes

<PAGE>

Excelsior Tax-Exempt Funds, Inc.
May 28, 1999
Page 2

(the "Classes"), each Class representing interests in a separate portfolio of
investments (the "Portfolios") and (ii) has classified each Class of shares into
one or more series of shares (the "Series"). The Classes and Series are referred
to herein as "Shares." The Board of Directors has previously authorized the
issuance of Shares to the public. Currently, the Company is authorized to issue
Shares of the following Classes and Series:

<TABLE>
<CAPTION>
Portfolio Authorized Shares
--------- -----------------
<S> <C>
Tax-Exempt Money Fund
A Shares 2,000,000,000
A-Special Series 1 Shares 1,000,000,000
A-Special Series 2 Shares 500,000,000
</TABLE>

<PAGE>

Excelsior Tax-Exempt Funds, Inc.
May 28, 1999
Page 3

<TABLE>
<CAPTION>
Portfolio Authorized Shares
--------- -----------------
<S> <C>

Intermediate-Term Tax-Exempt Fund
B Shares 500,000,000
B-Special Series 1 Shares 500,000,000
B-Special Series 2 Shares 500,000,000

Long-Term Tax-Exempt Fund
C Shares 500,000,000
C-Special Series 1 Shares 500,000,000
C-Special Series 2 Shares 500,000,000

New York Intermediate-Term Tax-Exempt Fund
D Shares 500,000,000
D-Special Series 1 Shares 500,000,000
D-Special Series 2 Shares 500,000,000

California Tax-Exempt Income Fund
E Shares 500,000,000
E-Special Series 1 Shares 500,000,000
E-Special Series 2 Shares 500,000,000

Short-Term Tax-Exempt Securities Fund
F Shares 500,000,000
F-Special Series 1 Shares 500,000,000
F-Special Series 2 Shares 500,000,000

New York Tax-Exempt Money Fund
G Shares 2,000,000,000

Unclassified Shares 1,000,000,000
--------------
TOTAL 14,000,000,000
</TABLE>

We have reviewed the Articles of Incorporation, Amended and Restated
By-Laws (the "By-Laws"), as amended, resolutions of the Company's Board of
Directors and shareholders, and such other legal and factual matters as we have
deemed appropriate. We have also reviewed the Company's Registration Statement
on Form N-1A under the 1933 Act (the "Registration Statement"), as amended
through Post-Effective Amendment No. 26 thereto.

<PAGE>

Excelsior Tax-Exempt Funds, Inc.
May 28, 1999
Page 4

This opinion is based exclusively on the Maryland General Corporation
Law and the federal law of the United States of America.

We have also assumed the following for this opinion:

1. Shares will be issued in accordance with the Company's Articles of
Incorporation and By-Laws and resolutions of the Company's Board of Directors
and shareholders relating to the creation, authorization and issuance of Shares.

2. Shares will be issued against consideration therefor as described
in the Registration Statement, and such consideration will have been in each
case at least equal to the applicable net asset value and the applicable par
value.

3. The number of outstanding Shares will not exceed the number of
Shares authorized for the particular Class or Series.

On the basis of the foregoing, it is our opinion that any Shares
issued and sold after the date hereof will be validly and legally issued, fully
paid and non-assessable by the Company.

We hereby consent to the filing of this opinion as an exhibit to
Post-Effective Amendment No. 26 to the Company's Registration Statement on Form
N-1A.

Very truly yours,

/s/ DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP

<PAGE>

CONSENT OF COUNSEL

We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel" in the Statement of Additional Information that
is included in Post-Effective Amendment No. 26 and Amendment No. 28 to the
Registration Statement (Nos. 2-93068; 811-4101) on Form N-1A of Excelsior
Tax-Exempt Funds, Inc. under the Securities Act of 1933 and the Investment
Company Act of 1940, respectively. This consent does not constitute a consent
under Section 7 of the Securities Act of 1933, and in consenting to the use of
our name and the reference to our Firm under such caption we have not certified
any part of the Registration Statement and do not otherwise come within the
categories of persons whose consent is required under Section 7 or the rules and
regulations of the Securities and Exchange Commission thereunder.

/s/ Drinker Biddle & Reath LLP
------------------------------------------

DRINKER BIDDLE & REATH LLP

Philadelphia, Pennsylvania
May 28, 1999

<PAGE>

PURCHASE AGREEMENT

Excelsior Tax-Exempt Funds, Inc. (the "Company"), a Maryland corporation,
and Edgewood Services, Inc. ("Edgewood"), a New York corporation, hereby agree
with each other as follows:

1. The Company hereby offers Edgewood and Edgewood hereby purchases two
shares of the New York Tax-Exempt Money Fund of the Company at $10 per
share. The Company hereby acknowledges receipt from Edgewood of funds
in the total amount of $20 in full payment for the shares.

2. Edgewood represents and warrants to the Company that the shares are
being acquired for investment purposes and not with a view to the
distribution thereof.

IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the 3rd day of August, 1998.

EXCELSIOR TAX-EXEMPT FUNDS, INC.

By: /s/ F.S. Wonham
--------------------------------

Title: President and Treasurer
-------------------------------

EDGEWOOD SERVICES, INC.

By: /s/ Kenneth W. Pegher, Jr.
--------------------------------

Title: Treasurer
-------------------------------