WARBURG PINCUS CASH RESERVE FUND, 497, 1997-07-01

WARBURG PINCUS CASH RESERVE FUND
497, 1997-07-01

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Rule 497(c)
Securities Act File No. 2-94840
Investment Company File No. 811-4171

<PAGE>

PROSPECTUS
June 25, 1997

WARBURG PINCUS
CASH RESERVE FUND

WARBURG PINCUS
NEW YORK TAX EXEMPT FUND

[Logo]

<PAGE>

PROSPECTUS June 25, 1997

Warburg Pincus Funds are a family of open-end mutual funds that offer investors
a variety of investment opportunities. Two money market funds are described in
this Prospectus:

WARBURG PINCUS CASH RESERVE FUND (the 'Cash Reserve Fund') is designed to
provide investors with high current income consistent with liquidity and
stability of principal.

WARBURG PINCUS NEW YORK TAX EXEMPT FUND (the 'Tax Exempt Fund') is designed to
provide investors with as high a level of current income that is exempt from
federal, New York State and New York City personal income taxes as is consistent
with preservation of capital and liquidity.

Because of its focus on investments that distribute income that is exempt from
New York State and New York City personal income tax, the Tax Exempt Fund will
have a more limited number of investment options available to it than a fund
that does not focus on investments that distribute income that is exempt from
taxation in a particular state. Consequently, the Fund may find it necessary to
invest a significant percentage of its assets in a single issuer. Changes in the
financial condition or market assessment of such an issuer could have a
significant adverse impact on the Fund. Therefore an investment in the Tax
Exempt Fund may be riskier than an investment in a money market fund that does
not focus on investments that distribute income which is exempt from taxation in
a particular state.

AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. ALTHOUGH EACH FUND SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF
$1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT IT CAN DO SO ON A CONTINUING
BASIS.

NO LOAD SHARES__________________________________________________________________
Fund shares are sold and redeemed at net asset value without the imposition of a
sales or redemption charge by the Fund. Fund shares are 'no-load,' which means
that there are no sales charges, commissions, 12b-1 plan or other deferred sales
charges applicable to the Fund.

LOW MINIMUM INVESTMENT__________________________________________________________

The minimum initial investment in each Fund is $1,000 ($500 for an IRA or
Uniform Transfers to Minors Act account in the case of the Cash Reserve Fund)
and the minimum subsequent investment is $100. Through the Automatic Monthly
Investment Plan, subsequent investment minimums may be as low as $50. See 'How
to Purchase Shares.'

This Prospectus briefly sets forth certain information about the Funds that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about each
Fund, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the 'SEC'). The SEC maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Funds.
The Statement of Additional Information is also available upon request and
without charge by calling Warburg Pincus Funds at (800) 927-2874. Information
regarding the status of shareholder accounts may also be obtained by calling the
Funds at the same number. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference in its entirety into
this Prospectus.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED OR ENDORSED
BY ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENTS IN SHARES OF A FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------

<PAGE>
THE FUNDS' EXPENSES_____________________________________________________________

<TABLE>
<CAPTION>
Cash Tax
Reserve Exempt
Fund Fund
------- ------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).............................. 0 0
Annual Fund Operating Expenses
(as a percentage of average net assets) (after fee waivers)
Management Fees.................................................... .36% .34%
12b-1 Fees......................................................... 0 0
Other Expenses..................................................... .19 .21
Total Fund Operating Expenses...................................... .55% .55%
-- --
-- --
EXAMPLE
You would pay the following expenses
on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
1 Year............................................................ $6 $6
3 Years........................................................... $18 $18
5 Years........................................................... $31 $31
10 Years........................................................... $69 $69
</TABLE>

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The expense table shows the costs and expenses that an investor will bear
directly or indirectly as an investor in each Fund. Certain broker-dealers and
financial institutions also may charge their clients fees in connection with
investments in Fund shares, which fees are not reflected in the table. Absent
the waiver of certain fees payable to the Funds' investment adviser and sub-
investment adviser and administrator, the Management Fees for the Cash Reserve
Fund and the Tax Exempt Fund would have equalled .50% and the Total Fund
Operating Expenses would have equalled .69% and .72%, respectively, of average
net assets with respect to each Fund. The Example should not be considered a
representation of past or future expenses; actual Fund expenses may be greater
or less than those shown. Moreover, while the Example assumes a 5% annual
return, each Fund's actual performance will vary and may result in a return
greater or less than 5%.

<PAGE>
FINANCIAL HIGHLIGHTS____________________________________________________________
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The information regarding each Fund for the five fiscal years ended February
28, 1997 has been derived from information audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report dated April 4, 1997 is incorporated by
reference in the relevant Fund's Statement of Additional Information. Further
information is contained in the Funds' annual report, dated February 28, 1997,
copies of which may be obtained without charge by calling Warburg Pincus Funds
at (800) 927-2874.

CASH RESERVE FUND

<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------------------------
2/28/97 2/29/96 2/28/95 2/28/94 2/28/93
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment
Operations
Net Investment Income...... .0492 .0543 .0426 .0273 .0322
Net Gains (Losses) on
securities (both realized
and unrealized)........... 0 0 0 0 0
-------- -------- -------- -------- --------
Total from Investment
Operations................. .0492 .0543 .0426 .0273 .0322
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net
investment income)......... (.0492) (.0543) (.0426) (.0273) (.0322)
Distributions (from capital
gains)..................... 0 0 0 0 0
-------- -------- -------- -------- --------
Total Distributions.......... (.0492) (.0543) (.0426) (.0273) (.0322)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return.................. 5.03% 5.57% 4.35% 2.76% 3.27%
Ratios/Supplemental Data
Net Assets, End of Year
(000s)....................... $416,735 $383,607 $403,211 $277,557 $287,723
Ratios to Average Daily Net
Assets
Operating expenses........... .55% .55% .55% .54% .50%
Net investment income........ 4.93% 5.43% 4.41% 2.73% 3.22%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .14% .16% .19% .13% .17%

For the Year Ended
------------------------------------------------------------
2/29/92 2/28/91 2/28/90 2/28/89 2/29/88
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from Investment
Operations
Net Investment Income...... .0542 .0760 .0870 .0747 .0651
Net Gains (Losses) on
securities (both realized
and unrealized)........... .0010 0 0 0 0
-------- -------- -------- -------- --------
Total from Investment
Operations................. .0552 .0760 .0870 .0747 .0651
-------- -------- -------- -------- --------
Less Distributions
Dividends (from net
investment income)......... (.0542) (.0760) (.0870) (.0747) (.0651)
Distributions (from capital
gains)..................... (.0010) 0 0 0 0
-------- -------- -------- -------- --------
Total Distributions.......... (.0552) (.0760) (.0870) (.0747) (.0651)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Return.................. 5.66% 7.87% 9.05% 7.73% 6.70%
Ratios/Supplemental Data
Net Assets, End of Year
(000s)....................... $426,479 $361,428 $365,008 $209,538 $259,398
Ratios to Average Daily Net
Assets
Operating expenses........... .50% .50% .50% .50% .46%
Net investment income........ 5.45% 7.59% 8.59% 7.51% 6.54%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .16% .13% .12% .16% .19%
</TABLE>

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

<PAGE>
TAX EXEMPT FUND

<TABLE>
<CAPTION>
For the Year Ended
--------------------------------------------------------
2/28/97 2/29/96 2/28/95 2/28/94 2/28/93
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
Total Income from Investment
Operations
Net Investment Income........ .0288 .0326 .0246 .0175 .0224
-------- ------- ------- ------- -------
Less Distributions
Dividends (from net
investment income)......... (.0288) (.0326) (.0246) (.0175) (.0224)
-------- ------- ------- ------- -------
Net Asset Value, End of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Total Return.................. 2.92% 3.31% 2.48% 1.77% 2.26%
Ratios/Supplemental Data
Net Assets, End of Year
(000s)....................... $124,191 $96,584 $77,111 $65,984 $76,995
Ratios to Average Daily Net
Assets
Operating expenses........... .55% .55% .54% .50% .50%
Net investment income........ 2.88% 3.24% 2.46% 1.75% 2.23%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .17% .27% .27% .19% .28%

For the Year Ended
-------------------------------------------------------
2/29/92 2/28/91 2/28/90 2/28/89 2/29/88
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
Total Income from Investment
Operations
Net Investment Income........ .0329 .0486 .0527 .0461 .0404
-------- ------- ------- ------- -------
Less Distributions
Dividends (from net
investment income)......... (.0329) (.0486) (.0527) (.0461) (.0404)
-------- ------- ------- ------- -------
Net Asset Value, End of
Year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Total Return.................. 3.34% 4.97% 5.40% 4.70% 4.10%
Ratios/Supplemental Data
Net Assets, End of Year
(000s)....................... $ 65,438 $85,783 $87,283 $58,112 $87,721
Ratios to Average Daily Net
Assets
Operating expenses........... .50% .50% .50% .50% .46%
Net investment income........ 3.27% 4.84% 5.38% 4.57% 4.03%
Decrease reflected in above
expense ratios due to
waivers/reimbursements..... .23% .21% .21% .25% .23%
</TABLE>

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

<PAGE>
INVESTMENT OBJECTIVES AND POLICIES______________________________________________

The Warburg Pincus Cash Reserve Fund (the 'Cash Reserve Fund') is a
diversified money market mutual fund whose investment objective is high current
income consistent with liquidity and stability of principal. The Warburg Pincus
New York Tax Exempt Fund (the 'Tax Exempt Fund') is a non-diversified money
market mutual fund whose objective is to provide investors with as high a level
of current interest income that is exempt from federal, New York State and New
York City personal income taxes as is consistent with preservation of capital
and liquidity. Each objective may be changed only with the approval of the
investors in that Fund. There can be, of course, no assurance that a Fund will
achieve its investment objective. Investors should be aware that the market
value of the obligations in each Fund's portfolio can be expected to vary
inversely to changes in prevailing interest rates. See 'Certain Investment
Strategies' for descriptions of certain types of investments the Funds may make.

CASH RESERVE FUND

The Cash Reserve Fund will attempt to achieve its investment objective by
investing in a portfolio of 'money market' instruments consisting of United
States Treasury Bills, other obligations issued or guaranteed by the United
States government, its agencies or instrumentalities ('Government Securities');
bank and bank holding company obligations such as certificates of deposit,
bankers' acceptances, time deposits, commercial paper and debt obligations;
commercial paper and notes of other corporate issuers, including those with
floating or variable rates of interest (including variable rate master demand
notes) and repurchase agreements with respect to the foregoing.
The Cash Reserve Fund will concentrate its investments in the banking
industry except during temporary defensive periods. Up to 25% of the assets of
the Cash Reserve Fund may be invested at any time in the debt obligations of
issuers conducting their principal business activities in any industry other
than banking. In addition, the Cash Reserve Fund may invest up to 25% of its
assets in the debt obligations of a single issuer for a period of up to three
business days. Securities issued by the United States or its agencies or
instrumentalities may be purchased without regard to these limits.

TAX EXEMPT FUND

At least 80% of the Tax Exempt Fund's assets will be invested in short-term
tax-exempt debt obligations issued by or on behalf of the State of New York and
other states, territories and possessions of the United States, the District of
Columbia and their respective authorities, agencies, instrumentalities and
political subdivisions ('Municipal Securities'). Dividends paid by the Tax
Exempt Fund which are derived from interest attributable to tax-exempt
obligations of the State of New York and its political subdivisions, as well as
of certain other governmental issuers such as Puerto Rico ('New York Municipal
Securities'), will be excluded from gross income for federal income tax purposes
and exempt from New York State and New York City personal

<PAGE>
income taxes. Dividends derived from interest on tax-exempt obligations of other
governmental issuers will be excluded from gross income for federal income tax
purposes, but will be subject to New York State and New York City personal
income taxes. The Tax Exempt Fund expects that, except during temporary
defensive periods or when acceptable securities are unavailable for investment
by the Fund, at least 65% of the Tax Exempt Fund's assets will be invested in
New York Municipal Securities.
The Tax Exempt Fund is concentrated in New York Municipal Securities. Changes
in the financial condition or market assessment of the financial condition of
the State of New York and its political subdivisions or entities located within
the State of New York could have a significant adverse impact on the Fund.
Consequently, an investment in the Tax Exempt Fund may be riskier than an
investment in a money market fund that does not concentrate in securities issued
by, or within, a single state.
Municipal Securities in which the Tax Exempt Fund may invest include
commercial paper, notes and bonds. Interest on certain bonds issued after August
7, 1986 to finance certain non-governmental activities ('Alternative Minimum Tax
Securities') is a preference item for purposes of the federal individual and
corporate alternative minimum taxes, but is exempt from regular federal income
tax. The Fund is authorized to invest up to 20% of its assets in Alternative
Minimum Tax Securities. The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments or tax
preference items. Available returns on Alternative Minimum Tax Securities
acquired by the Fund may be lower than those from newly issued Municipal
Securities acquired by the Fund due to the possibility of federal, state and
local alternative minimum or minimum income tax liability on interest from
Alternative Minimum Tax Securities.
The Tax Exempt Fund may for defensive or other purposes invest in certain
short-term taxable securities when the Fund's investment adviser believes that
it would be in the best interests of the Fund's investors. Taxable securities in
which the Fund may invest on a short-term basis are Government Securities,
including repurchase agreements with banks or securities dealers involving such
securities, time deposits maturing in not more than seven days, other debt
securities, commercial paper and certificates of deposit issued by United States
branches of United States banks with assets of $1 billion or more. At no time
will more than 20% of the Fund's total assets be invested in taxable short-term
securities unless the Fund's investment adviser has determined to temporarily
adopt a defensive investment policy in the face of an anticipated softening in
the market for Municipal Securities in general.

GENERAL_________________________________________________________________________

PRICE AND PORTFOLIO MATURITY. Each Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, are deemed to have) remaining maturities of
thirteen months or less at the date of purchase by the Fund. For this

<PAGE>
purpose, variable rate master demand notes (as described below), which are
payable on demand, or, under certain conditions, at specified periodic intervals
not exceeding thirteen months, in either case on not more than 30 days' notice,
will be deemed to have remaining maturities of thirteen months or less. Each
Fund maintains a dollar-weighted average portfolio maturity of 90 days or less.
Each Fund follows these policies to maintain a constant net asset value of $1.00
per share, although there is no assurance that it can do so on a continuing
basis.

PORTFOLIO QUALITY AND DIVERSIFICATION. Each Fund will limit its portfolio
investments to securities that its Board determines present minimal credit risks
and which are 'Eligible Securities' at the time of acquisition by the Fund. The
term Eligible Securities includes securities rated by the 'Requisite NRSROs' in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities. 'Requisite NRSROs' means (i) any two nationally
recognized statistical rating organizations ('NRSROs') that have issued a rating
with respect to a security or class of debt obligations of an issuer, or (ii)
one NRSRO, if only one NRSRO has issued a rating with respect to such security
or issuer at the time that the Fund acquires the security. If the Cash Reserve
Fund acquires securities that are unrated or that have been rated by a single
NRSRO, the acquisition must be approved or ratified by the Board. The Tax Exempt
Fund may purchase securities that are unrated at the time of purchase that the
Fund's investment adviser and sub-investment adviser deem to be of comparable
quality to rated securities that the Fund may purchase. The NRSROs currently
designated as such by the SEC are Standard & Poor's Ratings Services ('S&P'),
Moody's Investor Services, Inc. ('Moody's'), Fitch Investors Services, Inc.,
Duff and Phelps, Inc. and IBCA Limited and its affiliate, IBCA, Inc. A
discussion of the ratings categories of the NRSROs is contained in the Appendix
to each Fund's Statement of Additional Information.

Cash Reserve Fund. The Fund has adopted certain diversification requirements
under Rule 2a-7 under the Investment Company Act of 1940, as amended (the '1940
Act'), as operating policies. Under these policies the Cash Reserve Fund may not
invest more than 5% of its total assets in Eligible Securities that have not
received the highest rating from the Requisite NRSROs and comparable unrated
securities ('Second Tier Securities') and may not invest more than 1% of its
total assets in the Second Tier Securities of any one issuer. In addition, the
Cash Reserve Fund may invest up to 5% of the then-current value of the Fund's
total assets in the securities of a single issuer, provided that the Fund may
invest more than 5% in an issuer for a period of up to three business days,
provided that (i) the securities either are rated by the Requisite NRSROs in the
highest short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (ii) the Fund does not make more than one
such investment at any one time.

<PAGE>
However, if Rule 2a-7 is amended to permit it, the Fund may invest, with respect
to 25% of its assets, more than 5% of its assets in any one issuer.

PORTFOLIO INVESTMENTS___________________________________________________________
Set forth below are descriptions of investments the Funds may make. More
detailed information concerning these investments and their related risks is
contained in each Fund's Statement of Additional Information.
BANK OBLIGATIONS. The Cash Reserve Fund may purchase bank obligations,
including United States dollar-denominated instruments issued or supported by
the credit of the United States or foreign banks or savings institutions having
total assets at the time of purchase in excess of $1 billion. While the Cash
Reserve Fund will invest in obligations of foreign banks or foreign branches of
United States banks only if the Fund's investment adviser and sub-investment
adviser deem the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of United States banks due to differences in political,
regulatory and economic systems and conditions. Such risks include future
political and economic developments, the possible imposition of withholding
taxes on interest income, 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. The Cash Reserve Fund
may also make interest-bearing savings deposits in commercial and savings banks
in amounts not in excess of 5% of its assets.
VARIABLE RATE MASTER DEMAND NOTES. Each Fund may also purchase variable rate
master demand notes, which are unsecured instruments that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. Although the notes are not normally traded and there may be no
secondary market in the notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the note at any time to a third
party. In the event an issuer of a variable rate master demand note defaulted on
its payment obligation, the Fund might be unable to dispose of the note because
of the absence of a secondary market and might, for this or other reasons,
suffer a loss to the extent of the default.
GOVERNMENT SECURITIES. Government Securities in which the Funds may invest
include Treasury Bills, Treasury Notes and Treasury Bonds; other obligations
that are supported by the full faith and credit of the United States Treasury,
such as Government National Mortgage Association pass-through certificates;
obligations that are supported by the right of the issuer to borrow from the
Treasury, such as securities of Federal Home Loan Banks; and obligations that
are supported only by the credit of the instrumentality, such as Federal
National Mortgage Association bonds.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase money market
instruments from financial institutions such as banks and broker-dealers subject
to the seller's agreement to repurchase them at an agreed-upon date and price
('repurchase agreements'). The repurchase price generally equals

<PAGE>
the price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Default by a seller, if the Fund is
delayed or prevented from exercising its rights to dispose of the collateral
securities, could expose the Fund to possible loss, including the risk of a
possible decline in the value of the underlying securities during the period
while the Fund seeks to assert its rights thereto. Repurchase agreements are
considered to be loans by the Fund under the 1940 Act.
WHEN-ISSUED SECURITIES. Each Fund may purchase portfolio securities on a
'when-issued' basis. When-issued securities are securities purchased for
delivery beyond the normal settlement date at a stated price and yield. A Fund
will generally not pay for such securities or start earning interest on them
until they are received. Securities purchased on a 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. Each Fund expects that commitments to
purchase when-issued securities will not exceed 25% of the value of its total
assets absent unusual market conditions, and that a commitment by the Fund to
purchase when-issued securities will generally not exceed 45 days. The Funds do
not intend to purchase when-issued securities for speculative purposes but only
in furtherance of their investment objectives.
STAND-BY COMMITMENTS. The Tax Exempt Fund may acquire 'stand-by commitments'
with respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The principal risk of a stand-by
commitment is that the writer of a commitment may default on its obligation to
repurchase the securities acquired by it. The Fund intends to enter into
stand-by commitments only with brokers, dealers and banks that, in the opinion
of the investment adviser, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, the investment adviser
and sub-investment adviser will review periodically relevant financial
information concerning the issuer's assets, liabilities and contingent claims.
The Fund will acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes.
THIRD PARTY PUTS. The Tax Exempt Fund may purchase long-term fixed rate bonds
that have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or 'put') the
bonds to the institution and receive the face value thereof (plus accrued
interest). The Fund receives a short-term rate of interest (which is
periodically reset), and the interest rate differential between that rate and
the fixed rate on the bond is retained by the financial institution. The
financial institution does not provide credit enhancement, and in the event that
there is a default in the payment of principal or interest, or downgrading of a
bond to below investment grade, or a loss of the bond's tax-exempt status, the
put option will terminate automatically, the risk to the Fund will be that of

<PAGE>
holding such a long-term bond and the dollar-weighted average maturity of the
Fund's portfolio would be adversely affected. See the Fund's Statement of
Additional Information, 'Investment Policies -- Additional Information and
Policies.'
SPECIAL CONSIDERATIONS AND RISK FACTORS RELATING TO THE TAX EXEMPT FUND. In
seeking to achieve its investment objective the Tax Exempt Fund may invest all
or any part of its assets in Municipal Securities which are industrial
development bonds. Moreover, although the Tax Exempt Fund does not currently
intend to do so on a regular basis, it may invest more than 25% of its assets in
Municipal Securities the interest on which is paid solely from revenues of
economically related projects, if such investment is deemed necessary or
appropriate by the Fund's investment adviser and sub-investment adviser. To the
extent that the Fund's assets are concentrated in Municipal Securities payable
from revenues on economically related projects and facilities, 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.
The Tax Exempt Fund also invests in securities backed by guarantees from
banks and other financial institutions. The Fund's ability to maintain a stable
share price is largely dependent upon such guarantees, which are not supported
by federal deposit insurance. Consequently, changes in the credit quality of
these institutions could have an adverse impact on securities they have
guaranteed or backed, which could cause losses to the Fund and affect its share
price.
As a non-diversified mutual fund, the Tax Exempt Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, will be subject to greater credit risk with respect to its
portfolio securities. In the opinion of the Fund's adviser, any risk to the Fund
should be limited by its intention to continue to conduct its operations so as
to qualify as a 'regulated investment company' for purposes of the Internal
Revenue Code of 1986, as amended (the 'Code'), and by its policies restricting
investments to obligations with short-term maturities and high quality credit
ratings.
The Tax Exempt 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. In

<PAGE>
recent years, several different issues of municipal securities of New York State
and its agencies and instrumentalities and of New York City have been downgraded
by S&P and Moody's. On the other hand, strong demand for New York Municipal
Securities has 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 Prospectus, no
issuers of New York Municipal Securities are in default with respect to the
payment of their municipal securities, 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 Fund's portfolio.
Other considerations affecting the Tax Exempt Fund's investments in New York
Municipal Securities are summarized in its Statement of Additional Information.

INVESTMENT GUIDELINES___________________________________________________________
Each Fund may invest up to an aggregate of 10% of its total assets in
illiquid securities with contractual or other restrictions on resale and other
instruments which are not readily marketable. Each Fund is also authorized to
borrow and to enter into reverse repurchase agreements in an amount of up to 10%
of its total assets for temporary or emergency purposes, but not for leverage,
and to pledge its assets to the same extent in connection with such borrowings.
Whenever borrowings exceed 5% of the value of a Fund's total assets, the Fund
will not make any additional investments (including roll-overs). A more detailed
description of these policies, together with an enumeration of additional
investment restrictions that each Fund has adopted and that cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in each Fund's Statement of Additional Information.

MANAGEMENT OF THE FUNDS_________________________________________________________
INVESTMENT ADVISER. Each Fund employs Warburg, Pincus Counsellors, Inc.
('Warburg') as investment adviser to the Fund. In its Advisory Agreement with
each Fund, Warburg has agreed to be responsible, subject to the supervision and
direction of the Board, for the Fund's investment program, including decisions
concerning: (i) the specific types of securities to be held by the Fund and the
proportion of the Fund's assets that should be allocated to such investments
during particular market cycles, (ii) the specific issuers whose securities will
be purchased or sold by the Fund, (iii) the maximum maturity (under one year) of
its portfolio investments, (iv) the appropriate average weighted maturity of its
portfolio in light of current

<PAGE>
market conditions and, with respect to the Tax Exempt Fund, (v) the extent to
which taxable securities will be purchased for and held by the Tax Exempt Fund
and (vi) the extent to which securities other than New York Municipal Securities
will be purchased for and held by the Tax Exempt Fund. In addition, Warburg has
agreed to supervise the performance by the sub-investment adviser of the
functions described below.

For the services provided pursuant to the Advisory Agreement, Warburg is
entitled to receive a fee, computed daily and payable monthly, at the annual
rate of .25 of 1.00% of the value of each Fund's average daily net assets.
Warburg and each Fund's administrators may voluntarily waive a portion of their
fees from time to time and temporarily limit the expenses to be paid by the
Fund. For the year ended February 28, 1997, the Cash Reserve Fund and the Tax
Exempt Fund paid Warburg a fee after waivers at the rate of .20% and .19%,
respectively, of each Fund's net assets.

Warburg is a professional investment counselling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of May 31, 1997,
Warburg managed approximately $18.8 billion of assets, including approximately
$11 billion of investment company assets. Incorporated in 1970, Warburg is a
wholly owned subsidiary of Warburg, Pincus Counsellors G.P. ('Warburg G.P.'), a
New York general partnership, which itself is controlled by Warburg, Pincus &
Co. ('WP&Co.'), also a New York general partnership. Lionel I. Pincus may be
deemed to control both WP&Co. and Warburg. Warburg G.P. has no business other
than being a holding company of Warburg and its subsidiaries. Warburg's address
is 466 Lexington Avenue, New York, New York 10017-3147.

SUB-INVESTMENT ADVISER AND ADMINISTRATOR. PNC Institutional Management
Corporation ('PIMC'), a wholly owned subsidiary of PNC Bank, National
Association ('PNC'), serves as each Fund's sub-investment adviser and
administrator. PIMC was organized in 1977 by PNC to perform advisory services
for investment companies and has its principal offices at 400 Bellevue Parkway,
Wilmington, Delaware 19809. As of June 13, 1997, PIMC served as investment
adviser to 22 mutual fund portfolios and as sub-investment adviser to 15 mutual
funds, having total assets exceeding $33.7 billion.

As sub-investment adviser and administrator, PIMC has agreed to implement
each Fund's investment program as determined by the Board and Warburg. PIMC will
supervise the day-to-day operations of the Fund and perform the following
services: (i) providing investment research and credit analysis concerning the
Fund's investments, (ii) placing orders for all purchases and sales of the
Fund's portfolio investments and (iii) maintaining the books and records
required to support the Fund's operations. As compensation therefor, each Fund
has agreed to pay PIMC a fee computed daily and payable monthly at an annual
rate of .25 of 1.00% of the value of each Fund's average daily net assets. For
the year ended February 28, 1997,

<PAGE>

the Cash Reserve Fund and the Tax Exempt Fund paid PIMC a fee after waivers at
the rate of .17% and .15%, respectively, of each Fund's net assets.

CO-ADMINISTRATOR. The Funds employ Counsellors Funds Service, Inc.
('Counsellors Service'), a wholly owned subsidiary of Warburg, as a
co-administrator. As co-administrator, Counsellors Service provides shareholder
liaison services to the Funds including responding to shareholder inquiries and
providing information on shareholder investments. Counsellors Service also
performs a variety of other services, including furnishing certain executive and
administrative services, acting as liaison between a Fund and its various
service providers, furnishing corporate secretarial services, which include
preparing materials for meetings of the Board, preparing proxy statements and
annual, semiannual and quarterly reports, assisting in the preparation of tax
returns and monitoring and developing compliance procedures for the Fund. As
compensation, each Fund pays to Counsellors Service a fee calculated at an
annual rate of .10% of the Fund's average daily net assets.

CUSTODIAN. PNC serves as the custodian of each Fund's assets. PNC is a
subsidiary of PNC Bank Corp. and its principal business address is 1600 Market
Street, Philadelphia, Pennsylvania 19103.

TRANSFER AGENT. State Street Bank and Trust Company ('State Street') serves
as shareholder servicing agent, transfer agent and dividend disbursing agent for
the Funds. State Street has delegated to Boston Financial Data Services, Inc., a
50% owned subsidiary ('BFDS'), responsibility for most shareholder servicing
functions. State Street's principal business address is 225 Franklin Street,
Boston, Massachusetts 02110. BFDS's principal business address is 2 Heritage
Drive, North Quincy, Massachusetts 02171.
DISTRIBUTOR. Counsellors Securities Inc. ('Counsellors Securities') serves as
distributor of the shares of the Funds. Counsellors Securities is a wholly owned
subsidiary of Warburg and is located at 466 Lexington Avenue, New York, New York
10017-3147. No compensation is payable by each Fund to Counsellors Securities
for its distribution services.

Warburg or its affiliates may, at their own expense, provide promotional
incentives for qualified recipients who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. Incentives
may include opportunities to attend business meetings, conferences, sales or
training programs for recipients' employees or clients and other programs or
events and may also include opportunities to participate in advertising or sales
campaigns and/or shareholder services and programs regarding one or more Warburg
Pincus Funds. Warburg or its affiliates may pay for travel, meals and lodging in
connection with these promotional activities. In some instances, these
incentives may be offered only to certain institutions whose representatives
provide services in connection with the sale or expected sale of Fund shares.

<PAGE>

DIRECTORS AND OFFICERS. The officers of each Fund manage its day-to-day
operations and are directly responsible to its Board. The Board of a Fund sets
broad policies for each Fund and chooses the Fund's officers. A list of the
Directors and officers of each Fund and a brief statement of their present
positions and principal occupations during the past five years is set forth in
the Statement of Additional Information of each Fund.

HOW TO OPEN AN ACCOUNT__________________________________________________________
In order to invest in a Fund, an investor must first complete and sign an
account application. To obtain an application, an investor may telephone Warburg
Pincus Funds at (800) 927-2874. An investor may also obtain an account
application by writing to:
Warburg Pincus Funds
P.O. Box 9030
Boston, Massachusetts 02205-9030
Completed and signed account applications should be mailed to Warburg Pincus
Funds at the above address.

RETIREMENT PLANS AND UTMA ACCOUNTS. For information (i) about investing in
the Cash Reserve Fund through a tax-deferred retirement plan, such as an
Individual Retirement Account ('IRA') or a Simplified Employee Pension IRA
('SEP-IRA'), or (ii) about opening a Uniform Transfers to Minors Act ('UTMA')
account in the Cash Reserve Fund, an investor should telephone Warburg Pincus
Funds at (800) 927-2874 or write to Warburg Pincus Funds at the address set
forth above. Investors should consult their own tax advisers about the
establishment of retirement plans and UTMA accounts.

CHANGES TO ACCOUNT. For information on how to make changes to an account, an
investor should telephone Warburg Pincus Funds at (800) 927-2874.

HOW TO PURCHASE SHARES__________________________________________________________

Shares of each Fund may be purchased either by mail or, with special advance
instructions, by wire. The minimum initial investment in each Fund is $1,000 and
the minimum subsequent investment is $100. For retirement plans and UTMA
accounts in the Cash Reserve Fund, the minimum initial investment is $500.
Subsequent minimum investments can be as low as $50 under the Automatic Monthly
Investing Plan described below. The Fund reserves the right to change the
initial and subsequent investment minimum requirements at any time. In addition,
the Fund may, in its sole discretion, waive the initial and subsequent
investment minimum requirements with respect to investors who are employees of
Warburg or its affiliates or persons with whom Warburg has entered into an
investment advisory agreement. Existing investors will be given 15 days' notice
by mail of any increase in investment minimum requirements.

After an investor has made his initial investment, additional shares may be
purchased at any time by mail or by wire in the manner outlined above. Wire

<PAGE>

payments for initial and subsequent investments should be preceded by an order
placed with the Fund and should clearly indicate the investor's account number
and the name of the Fund in which shares are being purchased. Each Fund reserves
the right to suspend the offering of shares for a period of time or to reject
any specific purchase order. In the interest of economy and convenience,
physical certificates representing shares in the Funds are not normally issued.

BY MAIL. If the investor desires to purchase shares by mail, a check or money
order made payable to the Fund or Warburg Pincus Funds (in U.S. currency) should
be sent along with the completed account application to Warburg Pincus Funds
through its distributor, Counsellors Securities, at the address set forth above.
Checks payable to the investor and endorsed to the order of the Fund or Warburg
Pincus Funds will not be accepted as payment and will be returned to the sender.
If payment is received in proper form by the close of regular trading on the New
York Stock Exchange (the 'NYSE') (currently 4:00 p.m., Eastern time) on a day
that the Fund calculates its net asset value (a 'business day'), the purchase
will be made at the Fund's net asset value calculated at the end of that day. If
payment is received after the close of regular trading on the NYSE, the purchase
will be effected at the Fund's net asset value next determined after payment has
been received. Checks or money orders that are not in proper form or that are
not accompanied or preceded by a complete account application will be returned
to the sender. Shares purchased by check or money order are entitled to receive
dividends and distributions beginning on the day after payment has been
received. Checks or money orders in payment for shares of more than one Warburg
Pincus Fund should be made payable to Warburg Pincus Funds and should be
accompanied by a breakdown of amounts to be invested in each fund. If a check
used for purchase does not clear, the Fund will cancel the purchase and the
investor may be liable for losses or fees incurred. For a description of the
manner of calculating the Fund's net asset value, see 'Net Asset Value' below.

BY WIRE. Investors may also purchase shares in a Fund by wiring funds from
their banks. Telephone orders by wire will not be accepted until a completed
account application in proper form has been received and an account number has
been established. Investors should place an order with the Fund prior to wiring
funds by telephoning (800) 927-2874. Federal funds may be wired to Counsellors
Securities using the following wire address:

State Street Bank and Trust Co.
225 Franklin St.
Boston, MA 02101
ABA# 0110 000 28
Attn: Mutual Funds/Custody Dept.
[Insert Warburg Pincus fund name(s) here]
DDA# 9904-649-2
[Shareowner name]
[Shareowner account number]

<PAGE>
If a telephone order is received before 12:00 p.m. (Eastern time) and payment
by wire is received on the same day in proper form in accordance with
instructions set forth above, the purchase will be executed at noon and shares
are entitled to dividends and distributions beginning on that day. If payment by
wire is received in proper form before 12:00 p.m. without a prior telephone
order, that purchase and any telephone orders placed after 12:00 p.m. for which
payment by wire is received on the same day in proper form, will be priced at
the net asset value of the Fund as of 4:00 p.m. on that day and is entitled to
dividends and distributions beginning the next business day. Payment for orders
that are not accepted will be returned to the prospective investor after prompt
inquiry. If a telephone order is placed and payment by wire is not received on
the same day, the Fund will cancel the purchase and the investor may be liable
for losses or fees incurred.

AUTOMATIC MONTHLY INVESTING. Automatic monthly investing allows shareholders
to authorize a Fund to debit their bank account monthly ($50 minimum) for the
purchase of Fund shares on or about either the tenth or twentieth calendar day
of each month. To establish the automatic monthly investing option, obtain a
separate application or complete the 'Automatic Investment Program' section of
the account application and include a voided, unsigned check from the bank
account to be debited. Only an account maintained at a domestic financial
institution which is an automated clearing house member may be used.
Shareholders using this service must satisfy the initial investment minimum for
the Fund prior to or concurrent with the start of any Automatic Investment
Program. Please refer to an account application for further information, or
contact Warburg Pincus Funds at (800) 927-2874 for information or to modify or
terminate the program. Investors should allow a period of up to 30 days in order
to implement an automatic investment program. The failure to provide complete
information could result in further delays.

GENERAL. Each Fund reserves the right to reject any specific purchase order.
A Fund may discontinue sales of its shares if management believes that a
substantial further increase in assets may adversely affect the Fund's ability
to achieve its investment objective. In such event, however, it is anticipated
that existing shareholders would be permitted to continue to authorize
investment in the Fund and to reinvest any dividends or capital gains
distributions.

HOW TO REDEEM AND EXCHANGE SHARES_______________________________________________
REDEMPTION OF SHARES. An investor in a Fund may redeem (sell) his shares on
any day that the Fund's net asset value is calculated (see 'Net Asset Value'
below).
Shares of the Funds may either be redeemed by mail or by telephone. Investors
should realize that in using the telephone redemption and exchange option, you
may be giving up a measure of security that you may have if you were to redeem
or exchange your shares in writing. If an investor desires to redeem his shares
by mail, a written request for redemption should be sent to Warburg Pincus Funds
at the address indicated above under 'How to Open an Account.' An investor
should be sure that the redemption request

<PAGE>

identifies the Fund, the number of shares to be redeemed and the investor's
account number. In order to change the bank account or address designated to
receive the redemption proceeds, the investor must send a written request (with
signature guarantee of all investors listed on the account when such a change is
made in conjunction with a redemption request) to Warburg Pincus Funds. Each
mail redemption request must be signed by the registered owner(s) (or his legal
representative(s)) exactly as the shares are registered. If an investor has
applied for the telephone redemption feature on his account application, he may
redeem his shares by calling Warburg Pincus Funds at (800) 927-2874. An investor
making a telephone withdrawal should state (i) the name of the Fund, (ii) the
account number of the Fund, (iii) the name of the investor(s) appearing on the
Fund's records, (iv) the amount to be withdrawn and (v) the name of the person
requesting the redemption.

After receipt of the redemption request by mail or by telephone, the
redemption proceeds will, at the option of the investor, be paid by check and
mailed to the investor of record or be wired to the investor's bank as indicated
in the account application previously filled out by the investor. The Funds
currently do not impose a service charge for effecting wire transfers but each
Fund reserves the right to do so in the future. During periods of significant
economic or market change, telephone redemptions may be difficult to implement.
If an investor is unable to contact Warburg Pincus Funds by telephone, an
investor may deliver the redemption request to Warburg Pincus Funds by mail at
the address shown above under 'How to Open an Account.' Although each Fund will
redeem shares purchased by check or through the Automatic Investment Program
before the funds or check clear, payments of the redemption proceeds will be
delayed for five days (for funds received through the Automatic Investment
Program) or 10 days (for check purchases) from the date of purchase. Investors
should consider purchasing shares using a certified or bank check or money order
if they anticipate an immediate need for redemption proceeds.

Shares are redeemed at the net asset value per share next determined after
receipt of a redemption order by Warburg Pincus Funds. Except as noted above,
redemption proceeds will normally be mailed or wired to an investor on the next
business day following the date a redemption order is effected. If, however, in
the judgment of Warburg, immediate payment would adversely affect a Fund, each
Fund reserves the right to pay the redemption proceeds within seven days after
the redemption order is effected. Furthermore, each Fund may suspend the right
of redemption or postpone the date of payment upon redemption (as well as
suspend or postpone the recordation of an exchange of shares) for such periods
as are permitted under the 1940 Act.
Although each Fund intends to use its best efforts to maintain its net asset
value per share at $1.00, the proceeds paid upon redemption may be more or less
than the amount invested depending upon a share's net asset value at the time of
redemption. If an investor redeems all the shares in his account, all dividends
and distributions declared up to and including the date of redemption are paid
along with the proceeds of the redemption.

<PAGE>

If, due to redemptions, the value of an investor's account drops to less than
$750 ($250 in the case of an IRA or UTMA account), each Fund reserves the right
to redeem the shares in that account at net asset value. Prior to any
redemption, the Fund will notify an investor in writing that this account has a
value of less than the minimum. The investor will then have 60 days to make an
additional investment before a redemption will be processed by the Fund.

Redemption By Check. An individual investor who is the record owner of Fund
shares may request a supply of checks by making the appropriate election on his
account application. Checks may be made payable to the order of any person in
any amount not less than $500. When a check is presented to State Street for
payment, State Street, as agent for the investor, causes the relevant Fund to
redeem a sufficient number of shares in the investor's account to cover the
amount of the check.
Investors are entitled to receive dividends on the shares to be redeemed
through the day the check is presented to State Street for payment. If an
investor owns insufficient shares to cover a check, the check will be returned
to the investor marked 'insufficient funds.' Cancelled checks will be returned
to the investor. Each Fund reserves the right to terminate or modify the check
redemption procedure at any time, to impose a service charge or to charge for
checks. Each Fund may also charge an investor's account for returned checks and
for effecting stop orders.

TELEPHONE TRANSACTIONS. In order to request redemptions by telephone,
investors must have completed and returned to Warburg Pincus Funds an account
application containing a telephone election. Unless contrary instructions are
elected, an investor will be entitled to make exchanges by telephone. Neither
Fund nor its agents will be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. Reasonable procedures will
be employed on behalf of each Fund to confirm that instructions communicated by
telephone are genuine. Such procedures include providing written confirmation of
telephone transactions, tape recording telephone instructions and requiring
specific personal information prior to acting upon telephone instructions.

AUTOMATIC CASH WITHDRAWAL PLAN. Each Fund offers investors an automatic cash
withdrawal plan under which investors may elect to receive periodic cash
payments of at least $250 monthly or quarterly. To establish this service,
complete the 'Automatic Withdrawal Plan' section of the account application and
attach a voided check from the bank account to be credited. For further
information regarding the automatic cash withdrawal plan or to modify or
terminate the Plan, investors should contact Warburg Pincus Funds at (800)
927-2874.
EXCHANGE OF SHARES. An investor may exchange shares of a Fund for shares of
the other Fund or for Common Shares of another Warburg Pincus Fund at their
respective net asset values. Exchanges may be effected by mail or by telephone
in the manner described under 'Redemption of Shares' above. If an exchange
request is received by Warburg Pincus Funds or their agent prior

<PAGE>
to the close of regular trading on the NYSE, the exchange will be made at each
Fund's net asset value determined at the end of that business day. Exchanges may
be effected without a sales charge but must satisfy the minimum dollar amount
necessary for new purchases. Due to the costs involved in effecting exchanges,
each Fund reserves the right to refuse to honor more than three exchange
requests by a shareholder in any 30-day period. The exchange privilege may be
modified or terminated at any time upon 60 days' notice to shareholders.
Currently, exchanges may be made between the Funds and with the following other
funds:
WARBURG PINCUS NEW YORK INTERMEDIATE MUNICIPAL FUND -- an intermediate-term
municipal bond fund designed for New York investors seeking income exempt from
federal, New York State and New York City income tax;
WARBURG PINCUS TAX FREE FUND -- a bond fund seeking maximum current income
exempt from federal income taxes, consistent with preservation of capital;
WARBURG PINCUS INTERMEDIATE MATURITY GOVERNMENT FUND -- an intermediate-term
bond fund investing in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities;
WARBURG PINCUS FIXED INCOME FUND -- a bond fund seeking current income and,
secondarily, capital appreciation by investing in a diversified portfolio of
fixed-income securities;
WARBURG PINCUS GLOBAL FIXED INCOME FUND -- a bond fund investing in a portfolio
consisting of investment grade fixed-income securities of governmental and
corporate issuers denominated in various currencies, including U.S. dollars;
WARBURG PINCUS BALANCED FUND -- a fund seeking maximum total return through a
combination of long-term growth of capital and current income consistent with
preservation of capital through diversified investments in equity and debt
securities;
WARBURG PINCUS GROWTH & INCOME FUND -- an equity fund seeking long-term growth
of capital and income and a reasonable current return;

WARBURG PINCUS CAPITAL APPRECIATION FUND -- an equity fund seeking long-term
capital appreciation by investing principally in equity securities of domestic
companies;

WARBURG PINCUS STRATEGIC VALUE FUND -- an equity fund seeking capital
appreciation by investing in undervalued companies and market sectors;

WARBURG PINCUS EMERGING GROWTH FUND -- an equity fund seeking maximum capital
appreciation by investing in emerging growth companies;

WARBURG PINCUS SMALL COMPANY VALUE FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of small
companies;

<PAGE>

WARBURG PINCUS SMALL COMPANY GROWTH FUND -- an equity fund seeking capital
growth by investing in equity securities of small sized domestic companies;

WARBURG PINCUS HEALTH SCIENCES FUND -- an equity fund seeking capital
appreciation by investing primarily in equity and debt securities of health
sciences companies;

WARBURG PINCUS POST-VENTURE CAPITAL FUND -- an equity fund seeking long-term
growth of capital by investing primarily in equity securities of issuers in
their post-venture capital stage of development;

WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL FUND -- an equity fund seeking
long-term growth of capital by investing primarily in equity securities of U.S.
and foreign issuers in their post-venture capital stage of development;

WARBURG PINCUS INTERNATIONAL EQUITY FUND -- an equity fund seeking long-term
capital appreciation by investing primarily in equity securities of non-United
States issuers;
WARBURG PINCUS EMERGING MARKETS FUND -- an equity fund seeking growth of
capital by investing primarily in securities of non-United States issuers
consisting of companies in emerging securities markets;
WARBURG PINCUS JAPAN GROWTH FUND -- an equity fund seeking long-term growth of
capital by investing primarily in equity securities of Japanese issuers; and
WARBURG PINCUS JAPAN OTC FUND -- an equity fund seeking long-term capital
appreciation by investing in a portfolio of securities traded in the Japanese
over-the-counter market.
The exchange privilege is available to shareholders residing in any state in
which the shares being acquired may legally be sold. When an investor effects an
exchange of shares, the exchange is treated for federal income tax purposes as a
redemption. Therefore, the investor may realize a taxable gain or loss in
connection with the exchange. Investors wishing to exchange shares of a Fund for
shares in another Warburg Pincus Fund should review the prospectus of the other
fund prior to making an exchange. For further information regarding the exchange
privilege or to obtain a current prospectus for another Warburg Pincus Fund, an
investor should contact Warburg Pincus Funds at (800) 927-2874.

DIVIDENDS, DISTRIBUTIONS AND TAXES______________________________________________

DIVIDENDS AND DISTRIBUTIONS. Each Fund calculates its dividends from net
investment income. Net investment income is declared daily and paid monthly. Net
investment income earned on weekends and when the NYSE is not open will be
computed as of the next business day. Distributions of long-term capital gains,
if any, generally are declared and paid annually at the end of the Fund's fiscal
year in which they are earned. Distributions of short-term capital gains, if
any, are declared and paid annually, at the end of the fiscal year in the case
of the Tax Exempt Fund, and periodically, as the Board determines, in the case
of the Cash Reserve Fund. Unless an investor instructs

<PAGE>
a Fund to pay dividends or capital gains distributions in cash, dividends and
distributions will automatically be reinvested in additional shares of the
relevant Fund at net asset value. The election to receive dividends in cash may
be made on the account application or, subsequently, by writing to Warburg
Pincus Funds at the address set forth under 'How to Open an Account' or by
calling Warburg Pincus Funds at (800) 927-2874.
A Fund may be required to withhold for U.S. federal income taxes 31% of all
distributions payable to shareholders who fail to provide the Fund with their
correct taxpayer identification number or to make required certifications, or
who have been notified by the U.S. Internal Revenue Service that they are
subject to backup withholding.

TAXES. Each Fund intends to qualify each year as a 'regulated investment
company' within the meaning of the Code. A Fund, if it qualifies as a regulated
investment company, will be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of ordinary income and capital
gain. Each Fund expects to pay such additional dividends and to make such
additional distributions as are necessary to avoid the application of this tax.
As long as the Tax Exempt Fund qualifies as a regulated investment company and
meets certain other Code requirements (including the requirement that at least
50% of its assets are invested in tax-exempt obligations at the close of each
quarter of its taxable year), distributions of tax-exempt interest income will
be excluded from an investor's income for federal income tax purposes.

Such exempt interest dividends paid by the Tax Exempt Fund may be excluded by
investors from their gross incomes for federal income tax purposes, although (i)
such exempt interest dividends will be a tax preference item for purposes of the
federal individual and corporate alternative minimum taxes to the extent they
are derived from Alternative Minimum Tax Securities and (ii) all exempt interest
dividends will be a component of the 'current earnings' adjustment item for
purposes of the federal corporate alternative minimum tax. In addition,
corporate investors may incur a greater federal environmental tax liability
through the receipt of Fund dividends and distributions. Investors who are
'substantial users' (or 'related persons' of substantial users) within the
meaning of the Code of facilities financed by Alternative Minimum Tax Securities
should consult their tax advisers as to whether the Tax Exempt Fund is a
desirable investment.
Dividends paid by a Fund from its taxable net investment income (if any, in
the case of the Tax Exempt Fund) and distributions of any net short-term capital
gains (whether from tax-exempt or taxable obligations) are taxable to investors
as ordinary income, whether received in cash or reinvested in additional shares
of the Fund. As a general rule, an investor's gain or loss on a sale or
redemption of his Fund shares will be a long-term capital gain or loss if he has
held his shares for more than one year and will be short-term capital gain or
loss if he has held his shares for one year or less. Each Fund does not expect
to realize long-term capital gains and, therefore, it is unlikely

<PAGE>

that any portion of the dividends or distributions paid by a Fund will be
taxable to investors as long-term capital gains. An investor in the Tax Exempt
Fund who redeems his shares prior to the declaration of a dividend may lose tax
exempt status on accrued income attributable to tax exempt Municipal Securities.
Investors may be proportionately liable for taxes on income and gains of a Fund,
but investors not subject to tax on their income will not be required to pay tax
on amounts distributed to them. Each Fund's dividends and distributions will not
qualify for the dividends-received deduction allowed to corporations. The Funds'
investment activities should not result in unrelated business taxable income to
a tax exempt investor.

Exempt interest dividends derived from interest on qualifying New York
Municipal Securities will also be exempt from New York State and New York City
personal (but not corporate franchise) income taxes. The exclusion or exemption
of interest income for federal income tax purposes, or New York State or New
York City personal income tax purposes, in most cases does not result in an
exemption under the tax laws of any other state or local authority. Investors
who are subject to tax in other states or localities should consult their own
tax advisers about the taxation of dividends and distributions from the Tax
Exempt Fund by such states and localities.
GENERAL. Statements as to the tax status of each investor's dividends and
distributions are mailed annually. In the case of the Tax Exempt Fund, these
statements set forth the dollar amount of income excluded or exempt from federal
income taxes and exempt from New York State and New York City personal income
taxes, and the dollar amount, if any, subject to taxation. These statements also
designate the amount of exempt-interest dividends that is a specific preference
item for purposes of the federal individual and corporate alternative minimum
taxes. Each investor in the Cash Reserve Fund will also receive, if applicable,
various written notices after the close of the Fund's prior taxable year with
respect to certain dividends and distributions which were received from the Fund
during the Fund's prior taxable year. Investors should consult their own tax
advisers with specific reference to their own tax situations, including their
state and local taxes that may apply to dividends and distributions received
from the Cash Reserve Fund. In this regard, investors should be aware that if a
portion of any dividend is derived from interest on United States government
obligations, that portion may be subject to tax by certain states, even though
such interest, if received directly by an investor, would be exempt from state
income tax.

NET ASSET VALUE_________________________________________________________________
Each Fund's net asset value per share is calculated at noon and as of the
close of regular trading on the NYSE (currently 4:00 p.m., Eastern time) on each
business day, Monday through Friday, except on days when the NYSE is closed. The
NYSE is currently scheduled to be closed on New Year's Day, Washington's
Birthday, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on

<PAGE>
the preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively.
The net asset value per share of each Fund is computed by adding the value of
the Fund's assets, deducting liabilities and dividing the result by the number
of outstanding shares. Portfolio securities are valued on the basis of amortized
cost, which involves valuing a portfolio instrument at its cost initially and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.

PERFORMANCE_____________________________________________________________________
From time to time, a Fund may advertise its yield and effective yield and, in
the case of the Tax Exempt Fund, its tax equivalent yield. The yield of the Fund
refers to the income generated by an investment in the shares over a seven-day
period, which is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, assumes that income earned by an
investment in the Fund is reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. The tax equivalent yield shows the taxable yield an investor in
the highest applicable tax bracket would have to earn to equal the Tax Exempt
Fund's tax-free yield after the imposition of federal, New York State and New
York City personal income taxes. The Tax Exempt Fund's tax equivalent yield is
calculated by dividing the Fund's tax-exempt yield by one minus the highest
level of the combined federal, New York State and New York City tax rates.
Yield, effective yield and tax equivalent yield may be shown by means of
schedules, charts or graphs.
Investors should note that yield, effective yield and tax equivalent yield
figures are based on historical earnings and are not intended to indicate future
performance. Each Fund's Statement of Additional Information describes the
method used to determine the Fund's yield. Current yield figures may be obtained
by calling Warburg Pincus Funds at (800) 927-2874.
In reports or other communications to investors or in advertising material, a
Fund may describe general economic and market conditions affecting the Fund. The
Fund may compare its performance with (i) that of other mutual funds as listed
in the rankings prepared by Lipper Analytical Services, Inc. or similar
investment services that monitor the performance of mutual funds or (ii) in the
case of the Tax Exempt Fund, an average of the yields of similar New York
tax-exempt money market funds based on information contained in Donoghue's Money
Market Fund Report, which is published weekly by the Donoghue Organization or
(iii) in the case of the Cash Reserve Fund, the Donoghue's Money Market Fund
Average, which is an average of all major taxable money market fund yields
published weekly by the Donoghue Organization or (iv) in each case, other
appropriate indexes of investment

<PAGE>

securities. Each Fund may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Financial Times, Forbes,
Fortune, Inc., Institutional Investor, Investor's Business Daily, Money,
Morningstar, Inc., Mutual Fund Magazine, SmartMoney and The Wall Street Journal.
In reports or other communications to investors or in advertising, a Fund may
also describe the general biography, work experience and/or investment
philosophy and style of the portfolio managers of the Fund and may include
quotations attributable to the portfolio managers describing approaches taken in
managing the Fund's investments, research methodology underlying the Fund's
portfolio or the Fund's investment objective. In addition, the Fund and its
portfolio managers may render periodic updates of Fund investment activity,
which may include, among other things, a discussion or statistical or
comparative analysis of portfolio composition and significant portfolio
holdings. The Fund may also discuss measures of risk and the continuum of risk
and return relating to different investments. Morningstar, Inc. rates funds in
broad categories based on risk/reward analyses over various time periods. In
addition, the Fund may from time to time compare the expense ratio of its shares
to that of investment companies with similar objectives and policies, based on
data generated by Lipper Analytical Services, Inc., or similar investment
services that monitor mutual funds. In addition, each Fund may from time to time
compare its expense ratio to that of investment companies with similar
objectives and policies, based on data generated by Lipper Analytical Services,
Inc. or similar investment services that monitor mutual funds.

GENERAL INFORMATION_____________________________________________________________

ORGANIZATION. Each Fund was incorporated on November 15, 1984 under the laws
of the State of Maryland as 'Counsellors Cash Reserve Fund, Inc.' and as
'Counsellors New York Tax Exempt Fund, Inc.' On October 27, 1995, the Cash
Reserve Fund and the Tax Exempt Fund each filed an amendment to its charter in
order to change its name to 'Warburg, Pincus Cash Reserve Fund, Inc.' and
'Warburg, Pincus New York Tax Exempt Fund, Inc.', respectively. Each Fund's
charter authorizes the Board to issue three billion full and fractional shares
of capital stock, $.001 par value per share, of which two billion shares are
designated Advisor Shares. Under each Fund's charter documents, the Board has
the power to classify or reclassify any unissued shares of the Fund into one or
more additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of shares into one or more series and, without
shareholder approval, may increase the number of authorized shares of the Fund.
Since no Advisor Shares are outstanding for either of the Funds, references to
'shares' in this prospectus refer solely to the common shares of a Fund unless
the context otherwise requires.

MULTI-CLASS STRUCTURE. Although neither Fund currently does so, each Fund is
authorized to offer a separate class of shares, the Advisor Shares, pursuant to
a separate prospectus. Individual investors could only purchase Advisor Shares
through institutional shareholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and other financial
intermediaries. Shares of each class would represent equal pro rata interests in
the Fund and accrue dividends and calculate net asset value and performance
quotations in the same manner. Because of the higher fees paid by the Advisor
Shares, the total return on such shares can be expected to be lower than the
total return on common shares.
VOTING RIGHTS. Investors in a Fund are entitled to one vote for each full
share held and fractional votes for fractional shares held. Shareholders of a
Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements. There will normally be no
meetings of investors for the purpose of electing members of the Board

<PAGE>
unless and until such time as less than a majority of the members holding office
have been elected by investors. Any Director of a Fund may be removed from
office upon the vote of shareholders holding at least a majority of the relevant
Fund's outstanding shares at a meeting called for that purpose. A meeting will
be called for the purpose of voting on the removal of a Board member at the
written request of holders of 10% of the outstanding shares of a Fund. Lionel I.
Pincus may be deemed to be a controlling person of each Fund because he may be
deemed to possess or share investment power over shares owned by clients of
Warburg and certain other entities.

SHAREHOLDER COMMUNICATIONS. Each investor will receive a quarterly statement
of his account, as well as a statement of his account after any transaction that
affects his share balance or share registration (other than the reinvestment of
dividends or distributions or investment made through the Automatic Investment
Program). Each Fund will also send to its investors a semiannual report and an
audited annual report, each of which includes a list of the investment
securities held by the Fund and a statement of the performance of the Fund.
Periodic listings of the investment securities held by a Fund, as well as
certain statistical characteristics of the Fund, may be obtained by calling
Warburg Pincus Funds at (800) 927-2874.

The prospectuses of the Funds are combined in this Prospectus. Each Fund
offers only its own shares, yet it is possible that a Fund might become liable
for a misstatement, inaccuracy or omission in this Prospectus with regard to the
other Fund.

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, EACH FUND'S
STATEMENT OF ADDITIONAL INFORMATION OR THE FUNDS' OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF SHARES OF THE FUNDS, AND IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY EACH FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.

<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C>
The Funds' Expenses..................................................... 2
Financial Highlights.................................................... 3
Investment Objectives and Policies...................................... 5
General................................................................. 6
Portfolio Investments................................................... 8
Investment Guidelines................................................... 11
Management of the Funds................................................. 11
How to Open an Account.................................................. 14
How to Purchase Shares.................................................. 14
How to Redeem and Exchange Shares....................................... 16
Dividends, Distributions and Taxes...................................... 20
Net Asset Value......................................................... 22
Performance............................................................. 23
General Information..................................................... 24
</TABLE>

[LOGO]

P.O. BOX 9030, BOSTON, MA 02205-9030
800-WARBURG (800-927-2874)

COUNSELLORS SECURITIES INC., DISTRIBUTOR. WPMMF-1-0697

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

June 25, 1997

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

WARBURG PINCUS CASH RESERVE FUND

WARBURG PINCUS NEW YORK TAX EXEMPT FUND

P.O. Box 9030, Boston, Massachusetts 02205-9030

For information call: (800) WARBURG

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

Contents
--------

Page
----

Investment Objectives........................................................2
Municipal Securities.........................................................2
Investment Policies..........................................................3
Special Considerations Relating to New York Municipal Securities............12
Management of the Funds.....................................................25
Additional Purchase and Redemption Information..............................31
Exchange Privilege..........................................................32
Additional Information Concerning Taxes.....................................33
Determination of Yield......................................................36
Independent Accountants and Counsel.........................................37
Miscellaneous...............................................................37
Financial Statements........................................................38
Appendix

Description of Commercial Paper and Municipal Securities Ratings........A-1

This Statement of Additional Information is meant to be read in
conjunction with the combined Prospectus of Warburg Pincus Cash Reserve Fund
(the "Cash Reserve Fund") and Warburg Pincus New York Tax Exempt Fund (the "New
York Tax Exempt Fund") (collectively, the "Funds"), dated June 25, 1997 and is
incorporated by reference in its entirety into that Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no investment in
shares of a Fund should be made solely upon the information contained herein.
Copies of the Funds' Prospectus and information regarding each Fund's current
yield may be obtained by calling the Fund at (800) 927-2874. Information
regarding the status of shareholder accounts may also be obtained by calling the
Fund at the same number or by writing to the Fund, P.O. Box 9030, Boston,
Massachusetts 02205-9030.

<PAGE>

INVESTMENT OBJECTIVES

The investment objective of the Cash Reserve Fund is to provide
investors with high current income consistent with liquidity and stability of
principal.

The investment objective of the New York Tax Exempt Fund is to provide
investors with as high a level of current income that is excluded from gross
income for federal income tax purposes and exempt from New York State and New
York City personal income taxes as is consistent with preservation of capital
and liquidity.

MUNICIPAL SECURITIES

Under normal circumstances, substantially all of the New York Tax
Exempt Fund's assets will be invested in Municipal Securities. Municipal
Securities include short-term 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 securities that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Securities if the interest paid thereon
is exempt from federal income tax.

The two principal types of Municipal Securities consist of "general
obligation" and "revenue" issues, and the New York Tax Exempt Fund's portfolio
may include "moral obligation" issues, which are normally issued by special
purpose authorities. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds 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 the user of the
facility being financed. Private activity securities held by the Fund are in
most cases revenue bonds and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of such private activity securities
is usually directly related to the credit standing of the corporate user of the
facility involved.

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 rating agencies represent their opinions as to the quality of
Municipal Securities. It should be emphasized, however, that 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 the New York Tax
Exempt 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 Fund's investment adviser and sub-investment

2
<PAGE>

adviser will consider such an event in determining whether the Fund should
continue to hold the obligation. See the Appendix attached hereto for further
information concerning ratings and their significance.

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. There is also the possibility that as a result of litigation or other
conditions, the power or ability of any one or more issuers to pay, when due,
principal of and interest on its, or their, Municipal Securities may be
materially adversely affected.

Among other instruments, the New York Tax Exempt Fund may purchase
short-term Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes and other forms of short-term loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues.

INVESTMENT POLICIES

The following policies supplement the descriptions of each Fund's
investment objective and policies in the Prospectus.

Additional Information on Investment Practices
- ----------------------------------------------

Variable Rate Master Demand Notes. Variable rate master demand notes
held by a Fund may have maturities of more than thirteen months, provided: (i)
the Fund is entitled to payment of principal and accrued interest upon not more
than seven days' notice and (ii) the rate of interest on such notes is adjusted
automatically at periodic intervals which may extend up to thirteen months. In
determining the Fund's average weighted portfolio maturity and whether a
variable rate master demand note has a remaining maturity of thirteen months or
less, each note will be deemed by the Fund to have a maturity equal to the
longer of the period remaining until its next interest rate adjustment or the
period remaining until the principal amount owed can be recovered through
demand. In determining whether an unrated variable rate master demand note is of
comparable quality at the time of purchase to instruments rated "high quality"
by any major rating service or when purchasing variable rate master demand
notes, the Fund's investment adviser and sub-investment adviser will consider
the earning power, cash flow and other liquidity ratios of the issuer of the
note and will continuously monitor its financial condition. In addition, when
necessary to ensure that a note is of "high quality," the Fund will require that
the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter of line of credit, guarantee or commitment to lend.

In the event an issuer of a variable rate master demand note defaults
on its payment obligation, a Fund might be unable to dispose of the note because
of the absence of a secondary market and might, for this or other reasons,
suffer a loss to the extent of the default.

3
<PAGE>

However, the Fund will invest in such instruments only where its investment
adviser and sub-investment adviser believe that the risk of such loss is
minimal. In determining average weighted portfolio maturity, a variable rate
master demand note will be deemed to have a maturity equal to the longer of the
period remaining to the next interest rate adjustment or the demand note period.

When-Issued Securities. As stated in the Prospectus, a Fund may
purchase Municipal Securities or portfolio securities, as the case may be, on a
"when-issued" basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). When the Fund agrees to purchase when-issued
securities, its custodian will set aside cash or certain liquid, high-grade debt
obligations in a segregated account equal to the amount of the commitment.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently to
place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund will set aside cash and 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
commitments to purchase when-issued securities ever exceeded 25% of the value of
its assets.

When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.

Reverse Repurchase Agreements and Borrowings. A Fund may borrow funds
for temporary purposes and not for leverage by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed-upon date and price. At the time the Fund
enters into such an arrangement (a "reverse repurchase agreement"), it will
place in a segregated custodial account cash, United States government
securities or other high-grade debt obligations having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such equivalent value is maintained. 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. Reverse
repurchase agreements are considered to be borrowings by the Fund under the
Investment Company Act of 1940, as amended (the "1940 Act").

Repurchase Agreements (Cash Reserve Fund only). The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements will be held by
the Fund's custodian or in the Federal Reserve/Treasury book-entry system or
another authorized securities depository.

Stand-By Commitment Agreements (New York Tax Exempt Fund only). The
Fund may acquire "stand-by commitments" with respect to Municipal Securities
held in its

4
<PAGE>

portfolio. Under a stand-by commitment, a dealer agrees to purchase at the
Fund's option specified Municipal Securities at a specified price. Stand-by
commitments acquired by the Fund may also be referred to as "put" options. The
Fund's right to exercise stand-by commitments is unconditional and unqualified.
A stand-by commitment is not transferable by the Fund, although the Fund can
sell the underlying securities to a third party at any time.

The principal risk of a stand-by commitment is that the writer of a
commitment may default on its obligation to repurchase the securities acquired
with it. The Fund intends to enter into stand-by commitments only with brokers,
dealers and banks that, in the opinion of Warburg, Pincus Counsellors, Inc.,
each Fund's investment adviser ("Warburg"), present minimal credit risks. In
evaluating the creditworthiness of the issuer of a stand-by commitment, Warburg
will periodically review relevant financial information concerning the issuer's
assets, liabilities and contingent claims.

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
Securities (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period.

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, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in the Fund's portfolio will
not exceed 1/2 of 1% of the value of the Fund's total assets calculated
immediately after each stand-by commitment is acquired.

The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying Municipal Securities which, as
noted, would continue to be valued in accordance with the amortized cost method.
Stand-by commitments acquired by the Fund would be valued at zero in determining
net asset value. Where the Fund paid any consideration directly or indirectly
for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by the Fund.
Stand-by commitments would not affect the average weighted maturity of the
Fund's portfolio.

The Internal Revenue Service has issued a revenue ruling to the effect
that a registered investment company will be treated for federal income tax
purposes as the owner of the Municipal Securities acquired subject to a stand-by
commitment and the interest on the Municipal Securities will be tax-exempt to
the Fund.

5
<PAGE>

Third Party Puts (New York Tax Exempt Fund only). The Fund may purchase
long-term fixed rate bonds that have been coupled with an option granted by a
third party financial institution allowing the Fund at specified intervals to
tender (or "put") the bonds to the institution and receive the face value
thereof (plus accrued interest). These third party puts are available in several
different forms, may be represented by custodial receipts or trust certificates
and may be combined with other features such as interest rate swaps. The Fund
receives a short-term rate of interest (which is periodically reset), and the
interest rate differential between that rate and the fixed rate on the bond is
retained by the financial institution. The financial institution granting the
option does not provide credit enhancement, and in the event that there is a
default in the payment of principal or interest, or downgrading of a bond to
below investment grade, or a loss of the bond's tax-exempt status, the put
option will terminate automatically, the risk to the Fund will be that of
holding such a long-term bond and the dollar-weighted average maturity of the
Fund's portfolio would be adversely affected.

These bonds coupled with puts may present the same tax issues as are
associated with stand-by commitments. As with any stand-by commitment, the Fund
intends to take the position that it is the owner of any municipal obligation
acquired subject to a third party put, and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Internal Revenue Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees and
swap payments, in relation to various regulated investment company tax
provisions is unclear. However, Warburg, intends to manage the Fund's portfolio
in a manner designed to minimize any adverse impact from these investments.

Taxable Investments (New York Tax Exempt fund only). Because the Fund's
purpose is to provide income excluded from gross income for federal income tax
purposes and exempt from New York State and New York City taxes, the Fund
generally will invest in taxable obligations only if and when the investment
adviser believes it would be in the best interests of the Fund's investors to do
so. Situations in which the Fund may invest up to 20% of its total assets in
taxable securities include: (i) pending investment of proceeds of sales of Fund
shares or the sale of its portfolio securities or (ii) when the Fund requires
highly liquid securities in order to meet anticipated redemptions. The Fund may
temporarily invest more than 20% of its total assets in taxable securities to
maintain a "defensive" posture when the Fund's investment adviser determines
that it is advisable to do so because of adverse market conditions affecting the
market for Municipal Securities generally.

Among the taxable investments in which the Fund may invest are
repurchase agreements and time deposits maturing in not more than seven days.
The Fund may agree to purchase money market instruments from financial
institutions such as banks and broker-dealers subject to the seller's agreement
to repurchase them at an agreed-upon date and price ("repurchase agreements").
The seller under a repurchase agreement will be required to maintain the value
of the securities subject to the agreement at not less than the repurchase price
(including accrued interest). Securities subject to repurchase agreements will
be held by

6
<PAGE>

the Fund's custodian or in the Federal Reserve/Treasury book-entry system or
another authorized securities depository.

Other Investment Policies and Practices of the New York Tax Exempt Fund
- -----------------------------------------------------------------------

Non-Diversified Status. The New York Tax Exempt Fund is classified as
non-diversified within the meaning of the 1940 Act, which means that it is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments will be limited, however,
in order to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Additional
Information Concerning Taxes." To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (a) not more than 25% of the market value of its
total assets will be invested in the securities of a single issuer, and (b) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.

Other Investment Limitations
- ----------------------------

Cash Reserve Fund. The investment limitations numbered 1 through 10 may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding shares. Such majority is defined as the lesser of (i) 67% or
more of the shares present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares. Investment limitations 11 and 12 may be
changed by a vote of the Fund's Board of Directors (the "Board") at any time.

The Cash Reserve Fund may not:

1. Invest in common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or indentures, state bonds, municipal bonds or
industrial revenue bonds.

2. Purchase the securities of any issuer if as a result more than 5% of
the value of the Fund's assets would be invested in the securities of such
issuer, except that this 5% limitation does not apply to securities issued or
guaranteed by the United States government, its agencies or instrumentalities,
and except that up to 25% of the value of the Fund's assets may be invested
without regard to this 5% limitation.

3. Borrow money, issue senior securities or enter into reverse
repurchase agreements except for temporary or emergency purposes and not for
leveraging, and then in amounts not in excess of 10% of the value of the Fund's
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 or 10% of the value of the Fund's
assets at the time of such borrowing. The Fund does not currently intend to

7
<PAGE>

enter into reverse repurchase agreements in amounts in excess of 5% of its
assets at the time the agreement is entered into. Whenever borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments.

4. Purchase any securities which would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of obligations
issued or guaranteed by the United States, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political sub-divisions or certificates of
deposit, time deposits, savings deposits and bankers' acceptances.

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

6. Underwrite any issue of securities except to the extent that the
purchase of debt obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.

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

8. Write or sell puts, calls, straddles, spreads or combinations
thereof.

9. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may purchase
commercial paper issued by companies that invest in real estate or interests
therein.

10. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization.

11. Invest more than 10% of the value of the Fund's total assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are no readily available market quotations.
For purposes of this limitation, repurchase agreements with maturities greater
than seven days after notice by the Fund, variable rate master demand notes
providing for settlement upon maturities longer than seven days and savings
accounts which require more than seven days' notice prior to withdrawal shall be
considered illiquid securities.

12. Invest in oil, gas or mineral leases.

If a percentage restriction (other than the percentage limitation set
forth in No. 3 above) is adhered to at the time of an investment, a later
increase or decrease in the

8
<PAGE>

percentage of assets resulting from a change in the values of portfolio
securities or in the amount of the Fund's assets will not constitute a violation
of such restriction.

Other Investment Limitations
- ----------------------------

New York Tax Exempt Fund. The investment limitations numbered 1 through
9 may not be changed without the affirmative vote of the holders of a majority
of the Fund's outstanding shares. Such majority is defined as the lesser of (i)
67% or more of the shares present at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding shares. Investment limitations 10 and 11
may be changed by a vote of the Fund's Board of Directors (the "Board") at any
time.

The New York Tax Exempt Fund may not:

1. Invest less than 80% of its assets in securities the interest on
which is exempt from federal income tax, except during temporary defensive
periods or under unusual market conditions, as determined by the Fund's
investment adviser.

2. Borrow money, issue senior securities or enter into reverse
repurchase agreements except for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of the Fund's
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 or 10% of the value of the Fund's
assets at the time of such borrowing. The Fund does not currently intend to
enter into reverse repurchase agreements in amounts in excess of 5% of its
assets at the time the agreement is entered into. Whenever borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments.

3. Purchase any securities which would cause more than 25% of the value
of the Fund's total assets at the time of purchase to be invested in the
securities of issuers conducting their principal business activities in the same
industry; provided that there shall be no limit on the purchase of (i)
obligations issued by the United States, any state, territory or possession of
the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political sub-divisions, (ii) certificates of
deposit issued by United States branches of United States banks or (iii)
Municipal Securities the interest on which is paid solely from revenues of
economically related projects. For purposes of this restriction, private
activity securities ultimately payable by companies within the same industry are
treated as if they were issued by issuers in the same industry.

4. Make loans except that the Fund may purchase or hold debt
obligations and enter into repurchase agreements in accordance with its
investment objective, policies and limitations.

9
<PAGE>

5. Underwrite any issue of securities except to the extent that the
purchase of debt obligations 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, real estate investment trust
securities, commodities or commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Fund may invest in debt
obligations secured by real estate, mortgages or interests therein.

7. Purchase securities on margin, make short sales of securities or
maintain short positions.

8. Write or sell puts, calls, straddles, spreads or combinations
thereof, except that the Fund may acquire stand-by commitments.

9. Purchase securities of other investment companies except in
connection with a merger, consolidation, acquisition or reorganization.

10. Invest more than 10% of the value of the Fund's total assets in
securities which may be illiquid because of legal or contractual restrictions on
resale or securities for which there are not readily available market
quotations. For purposes of this limitation, repurchase agreements with
maturities greater than seven days and variable rate master demand notes
providing for settlement upon more than seven days notice by the Fund and time
deposits maturing in more than seven calendar days shall be considered illiquid
securities.

11. Invest in oil, gas or mineral leases.

If a percentage restriction (other than the percentage limitation set
forth in No. 2 above) is adhered to at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of the Fund's assets will not
constitute a violation of such restriction.

Portfolio Valuation
- -------------------

Each Fund's portfolio securities are valued on the basis of amortized
cost. Under this method, the Fund values a portfolio security at cost on the
date of purchase and thereafter assumes a constant value of the security for
purposes of determining net asset value, which normally does not change in
response to fluctuating interest rates. Although the amortized cost method seems
to provide certainty in portfolio valuation, it may result in periods during
which values, as determined by amortized cost, are higher or lower than the
amount the Fund would receive if it sold the securities. In connection with
amortized cost valuation, the Board has established procedures that are intended
to stabilize the Fund's net asset value per share for purposes of sales and
redemptions at $1.00. These procedures include review by the Board, at such
intervals as it deems appropriate, to determine the extent, if any, to which the
Fund's net asset value per share calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds 1/2 of 1%,
the

10
<PAGE>

Board will promptly consider what action, if any, should be initiated. If the
Board believes that the amount of any deviations from the Fund's $1.00 amortized
cost price per share may result in material dilution or other unfair results to
investors or existing shareholders, it will take such steps as it considers
appropriate 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 Fund's average portfolio maturity;
withholding or reducing dividends; redeeming shares in kind; reducing the number
of the Fund's outstanding shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.

Portfolio Transactions
- ----------------------

Warburg is responsible for establishing, reviewing, and, where
necessary, modifying a Fund's investment program to achieve its investment
objective. PNC Institutional Management Corporation ("PIMC") generally will
select specific portfolio investments and effect transactions for each Fund.
Purchases and sales of portfolio securities are usually principal transactions
without brokerage commissions effected directly with the issuer or with dealers
who specialize in money market instruments. PIMC seeks to obtain the best net
price and the most favorable execution of orders. To the extent that the
execution and price offered by more than one dealer are comparable, PIMC may, in
its discretion, effect transactions in portfolio securities with dealers who
provide the Fund with research advice or other services.

Investment decisions for a Fund concerning specific portfolio
securities are made independently from those for other clients advised by PIMC.
Such other investment clients may invest in the same securities as the Fund.
When purchases or sales of the same security are made at substantially the same
time on behalf of such other clients, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which PIMC believes to
be equitable to each client, including the 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 or sold for the Fund. To the extent
permitted by law, PIMC may aggregate the securities to be sold or purchased for
each Fund with those to be sold or purchased for such other investment clients
in order to obtain best execution.

In no instance will portfolio securities be purchased from or sold to
Warburg, PIMC, PNC Bank, National Association ("PNC") or Counsellors Securities
Inc. ("Counsellors Securities") or any affiliated person of such companies,
except pursuant to an exemption received from the Securities and Exchange
Commission (the "SEC").

The New York Tax Exempt Fund may participate, if and when practicable,
in bidding for the purchase of Municipal Securities directly from an issuer for
the Fund's portfolio in order to take advantage of the lower purchase price
available to members of such a group. The Fund will engage in this practice,
however, only when Warburg and PIMC, in their sole discretion, believe such
practice to be otherwise in the Fund's interest.

Each Fund does not intend to seek profits through short-term trading. A
Fund's annual portfolio turnover will be relatively high but the Fund's
portfolio turnover is not

11
<PAGE>

expected to have a material effect on its net income. The Fund's portfolio
turnover is expected to be zero for regulatory reporting purposes.

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 official statements relating to
issues of New York Municipal Securities that were available prior to the date of
this Statement of Additional Information. The accuracy and completeness of the
information contained in those official statements have not been independently
verified.

State Economy. New York is 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 has a declining
proportion of its workforce engaged in manufacturing, and an increasing
proportion engaged in service industries. New York City (the "City"), which is
the most populous city in the State and nation and is the center of the nation's
largest metropolitan area, accounts for a large portion of the State's
population and personal income.

The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position.

There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1997-1998 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.

State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Between 1975 and 1990, total employment grew by 21.3 percent while the labor
force grew only by 15.7 percent, unemployment fell from 9.5 percent to 5.2
percent of the labor force. In 1991 and 1992, however, total employment in the
State fell by 5.5 percent. As a result, the unemployment rate rose to 8.5
percent reflecting a recession that has had a particularly strong impact on the
entire Northeast. Calendar years 1993 and 1994 saw only a partial recovery, with
the unemployment rate decreasing to 7.8 percent and 6.9 percent, respectively.
The unemployment rate for 1995 was 6.3 percent and was projected by the Division
of Budget to be 6.2 percent for 1996.

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

12
<PAGE>

estimated to be available therefor, accompanied by bills containing all proposed
appropriations or reappropriations and any new or modified revenue measures to
be enacted in connection with the executive budget. The entire plan constitutes
the proposed State financial plan for that fiscal year. The Governor is required
to submit to the Legislature quarterly budget updates which include a revised
cash-basis state financial plan, and an explanation of any changes from the
previous state financial plan.

The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").

The Governor presented his 1997-98 Executive Budget to the Legislature
on January 14, 1997. It is expected that the Governor will prepare amendments to
his Executive Budget as permitted under law. There can be no assurance that the
Legislature will enact the Executive Budget as proposed by the Governor into
law, or that the State's adopted budget projections will not differ materially
and adversely from the projections set forth therein.

The 1997-98 Executive Budget projected balance on a cash basis in the
General Fund. It reflected a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds were projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the 1996-97 fiscal
year. Total General Fund disbursements and transfers to other funds were
projected to be $32.84 billion, a decrease of $56 million from spending totals
projected for the 1996-1997 fiscal year. As compared to the 1996-97 State
Financial Plan, the 1997-98 Executive Budget proposed a year-to-year decline in
General Fund spending of 0.2 percent. State funds spending (i.e., General Fund
plus other dedicated funds, with the exception of federal aid) was projected to
grow by 1.2 percent. Spending from all governmental funds (excluding transfers)
was proposed to increase by 2.2 percent from the prior fiscal year.

In the 1997-98 Executive Budget, the Governor indicated that, before
taking action to balance the 1997-98 financial plan, the budget forecast
projected an imbalance of almost $2.3 billion. Before reflecting any actions
proposed by the Governor to restrain spending, General Fund disbursements for
1997-98 were projected to grow by approximately 4 percent. This increase would
have resulted from growth in Medicaid, higher fixed costs such as pensions and
debt service, collective bargaining agreements, inflation, and the loss of
non-recurring resources that offset spending in 1996-97. General Fund receipts
were projected to fall by roughly 3 percent. This reduction would have been
attributable to modest growth in the State's economy and underlying tax base,
the loss of non-recurring revenues available in 1996-97 and implementation of
previously enacted tax reduction programs. The 1997-98

13
<PAGE>

Executive Budget proposed to close this gap primarily through a series of
spending reductions and Medicaid cost containment measures, the use of a portion
of the 1996-97 projected budget surplus, and other actions, with a projected
1997-98 closing fund balance in the General Fund of $397 million.

The 1997-98 Executive Budget projected General Fund receipts of $33.02
billion and $33.91 billion for 1998-99 and 1999-2000, respectively. The receipts
projections were prepared on the basis of an economic forecast of a steadily
growing national economy, in an environment of low inflation and slow employment
growth. The forecast for the State's economic performance likewise was for slow
but steady economic growth. The receipt projections reflected tax reductions
proposed in the 1997-98 Executive Budget that will reduce receipts by an
estimated $798 million in 1998-99 and at $1.43 billion in 1999-2000. The bulk of
previously enacted tax reductions are annualized in 1997-98 and their impact in
the out years was largely proportional to projected growth in the underlying tax
liability.

Disbursements from the General Fund are projected at $34.60 billion in
1998-99 and $35.93 billion in 1999-2000, before assuming additional spending
efficiencies and/or additional federal revenue maximization. Assuming
implementation of proposed cost containment and other actions proposed in the
1997-98 Executive Budget, annual disbursements for fiscal years 1998-99 and
1999-2000 grow by $1.77 billion and $1.33 billion, respectively.

The Executive Budget contained projections of a potential imbalance in
the 1998-1999 fiscal year of $988 million and in the 1999-2000 fiscal year of
$1.2 billion, assuming implementation of the 1997-1998 Executive Budget
recommendations and implementation of $600 million and $800 million of
unspecified efficiency initiatives and other actions in the 1998-1999 and
1999-2000 fiscal years, respectively. The Executive Budget stated that the
assumed unspecified efficiency initiatives and other actions for such fiscal
years are comparable with reductions over the past several years, and that the
Governor plans to make additional proposals to limit State spending in order to
address any potential remaining gap.

It is expected that the 1997-98 financial plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State workforce, and efficiency and
productivity initiatives.

The Division of the Budget believed that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 Executive
Budget were reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
also by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. There

14
<PAGE>

can be no assurance that the State economy will not experience results that are
worse than predicted, with corresponding material and adverse effects on the
State's financial projections.

To make progress toward addressing recurring budgetary imbalances, the
1997-98 Executive Budget proposed significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in either 1997-98 or in future fiscal
years. In the State's 1997-98 fiscal year and in certain recent fiscal years,
the State has failed to enact a budget prior to the beginning of the State's
fiscal year.

In addition, there has been discussion of additional tax reductions,
beyond those reflected in the State's current projections for 1997-98 and the
out years that, if enacted, could make it more difficult to achieve budget
balance over this period. In particular, modifying the State's sales tax
treatment of clothing has been discussed. The State now receives approximately
$700 million annually under the current tax statutes from taxation on clothing,
and localities receive a roughly equivalent amount.

Uncertainties with regard to both the economy and potential decisions
at the federal level add further pressure on future budget balance in New York
State. Risks to the financial plan include either a financial market or broader
economic "correction" during the period, a risk heightened by the relatively
lengthy expansions currently underway. In addition, a normal "forecast error" of
one percentage point in the expected growth rate could raise or lower receipts
by $600 million during the last year of the projection period. Potential changes
to federal tax law could alter the federal definitions of income on which many
State taxes rely. Similarly, the financial plan assumed no significant federal
disallowances or other actions which could affect State finances.

On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families program
(TANF) funded with a fixed federal block grant to states. The new law also
imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.

On October 16, 1996, the Governor submitted the State's TANF
implementation plan to the federal government as required under the new federal
welfare law. On December 13, 1996, the State's plan was approved by the federal
government. Legislation

15
<PAGE>

will be required to implement the State's TANF plan, and the Governor has
introduced legislation necessary to conform with federal law.

States are required to comply with the new federal welfare reform law
no later than July 1, 1997. There can be no assurances that the State
Legislature will enact welfare reform proposals as submitted by the Governor and
as required under federal law.

An additional risk to the financial plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Specifically, in the case of Tug Buster Bouchard et al. v. Wetzler, the Division
of the Budget believed that the court's decision, as interpreted by the State,
would reduce tax revenues by approximately $5 million in 1997-98 and $2 million
thereafter.

Recent Financial Results. The General Fund is the principal operating
fund of the State and is used to account for all financial transactions, except
those required to be accounted for in another fund. It is the State's largest
fund and receives almost all State taxes and other resources not dedicated to
particular purposes.

The General Fund was projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds were
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Fund disbursements and transfers to other funds were
projected to be $33.12 billion for the 1996-97 fiscal year, an increase of $444
million from the total in the prior fiscal year.

The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1996 showed an accumulated deficit in its
combined governmental funds of $1.23 billion, reflecting liabilities of $14.59
billion and assets of $13.35 billion.

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

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

16
<PAGE>

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 Local Government
Assistance Corporation ("LGAC") to restructure the way the State makes certain
local aid payments.

In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which were to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated revenues
equal to one-quarter of the four cent State sales and use tax to pay debt
service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except in
cases where the Governor and the legislative leaders have certified the need for
additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap was thus permitted in any fiscal year, it was required
by law to be reduced to the cap by the fourth fiscal year after the limit was
first exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds
of $4.7 billion, completing the program.

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 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.

The State had anticipated that its capital programs would be financed,
in part, by State and public authorities borrowings in 1996-97. The State had
expected to issue $411 million in general obligation bonds (including $153.6
million for purposes of redeeming outstanding bond anticipation notes) and $154
million in general obligation commercial paper. The Legislature had also
authorized the issuance of up to $101 million in certificates of participation
during the State's 1996-97 fiscal year for equipment purchases. The projection
of the State regarding its borrowings may change if circumstances require.

17
<PAGE>

In November 1996 voters approved a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. As a result, the amount of general obligation bonds issued
during the 1996-97 fiscal year may increase above the $411 million currently
included in the 1996-97 borrowing plan to finance a portion of this new program.

Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes were $735 million for the 1995-96
fiscal year, and were estimated to be $719 million for the 1996-97 fiscal year.
Principal and interest payments on fixed rate and variable rate bonds issued by
LGAC were $340 million for the 1995-96 fiscal year, and were estimated to be
$323 million for 1996-97.

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 the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (5) alleged responsibility of New York State officials to assist in
remedying racial segregation in the City of Yonkers; (6) challenges by
commercial insurers, employee welfare benefit plans, and health maintenance
organizations to the imposition of surcharges on inpatient hospital bills; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; (10) an action seeking reimbursement
from the State for certain costs arising out of the provision of pre-school
services and programs for children with handicapped conditions; and (11)
challenges to regulations promulgated by the Superintendent of Insurance
establishing excess malpractice premium rates for the 1986-87 through 1995-96
and 1996-97 fiscal years, respectively.

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

18
<PAGE>

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 tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State. Adverse
developments in these proceedings 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. In its audited financial statements for the fiscal year ended
March 31, 1996, the State reported its estimated liability for awarded and
anticipated unfavorable judgments to be $474 million.

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 are
State-supported or State-related. As of September 30, 1995, date of the latest
data available, there were 17 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 17 Authorities was $73.45 billion.

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

19
<PAGE>

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.

New York City and Other Localities. The fiscal health of the State of
New York may also be impacted by the fiscal health of its localities,
particularly the City of New York, which has required and continues to require
significant financial assistance from New York 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.

For each of the 1981 through 1996 fiscal years, the City achieved
balanced operating results as reported in accordance with then applicable GAAP.
The City was required to close substantial budget gaps in recent years in order
to maintain balanced operating results. There can be no assurance that the City
will continue to maintain a balanced operating results. There can be no
assurance that the City will continue to maintain a balanced budget as required
by State law without additional tax or other revenue increases or additional
reductions in City services or entitlement programs, which could adversely
affect the City's economic base.

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's 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's. On July 2, 1985, S&P's revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. 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 July 10, 1995, S&P's downgraded its
rating on the City's $23 billion of outstanding general obligation bonds to
"BBB+" from "A-", citing the City's chronic structural budget problems and weak
economic outlook. S&P's stated that New York City's reliance on one-time revenue
measures to close annual budget gaps, a dependence on unrealized labor savings,
overly optimistic estimates of revenues and state and federal aid and the City's
continued high debt levels also contributed to its decision to lower the rating.

20
<PAGE>

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. As
of March 31, 1997, MAC had outstanding an aggregate of approximately $4.592
billion of its bonds. MAC is authorized to issue bonds and notes to refunds its
outstanding bonds and notes and to fund certain reserves, without limitation as
to principal amount, and to finance certain capital commitments to the Transit
Authority and the New York City School Construction Authority through the 1997
fiscal year in the event the City fails to provide such financing.

As of March 31, 1997, the City had received an aggregate of
approximately $4.85 billion from MAC for certain authorized uses by the City
exclusive of capital purposes. In addition, the City had received an aggregate
of approximately $2.352 billion from MAC for capital purposes in exchange for
serial bonds in a like principal amount, of which $191 million was held by MAC
as of March 31, 1997, after $569.1 million was redeemed on January 7, 1997. MAC
has also exchanged $1.839 billion principal amount of MAC bonds for City debt,
of which approximately $57.1 million was redeemed on January 7, 1997. MAC made
the $609.3 million of net redemption proceeds available to the City for capital
financing.

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.

21
<PAGE>

On May 8, 1997, the City released the Financial Plan for the 1998
through 2001 fiscal years (the "1998-2001 Financial Plan"), which relates to the
City, the Board of Education ("BOE") and the City University of New York
("CUNY") and was based on the Executive Budget and Budget Message for the City's
1998 fiscal year (the "City Executive Budget"). The City Executive Budget and
the 1998-2001 Financial Plan projected revenues and expenditures for the 1998
fiscal year balanced in accordance with GAAP. The City Executive Budget and the
1998-2001 Financial Plan included increased tax revenue projections and
additional expenditures for textbooks, computers, improved education programs
and welfare reform, law enforcement, immigrant naturalization and other
initiatives. In addition, the City Executive Budget and the 1998-2001 Financial
Plan set forth gap-closing actions to eliminate a previously projected gap of
$720 million for the 1998 fiscal year, after taking into account the prepayment
in the 1997 fiscal year of $856 million of debt service due in the 1998 and 1999
fiscal years. The gap-closing actions for the 1998 fiscal year included (i)
additional agency actions totaling $660 million; (ii) the prepayment in the 1998
fiscal year of $200 million of debt service due in the 1999 fiscal year; (iii)
the proposed sale of various assets; (iv) additional State aid of $294 million,
including a proposal that the State accelerate a $142 million revenue sharing
payment to the City from March 1999; and (v) entitlement savings of $128 million
which would result from certain of the reductions in Medicaid spending proposed
in the Governor's 1997-1998 Executive Budget and the State making available to
the City $77 million of additional Federal block grant aid, as proposed in the
Governor's 1997-1998 Executive Budget. The City Executive Budget is subject to
approval by the City Council, and there can be no assurance that the City
Executive Budget will be adopted in its proposed form. The 1998-2001 Financial
Plan also set forth projections for the 1999 through 2001 fiscal years and
projected gaps of $2.0 billion, $2.9 billion and $2.7 billion for the 1999
through 2001 fiscal years, respectively.

The 1998-2001 Financial Plan included a proposed tax reduction program
totaling $284 million, $651 million, $895 million and $1.2 billion in the 1998
through 2001 fiscal year, respectively. The tax reduction program included a
proposed elimination of the 4% City sales tax on clothing items under $500 as of
December 1, 1997, as well as a proposed reduction in the City property tax and
personal income tax which the 1998-2001 Financial Plan assumed will be offset by
proposed increased State aid totaling $47 million, $254 million, $472 million
and $722 million in the 1998 through 2001 fiscal years, respectively.

The 1998-2001 Financial Plan assumed (i) approval by the Governor and
the State Legislature of the extension of the 14% personal income tax surcharge,
which is scheduled to expire on December 31, 1997 and is projected to provide
revenue (if extended) of $169 million, $501 million and $531 million in the 1998
through 2000 fiscal years, respectively, and of the extension of the 12.5%
personal income tax surcharge, which is scheduled to expire on December 31, 1998
and is projected to provide revenue (if extended) of $190 million and $527
million in the 1999 and 2000 fiscal years, respectively; (ii) collection of the
project rent payments for the City's airports, totaling $270 million and $180
million in the 1998 and 1999 fiscal years, respectively, which may depend on the
successful completion of negotiations with the Port Authority or the enforcement
of the City's rights under the existing leases through pending legal actions;
(iii) the ability of the New York City Health and Hospital

22
<PAGE>

Corporation to identify actions to offset substantial City and State revenue
reductions and the receipt by BOE of additional State aid; and (iv) State
approval of the cost containment initiatives and State aid proposed by the City
for the 1998 fiscal year, and $115 million in State aid which is assumed in the
1998-2001 Financial Plan but not provided for in the Governor's 1997-1998
Executive Budget. The 1998-2001 Financial Plan reflected the increased costs
which the City is prepared to incur as a result of welfare legislation recently
enacted by Congress, but not certain of the costs resulting from legislation
proposed by the Governor, which would, if enacted, implement such Federal
welfare legislation. Moreover, certain of the proposed entitlement cost
containment and other initiatives included in the 1998-2001 Financial Plan have
been previously considered and rejected by the Legislature. The nature and
extent of the impact on the City of the State budget, when adopted, is
uncertain, and no assurance can be given that the State actions included in the
State adopted budget may not have a significant adverse impact on the City's
budget and its financial plan.

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 HHC 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. Indebtedness subject to the constitutional debt
limit includes liability on capital contracts that are expected to be funded
with general obligation bonds, as well as general obligation bonds. In addition,
the City issues revenue and tax anticipation notes to finance its seasonal
working capital requirements. The success of projected public sales of City
bonds and notes, New York City Municipal Water Finance Authority ("Water
Authority") bonds and Finance Authority bonds will be subject to prevailing
market conditions, and no assurance can be given that such sales will be
completed. If the City were unable to sell its general obligation bonds and
notes or the Water Authority or the Finance Authority were unable to sell its
bonds, the City would be prevented from meeting its planned capital and
operating expenditures. Future developments concerning the City and public
discussion of such

23
<PAGE>

developments, as well as prevailing market conditions, may affect the market for
outstanding City general obligation bonds and notes.

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. It is
expected that the City Comptroller and other agencies will issue reports in the
near future commenting on the City Executive Budget and/or the 1998-2001
Financial Plan.

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. The City has issued $2.4 billion of short-term
obligations in fiscal year 1997 to finance the City's current estimate of its
seasonal cash flow needs for the 1997 fiscal year. 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 and $2.25 billion in the 1993
and 1992 fiscal years, respectively. 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 year.

Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the State's projections of its receipts and disbursements.

Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation 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
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.

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.

Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.

Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the

24
<PAGE>

comptroller to review and make recommendations concerning the budgets of those
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Seventeen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1994.

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 New York State, New York 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 New York 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
New York State assistance in the future.

MANAGEMENT OF THE FUNDS

Officers and Board of Directors
- -------------------------------

The names (and ages) of each Fund's Directors and officers, their
addresses, present positions and principal occupations during the past five
years and other affiliations are set forth below.

<TABLE>
<S> <C>
Richard N. Cooper (63) ............................ Director
Harvard University Professor at Harvard University; National Intelligence
1737 Cambridge Street Council from June 1995 until January 1997; Director or
Cambridge, Massachusetts 02138 Trustee of Circuit City Stores, Inc. (retail electronics and
appliances) and Phoenix Home Life Insurance Company.

Donald J. Donahue (72)............................. Director
27 Signal Road Chairman of Magma Copper Company from December 1987 until
Stamford, Connecticut 06902 December 1995; Chairman and Director of NAC Holdings from
September 1990-June 1993; Director of Chase Brass Industries,
Inc. since December 1994; Director of Pioneer Companies, Inc.
(chlor-alkali chemicals) and predecessor companies since 1990
and Vice Chairman since December 1995.

</TABLE>

25
<PAGE>

Jack W. Fritz (70)................................. Director
2425 North Fish Creek Road Private investor; Consultant and Director of Fritz
P.O. Box 483 Broadcasting, Inc. and Fritz Communications (developers and
Wilson, Wyoming 83014 operators of radio stations); Director of Advo, Inc. (direct
mail advertising).

John L. Furth* (66)................................ Director
466 Lexington Avenue Vice Chairman and Director of Warburg; Associated with
New York, New York 10017-3147 Warburg since 1970; Chairman of the Board and Officer of
other investment companies advised by Warburg.

Thomas A. Melfe (65)............................... Director
30 Rockefeller Plaza Partner in the law firm of Donovan Leisure Newton & Irvine;
New York, New York 10112 Director of Municipal Fund for New York Investors, Inc.

Arnold M. Reichman* (49)........................... Director
466 Lexington Avenue Managing Director and Assistant Secretary of Warburg;
New York, New York 10017-3147 Associated with Warburg since 1984; Senior Vice President,
Secretary and Chief Operating Officer of Counsellors
Securities; Director and Officer of other investment
companies advised by Warburg.

Alexander B. Trowbridge (67)....................... Director
1317 F Street, N.W., 5th Floor President of Trowbridge Partners, Inc. (business consulting)
Washington, D.C. 20004 from January 1990-January 1996; President of the National
Association of Manufacturers from 1980-1990; Director or
Trustee of New England Mutual Life Insurance Co., ICOS
Corporation (biopharmaceuticals), WMX Technologies Inc.
(solid and hazardous waste collection and disposal), The
Rouse Company (real estate development), SunResorts
International Ltd. (hotel real estate management), Harris
Corp. (electronics and communications equipment), The
Gillette Co. (personal care products) and Sun Company Inc.
(petroleum refining and marketing).

<FN>
___________________
* Indicates a Director who is an "interested person" of the Fund as defined in the 1940 Act.
</FN>
</TABLE>

26
<PAGE>

Eugene L. Podsiadlo (40)........................... President
466 Lexington Avenue Managing Director of Warburg; Associated with Warburg since
New York 10017-3147 1991; Vice President of Citibank, N.A. from 1987-1991; Senior
Vice President of Counsellors Securities and officer of
other investment companies advised by Warburg.

Eugene P. Grace (45)............................... Vice President and Secretary
466 Lexington Avenue Associated with Warburg since April 1994; Attorney-at-law
New York, New York 10017-3147 from September 1989-April 1994; life insurance agent, New
York Life Insurance Company from 1993-1994; General Counsel
and Secretary, Home Unity Savings Bank from 1991-1992; Vice
President, Chief Compliance Officer and Assistant Secretary
of Counsellors Securities; Vice President and Secretary of
other investment companies advised by Warburg.

Stephen Distler (43)............................... Vice President
466 Lexington Avenue Managing Director, Controller and Assistant Secretary of
New York, New York 10017-3147 Warburg; Associated with Warburg since 1984; Treasurer of
Counsellors Securities; Vice President of other investment
companies advised by Warburg.

Howard Conroy (43)................................. Vice President and Chief Financial Officer
466 Lexington Avenue Associated with Warburg since 1992; Associated with Martin
New York, New York 10017-3147 Geller, C.P.A. from 1990-1992; Vice President, Finance with
Gabelli/Rosenthal & Partners, L.P. until 1990; Vice
President, Treasurer and Chief Financial Officer of other
investment companies advised by Warburg.

Daniel S. Madden, CPA (31)......................... Treasurer and Chief Accounting Officer
466 Lexington Avenue Associated with Warburg since 1995; Associated with BlackRock
New York, New York 10017-3147 Financial Management, Inc. from September 1994 to October
1996; Associated with BEA Associates from April 1993 to
September 1994; Associated with Ernst & Young LLP from 1990
to 1993. Treasurer and Chief Accounting Officer of other
investment companies advised by Warburg.

</TABLE>

27
<PAGE>

Janna Manes, Esq. (29)............................. Assistant Secretary
466 Lexington Avenue Associated with Warburg since 1996; Associated with the law
New York, New York 10017 firm of Willkie Farr & Gallagher from 1993-1996;
Assistant Secretary of other investment companies advised
by Warburg.
</TABLE>

No employee of Warburg, PIMC, PNC or PFPC Inc. ("PFPC") or any of their
affiliates receives any compensation from a Fund for acting as an officer or
Director of a Fund. Each Director who is not a director, officer or employee of
Warburg, PFPC or any of their affiliates receives an annual fee of $2,000, and
$500 for each meeting of the Board attended by him for his services as Director
and is reimbursed for expenses incurred in connection with his attendance at
Board meetings.

Directors' Compensation
- -----------------------

(for the fiscal year ended February 28, 1997)

Total Compensation from
Compensation from all Investment Companies
Name of Director* each Fund Managed by Warburg
- ---------------- --------- ------------------
John L. Furth None** None**
Richard N. Cooper $2,000 $44,500
Donald J. Donahue $2,000 $44,500
Jack W. Fritz $2,000 $44,500
Thomas A. Melfe $2,000 $44,500
Arnold M. Reichman None** None**
Alexander B. Trowbridge $2,000 $44,500

- --------------------
* Each Director also serves as a Director or Trustee of 23 other investment
companies advised by Warburg.

** Mr. Furth and Mr. Reichman are considered to be interested persons of
each Fund and Warburg, as defined under Section 2(a)(19) of the 1940 Act,
and, accordingly, receive no compensation from a Fund or any other
investment company managed by Warburg.

As of June 16, 1997, Directors and officers of a Fund as a group owned
of record less than 1% of the relevant Fund's outstanding common stock.

28
<PAGE>

Investment Adviser, Sub-Investment Adviser and Administrator
and Co-Administrator
- ------------------------------------------------------------

Warburg serves as investment adviser to the Fund, PIMC serves as
sub-investment adviser and administrator to the Fund and Counsellors Funds
Service, Inc. ("Counsellors Service") serves as co-administrator to the Fund
pursuant to written agreements (the "Advisory Agreement," the "Sub-Advisory
Agreement" and the "Co-Administration Agreement," respectively, and
collectively, the "Agreements"). The services provided by and the fees payable
by the Fund to Warburg, PIMC and Counsellors Service under the respective
Agreements are described in the Prospectus. Prior to June 29, 1994, Counsellors
Service served as administrative services agent to the Fund pursuant to a
written agreement (the "Administrative Services Agreement").

Advisory and Sub-Advisory Fees paid to each of Warburg and PIMC
- ---------------------------------------------------------------
(portions of aggregate fees waived, if any, are noted
in parenthesis next to the amount earned)

Cash Reserve Fund

Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1995 February 29, 1996 February 28, 1997
----------------- ----------------- -----------------

$795,255 ($438,940) $772,648 ($513,054) $1,092,344 ($574,926)

Regarding the aggregate amounts waived and for the same periods, Warburg
voluntarily waived $73,215, $205,222 and $229,970, respectively, and PIMC
voluntarily waived $365,725, $307,832 and $344,956, respectively.

Administrative Services/Co-Administration
Fees paid to Counsellors Service
- -----------------------------------------
(portions of fees waived, if any, are noted
in parenthesis next to the amount earned)

Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1995 February 29, 1996 February 28, 1997
----------------- ----------------- -----------------

$316,605 ($159,051) $309,059 $436,938

New York Tax Exempt Fund

Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1995 February 29, 1996 February 28, 1997
----------------- ----------------- -----------------

$221,553 ($199,026) $224,129 ($240,784) $287,156 ($185,905)

29
<PAGE>

Regarding the aggregate amounts waived and for the same periods, Warburg
voluntarily waived $55,231, $96,389 and $74,362, respectively, and PIMC
voluntarily waived $143,795, $144,395 and $111,543, respectively.

Fiscal year ended Fiscal year ended Fiscal year ended
February 28, 1995 February 29, 1996 February 28, 1997
----------------- ----------------- -----------------

$88,871 ($44,311) $89,652 $114,862

Banking Laws
- ------------

Banking laws and regulations presently (i) prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any bank or non-bank affiliate thereof from
sponsoring, organizing, controlling, or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares,
but (ii) do not prohibit such a holding company or affiliate from acting as
investment adviser, transfer agent or custodian to such an investment company.
PNC and PIMC are subject to such banking laws and regulations.

PIMC, PNC and each Fund have been advised by Messrs. Ballard, Spahr,
Andrews & Ingersoll that PIMC and PNC may perform the services for a Fund
contemplated by their respective agreements with the Fund and the Prospectus
without violation of applicable banking laws or regulations. Such counsel have
pointed out, however, that future changes in legal requirements relating to the
permissible activities of banks and their affiliates, as well as future
interpretations of present requirements, could prevent one or more of them from
continuing to perform services for the Fund. If PIMC or PNC were prohibited from
providing services to the Fund, the Board would select another qualified firm.
Any new sub-investment advisory agreement would be subject to shareholder
approval.

Custodian and Transfer Agent
- ----------------------------

PNC is custodian of each Fund's assets pursuant to a custodian
agreement (the "Custodian Agreement"). Under the Custodian Agreement, PNC (i)
maintains a separate account or accounts in the name of the Fund, (ii) holds and
transfers portfolio securities on account of the Fund, (iii) makes receipts and
disbursements of money on behalf of the Fund, (iv) collects and receives all
income and other payments and distributions on account of the Fund's portfolio
securities and (v) makes periodic reports to the Board concerning the Fund's
custodial arrangements. PNC is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of a Fund, provided that PNC
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Fund harmless from the acts and omissions of any
sub-custodian. PNC is an indirect wholly owned subsidiary of

30
<PAGE>

PNC Bank Corp., and its principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103.

State Street Bank and Trust Company ("State Street") has agreed to
serve as each Fund's shareholder servicing, transfer and dividend disbursing
agent pursuant to a Transfer Agency and Service Agreement, under which State
Street (i) issues and redeems shares of the Fund, (ii) addresses and mails all
communications by the Fund to record owners of the Fund shares, including
reports to shareholders, dividend and distribution notices and proxy material
for its meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts, and (iv) makes periodic reports to the Board concerning
the transfer agent's operations with respect to the Fund. State Street has
delegated to Boston Financial Data Services, Inc. ("BFDS"), a 50% owned
subsidiary, responsibility for most shareholder servicing functions. The
principal business address of State Street is 225 Franklin Street, Boston,
Massachusetts 02110. BFDS's principal business address is 2 Heritage Drive,
Boston, Massachusetts 02171.

Organization of the Fund
- ------------------------

Each Fund is incorporated in Maryland. See the Prospectus, "General
Information." All shareholders of a Fund, upon liquidation, will participate
ratably in the Fund's net assets. Shares do not have cumulative voting rights,
which means that holders of more than 50% of the shares voting for the election
of Directors can elect all Directors. Shares are transferable but have no
preemptive, conversion or subscription rights.

Distribution and Shareholder Servicing
- --------------------------------------

Until June 9, 1995, the New York Tax Exempt Fund was under an agreement
(the "Selected Dealer Agreement") with Janney Montgomery Scott Inc. ("Janney
Montgomery") whereby Janney Montgomery agreed to provide distribution,
administrative and shareholder services for their Customers who owned Advisor
Shares. Under the Selected Dealer Agreement, Counsellors Securities, out of
moneys received from the Fund, paid Janney Montgomery a fee, accrued daily and
paid quarterly, calculated at the annual rate of .10% of the Fund's average
daily net assets with respect to distribution and administrative services and
.25% of the Fund's average daily net assets with respect to shareholder
services. During the fiscal year ended February 28, 1995, Janney Montgomery
received $41,225. During the period March 1, 1995 through June 8, 1995
(elimination of series), Janney Montgomery received fees of $10,080. The amounts
retained were used primarily to defray a portion of the costs incurred in
rendering services to Janney Montgomery's customers under the Selected Dealer
Agreement, principally compensation to its sales representatives.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Information on how to purchase and redeem Fund shares and how such
shares are priced is included in the Prospectus.

31
<PAGE>

Under the 1940 Act, each Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed, other than customary weekend and
holiday closings, or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or fair valuation of portfolio securities is not
reasonably practicable, or for such other periods as the SEC may permit. (A Fund
may also suspend or postpone the recordation of an exchange of its shares upon
the occurrence of any of the foregoing conditions.)

If the Board of a Fund determines that conditions exist which make
payment of redemption proceeds wholly in cash unwise or undesirable, the Fund
may make payment wholly or partly in securities or other investment instruments
which may not constitute securities as such term is defined in the applicable
securities laws. If a redemption is paid wholly or partly in securities or other
property, a shareholder would incur transaction costs in disposing of the
redemption proceeds. The Fund intends to comply with Rule 18f-1 promulgated
under the 1940 Act with respect to redemptions in kind.

Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Plan") is available to shareholders who wish to receive specific amounts of
cash periodically. Withdrawals may be made under the Plan by redeeming as many
shares of a Fund as may be necessary to cover the stipulated withdrawal payment.
To the extent that withdrawals exceed dividends, distributions and appreciation
of a shareholder's investment in the Fund, there will be a reduction in the
value of the shareholder's investment and continued withdrawal payments may
reduce the shareholder's investment and ultimately exhaust it. Withdrawal
payments should not be considered as income from investment in the Fund. All
dividends and distributions on shares in the Plan are automatically reinvested
at net asset value in additional shares of the Fund.

EXCHANGE PRIVILEGE

An exchange privilege with certain other funds advised by Warburg is
available to investors in each Fund. The funds into which exchanges of Common
Shares currently can be made are listed in the Common Share Prospectus.
Exchanges may also be made between certain Warburg Pincus Advisor Funds.

The exchange privilege enables shareholders to acquire shares in a fund
with a different investment objective when they believe that a shift between
funds is an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the Common Shares or Advisor Shares
being acquired, as relevant, may legally be sold. Prior to any exchange, the
investor should obtain and review a copy of the current prospectus of the
relevant class of each fund into which an exchange is being considered.
Shareholders may obtain a prospectus of the relevant class of the fund into
which they are contemplating an exchange from Counsellors Securities.

32
<PAGE>

Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value of the relevant class and the proceeds are invested on the same day,
at a price as described above, in shares of the relevant class of the fund being
acquired. Warburg reserves the right to reject more than three exchange requests
by a shareholder in any 30-day period. The exchange privilege may be modified or
terminated at any time upon 60 days' notice to shareholders.

ADDITIONAL INFORMATION CONCERNING TAXES

The discussion set out below of tax considerations generally affecting
a Fund and its shareholders is intended to be only a summary and is not intended
as a substitute for careful tax planning by prospective shareholders.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.

As described above and in the Funds' Prospectus, the New York Tax
Exempt Fund is designed to provide investors with current income which is
excluded from gross income for federal income tax purposes and exempt from New
York State and New York City personal income taxes. The Fund is not intended to
constitute a balanced investment program and is not designed for investors
seeking capital gains or maximum tax-exempt income irrespective of fluctuations
in principal. Investment in the Fund would not be suitable for tax-exempt
institutions, individual retirement plans, employee benefit plans and individual
retirement accounts since such investors would not gain any additional tax
benefit from the receipt of tax-exempt income.

Each Fund has qualified and intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). If it qualifies as a regulated investment
company, a Fund will pay no federal income taxes on its taxable net investment
income (that is, taxable income other than net realized capital gains) and its
net realized capital gains that are distributed to shareholders. To qualify
under Subchapter M, each Fund must, among other things: (i) distribute to its
shareholders at least the sum of 90% of its taxable net investment income (for
this purpose consisting of taxable net investment income and net realized
short-term capital gains) plus 90% of its net tax-exempt interest income; (ii)
derive at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
securities, or other income (including, but not limited to, gains from options,
futures, and forward contracts) derived with respect to the Fund's business of
investing in securities; (iii) derive less than 30% of its annual gross income
from the sale or other disposition of securities, options, futures, forward
contracts and certain other assets held for less than three months; and (iv)
diversify its holdings so that, at the end of each fiscal quarter of the Fund
(a) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. government securities and other securities, with those other
securities limited, with respect to any one issuer, to an amount no greater in
value than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of the issuer, and (b) not more

33
<PAGE>

than 25% of the market value of the Fund's assets is invested in the securities
of any one issuer (other than U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that the Fund controls
and that are determined to be in the same or similar trades or businesses or
related trades or businesses. In meeting these requirements, a Fund may be
restricted in the selling of securities held by the Fund for less than three
months and in the utilization of certain of the investment techniques described
above and in the Prospectus. As a regulated investment company, the Fund will be
subject to a 4% non-deductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gain required to be but not
distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's taxable ordinary income for the calendar year and at least 98% of
the excess of its capital gains over capital losses realized during the one-year
period ending October 31 during such year, together with any undistributed,
untaxed amounts of ordinary income and capital gains from the previous calendar
year. The Fund expects to pay the dividends and make the distributions necessary
to avoid the application of this excise tax.

Although each Fund expects to be relieved of all or substantially all
federal income taxes, depending upon the extent of its activities in states and
localities in which its offices are maintained, in which its agents or
independent contractors are located or in which it is otherwise deemed to be
conducting business, that portion of a Fund's income which is treated as earned
in any such state or locality could be subject to state and local tax. Any taxes
paid by the Fund would reduce the amount of income and gains available for
distribution to shareholders.

Investors in the Cash Reserve Fund should be aware that it is possible
that some portion of the Fund's income from investments in obligations of
foreign banks could become subject to foreign taxes.

Because the New York Tax Exempt Fund will distribute exempt interest
dividends, interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for federal income tax purposes and New York
State and New York City personal income tax purposes. In addition, the Code may
require a shareholder, if he or she receives exempt interest dividends, to treat
as taxable income a portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Furthermore, that portion of any dividend
paid by the Fund which represents income derived from private activity
securities held by the Fund may not retain its tax-exempt status in the hands of
a shareholder who is a "substantial user" of a facility financed by such bonds,
or a "related person" thereof. Moreover, as noted in the Fund's prospectus, (i)
some of the Fund's dividends may be a tax preference item, or a component of an
adjustment item, for purposes of the federal individual and corporate
alternative minimum taxes and (ii) the receipt of Fund dividends and
distributions may affect a corporate shareholder's federal "environmental" tax
liability. In addition, the receipt of Fund dividends and distributions may
affect a foreign corporate shareholder's federal "branch profits" tax liability
and a Subchapter S corporation shareholder's federal "excess net passive income"
tax liability. Shareholders should consult their own tax advisers as to whether
they (i) may be "substantial users" with respect to a

34
<PAGE>

facility or "related" to such users within the meaning of the Code and (ii) are
subject to a federal alternative minimum tax, the federal environmental tax, the
federal "branch profits" tax, or the federal "excess net passive income" tax.

While each Fund does not expect to realize net long-term capital gains,
any such realized gains will be distributed as described in the Prospectus. Such
distributions ("capital gain dividends") will be taxable to shareholders as
long-term capital gains, regardless of how long a shareholder has held Fund
shares, and will be designated as capital gain dividends in a written notice
mailed by a Fund to shareholders after the close of the Fund's taxable year.
Gain or loss, if any, recognized on the sale or other disposition of shares of
the Fund will be taxed as capital gain or loss if the shares are capital assets
in the shareholder's hands. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year. If a
shareholder sells or otherwise disposes of a share of the Fund before holding it
for more than six months, any loss on the sale or other disposition of such
share shall be treated as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such share.

A shareholder of a Fund receiving dividends or distributions in
additional shares should be treated for federal income tax purposes as receiving
a distribution in an amount equal to the amount of money that a shareholder
receiving cash dividends or distributions receives, and should have a cost basis
in the shares received equal to that amount.

Distributions by the New York Tax Exempt Fund result in a reduction in
the net asset value of the Fund's shares. Should a distribution reduce the net
asset value below a shareholder's cost basis, such distribution would
nevertheless be taxable to the shareholder to the extent it is derived from
other than tax-exempt interest as ordinary income or capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the distribution
which, to the extent it is derived from other than tax-exempt interest, will
nevertheless be taxable to them.

Each shareholder of the Cash Reserve Fund will receive an annual
statement as to the federal income tax status of his dividends and distributions
from the Fund for the prior calendar year. Furthermore, shareholders will also
receive, if appropriate, various written notices after the close of the Fund's
taxable year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year.

Each shareholder of the New York Tax Exempt Fund will receive an annual
statement as to the federal and New York State and New York City personal income
tax status of his dividends and distributions from the Fund for the prior
calendar year. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Fund's taxable year regarding the
federal income tax status of certain dividends and

35
<PAGE>

distributions that were paid (or that are treated as having been paid) by the
Fund to its shareholders during the preceding year. Shareholders should consult
their tax advisers as to any other state and local taxes that may apply to the
Fund's dividends and distributions. The dollar amount of dividends excluded from
federal income taxation and exempt from New York State and New York City
personal income taxation and the dollar amounts subject to federal income and
New York State and New York City personal income taxation, if any, will vary for
each shareholder depending upon the size and duration of each shareholder's
investment in the Fund. In the event that the Fund derives taxable net
investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend as its actual taxable net investment income
bears to its total net investment income earned on that day. Therefore, the
percentage of each day's dividend designated as taxable, if any, may vary from
day to day.

If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is not
subject to withholding, then the shareholder may be subject to a 31% "backup
withholding" tax with respect to (a) taxable dividends and distributions and (b)
the proceeds of any redemptions of Fund shares. An individual's taxpayer
identification number is his social security number. Corporate shareholders and
other shareholders specified in the Code are or may be exempt from backup
withholding. The backup withholding tax is not an additional tax and may be
credited against a taxpayer's federal income tax liability.

DETERMINATION OF YIELD

From time to time, each Fund may quote its yield, effective yield and
tax equivalent yield, as applicable, in advertisements or in reports and other
communications to shareholders. The Cash Reserve Fund's yield and effective
yield for the seven-day period ended on February 28, 1997 were 4.96% and 5.08%,
respectively. In the absence of waivers these yields would have been 4.94% and
5.06%, respectively. The New York Tax Exempt Fund's yield, effective yield and
tax equivalent yield for the seven-day period ended on February 28, 1997 was
2.81%, 2.85% and 5.01% (based on a 46.72% tax bracket), respectively. In the
absence of waivers these yields would have been 2.78%, 2.82% and 4.96%,
respectively. Each Fund's seven-day yield is calculated by (i) determining the
net change in the value of a hypothetical pre-existing account in the Fund
having a balance of one share at the beginning of a seven calendar day period
for which yield is to be quoted, (ii) dividing the net change by the value of
the account at the beginning of the period to obtain the base period return and
(iii) annualizing the results (i.e., multiplying the base period return by
365/7). The net change in the value of the account reflects the value of
additional shares purchased with dividends declared on the original share and
any such additional shares, but does not include realized gains and losses or
unrealized appreciation and depreciation. Each Fund's seven-day compound
effective annualized yield is calculated by adding 1 to the base period return
(calculated as described above), raising the sum to a power equal to 365/7 and
subtracting 1. The New York Tax Exempt Fund's tax equivalent yield is calculated
by dividing that portion of the base period return which is exempt from federal,
New York State and New York City personal income taxes by 1 minus the highest
marginal federal, New York State and New York City individual income tax rates
and adding the quotient to that portion, if any, of the yield which is not
exempt from those taxes.

36
<PAGE>

Each Fund's yield will vary from time to time depending upon market
conditions, the composition of a Fund's portfolio and operating expenses
allocable to it. Yield information may be useful in reviewing the Fund's
performance and for providing a basis for comparison with other investment
alternatives. However, the Fund's yield will fluctuate, unlike certain bank
deposits or other investments which pay a fixed yield for a stated period of
time. In comparing the Fund's yield with that of other money market funds,
investors should give consideration to the quality and maturity of the portfolio
securities of the respective funds.

INDEPENDENT ACCOUNTANTS AND COUNSEL

Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), with principal offices
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania 19103, serves as
independent accountants for each Fund. A Fund's financial statements for the
fiscal year ended February 28, 1997 that is incorporated by reference in this
Statement of Additional Information have been audited by Coopers & Lybrand,
whose report thereon appears elsewhere herein, and have been included herein in
reliance upon the report of such firm of independent accountants given upon
their authority as experts in accounting and auditing.

Willkie Farr & Gallagher serves as counsel for each Fund as well as
counsel to Warburg, Counsellors Service and Counsellors Securities.

MISCELLANEOUS

As of May 31, 1997, the name, address and percentage of ownership of
other persons that control a Fund (within the meaning of the rules and
regulations under the 1940 Act) or own of record 5% or more of the Fund's
outstanding shares were as follows:

Cash Reserve Fund Common Stock
----------------- ------------
Fiduciary Trust Company International 22.25%
Church Street
Station
P.O. Box 3199
New York, NY 10008-3199

Neuberger and Berman 35.73%
11 Broadway
New York, NY 10004-1303

The Bank of New York 5.68%
One Wall Street
New York, N.Y. 10005-2501

37
<PAGE>

New York Tax Exempt Fund Common Stock
------------------------ ------------
Fiducial Trust Company International 54.13%
Church Street Station
P.O. Box 3199
New York, N.Y. 10008-3199

Neuberger & Berman 35.70%
11 Broadway
New York, N.Y. 10004-1303

To the knowledge of each Fund, these entities are not the beneficial
owners of a majority of the shares held by them of record. Mr. Lionel I. Pincus
may be deemed to have beneficially owned 39.6% and 27.6% of the Cash Reserve and
New York Tax Exempt Fund's shares outstanding, respectively, including shares
owned by clients for which Warburg has investment discretion and by companies
that he may be deemed to control. Mr. Pincus disclaims ownership of these shares
and does not intend to exercise voting rights with respect to these shares.

FINANCIAL STATEMENTS

Each Fund's audited annual report, dated February 28, 1997, which
either accompanies this Statement of Additional Information or has previously
been provided to the investor to whom this Statement of Additional Information
is being sent, is incorporated herein by reference. A Fund will furnish without
charge a copy of its annual report upon request by calling Warburg Pincus Funds
at (800) 927-2874.

38
<PAGE>

APPENDIX

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Commercial paper rated A-1 by Standard & Poor's Ratings Services
("S&P") indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted with a plus sign designation. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.

The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investor Services, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.

Short term obligations, including commercial paper, rated A1 + by IBCA
are obligations supported by the highest capacity for timely repayment.
Obligations rated A1 have a very strong capacity for timely repayment.
Obligations rated A2 have a strong capacity for timely repayment, although such
capacity may be susceptible to adverse changes in business, economic or
financial conditions.

Fitch Investors Services, Inc. employs the rating F-1+ to indicate
issues regarded as having the strongest degree of assurance for timely payment.
The rating F-1 reflects an assurance of timely payment only slightly less in
degree than issues rated F-1+, while the rating F-2 indicates a satisfactory
degree of assurance for timely payment, although the margin of safety is not as
great as indicated by the F-1+ and F-1 categories.

Duff & Phelps, Inc. employs the designation of Duff 1 with respect to
top grade commercial paper and bank money instruments. Duff 1+ indicates the
highest certainty of timely payment: short-term liquidity is clearly outstanding
and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1-
indicates high certainty of timely payment. Duff 2 indicates good certainty of
timely payment: liquidity factors and company fundamentals are sound.

DESCRIPTION OF MUNICIPAL SECURITIES RATINGS

The following summarizes the highest two ratings used by S&P for
Municipal Securities:

AAA - This is the highest rating assigned by S&P to a debt obligation
and indicates an extremely strong capacity to pay interest and repay principal.

A-1
<PAGE>

AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.

To provide more detailed indications of credit quality, the "AA" rating
may be modified by the addition of a plus or minus sign to show relative
standing within this major rating category.

The following summarizes the highest two ratings used by Moody's for
bonds:

Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or 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 that are rated As are judged to be of high quality by all
standards. Together with the Aaa group 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.

Moody's applies numerical modifiers (1,2 and 3) with respect to the
bonds rated Aa. The modifier 1 indicates that the bond being rated ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the bond ranks in the lower end of
its generic rating category.

The following summarizes the two highest ratings used by S&P for
short-term notes:

SP-1 - Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a (+) designation.

SP-2 - Loans bearing this designation evidence a satisfactory capacity
to pay principal and interest.

The following summarizes the two highest ratings used by Moody's for
short-term notes and variable rate demand obligations:

MIG-1/VMIG-1 - Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both.

MIG-2/VMIG-2 - Obligations bearing these designations are of high
quality with margins of protection ample although not so large as in the
preceding group.

A-2
<PAGE>

Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign designation. Capacity
for timely payment on commercial paper rated A-2 is satisfactory, but the
relative degree of safety is not as high as for issues designated A-1.

The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Services, Inc. Issuers rated Prime-1 (or related supporting
institutions) are considered to have a superior capacity for repayment of
short-term promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.

A-3