MSD&T FUNDS INC, 497, 1998-03-06

MSD&T FUNDS INC
497, 1998-03-06

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M.S.D.&T. Funds, Inc.

........................................................

Prospectus

Equity Income Fund
Equity Growth Fund
Total Return Bond Fund
National Tax-Exempt Bond Fund
Intermediate Tax-Exempt Bond Fund

FEBRUARY 18, 1998
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TABLE OF CONTENTS

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<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY............................................................ 3
INVESTMENT OBJECTIVES, POLICIES AND RISKS.................................. 4
FUNDAMENTAL LIMITATIONS.................................................... 13
INVESTING IN THE FUNDS..................................................... 14
SHAREHOLDER SERVICES....................................................... 18
DIVIDENDS AND DISTRIBUTIONS................................................ 19
TAX INFORMATION............................................................ 20
MANAGEMENT OF THE COMPANY.................................................. 21
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.................... 23
PERFORMANCE REPORTING...................................................... 23
MISCELLANEOUS.............................................................. 24
</TABLE>

IF YOU HAVE QUESTIONS

For current yield, purchase and redemption information, call 1-800-551-2145.

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M.S.D. & T. FUNDS, INC.

PROSPECTUS

FOR THE

EQUITY INCOME FUND
EQUITY GROWTH FUND
TOTAL RETURN BOND FUND
NATIONAL TAX-EXEMPT BOND FUND
INTERMEDIATE TAX-EXEMPT BOND FUND

FEBRUARY 18, 1998

<TABLE>
<CAPTION>
M.S.D. & T.
FUND GOAL FOR INVESTORS WHO WANT
- -----------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY INCOME Current income and long-term capital Current income and long-term
appreciation with reasonable risk capital appreciation and are
through investments primarily in willing to accept the relative
common and preferred stock and debt risks associated with
securities convertible into common investments in equity
stock. securities.
- -----------------------------------------------------------------------------------------
EQUITY GROWTH Long-term capital appreciation Long-term capital appreciation
through investments primarily in and are willing to accept the
common and preferred stock and debt relative risks associated with
securities convertible into common investments in equity
stock that represent growth securities.
potential.
- -----------------------------------------------------------------------------------------
TOTAL RETURN High level of current income and Current income from corporate
BOND relative protection of capital and government securities and
through investments primarily in can accept fluctuations in
corporate and government debt price and yield.
obligations. The Fund will generally
have an average weighted maturity of
from four to fifteen years.
- -----------------------------------------------------------------------------------------
NATIONAL High current income free of federal Current income and relative
TAX-EXEMPT income tax and relative protection protection of capital from an
BOND of capital through investments investment that is free from
primarily in medium-term and long- federal income tax.
term municipal obligations.
- -----------------------------------------------------------------------------------------
INTERMEDIATE High current income free of federal Current income from an
TAX-EXEMPT income tax and relative protection investment that is free from
BOND of capital through investments federal income tax and less
primarily in short-term and medium- principal volatility than
term municipal obligations. normally associated with a
long-term fund.
- -----------------------------------------------------------------------------------------
</TABLE>

SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY
INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY.
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL. IN ADDITION, THE DIVIDENDS PAID BY THE FUNDS WILL GO UP AND DOWN.
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT ADVISER AND
ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH BISYS FUND SERVICES LIMITED PARTNERSHIP, THE FUNDS'
DISTRIBUTOR.
<PAGE>

This Prospectus relates to shares of the Equity Income Fund, Equity Growth
Fund, Total Return Bond Fund, National Tax-Exempt Bond Fund and Intermediate
Tax-Exempt Bond Fund (collectively the "Funds") of M.S.D. & T. Funds, Inc.
(the "Company"), a no-load, open-end management investment company. This
Prospectus describes concisely the information about the Funds that you should
know before investing. Please read and keep it for future reference. More
information about the Funds is contained in the Statement of Additional
Information dated February 18, 1998 that has been filed with the Securities
and Exchange Commission ("SEC"). The Statement of Additional Information,
which can be obtained free of charge upon request by writing to the Company at
Two Hopkins Plaza, Baltimore, Maryland 21201 or by calling 1-800-551-2145, is
incorporated by reference into (considered a part of) this Prospectus.

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>

EXPENSE SUMMARY

Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareholder accounts, general
Fund administration, accounting, custody and other services.

Below is information regarding the operating expenses which the Funds
expect to incur during the current fiscal year. Examples based on this
information are also provided.

<TABLE>
<CAPTION>
NATIONAL
TOTAL TAX- INTERMEDIATE
EQUITY EQUITY RETURN EXEMPT TAX-EXEMPT
INCOME GROWTH BOND BOND BOND
FUND FUND FUND FUND FUND
------ ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees (after fee
waivers)/1/........................ .45% .31% .22% .22% .22%
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and
miscellaneous other charges)/1/.... .25% .39% .23% .23% .23%
--- --- --- --- ---
Total Fund Operating Expenses
(after fee waivers)/1/............. .70% .70% .45% .45% .45%
=== === === === ===
</TABLE>
- -------------------
/1/ This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one of
the Funds. The expense information reflects the operating expenses which the
Funds expect to incur during the current fiscal year. Without fee waivers by
the investment adviser and administrator, Management Fees, Other Expenses and
Total Fund Operating Expenses, stated as a percentage of average daily net
assets, would be .60%, .25% and .85%, respectively, for the Equity Income
Fund; .60%, 43% and 1.03%, respectively, for the Equity Growth Fund; .35%,
.29% and .64%, respectively, for the Total Return Bond Fund; .50%, .27% and
.77%, respectively, for the National Tax-Exempt Bond Fund; and .50%, .29% and
.79%, respectively, for the Intermediate Tax-Exempt Bond Fund.

The investment adviser and administrator are under no obligation to waive
fees or reimburse expenses, but have informed the Company that they expect to
waive fees and/or reimburse expenses during the current fiscal year as
necessary to maintain the Funds' total operating expenses at the levels set
forth in the above table. You should note that any fees that are charged by
the investment adviser, its affiliates or any other institutions directly to
their customer accounts for services related to an investment in the Funds are
in addition to, and are not reflected in, the fees and expenses described
above.

For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.

EXAMPLE:

Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Equity Income Fund............................................... $ 7 $22
Equity Growth Fund............................................... $ 7 $22
Total Return Bond Fund........................................... $ 5 $14
National Tax-Exempt Bond Fund.................................... $ 5 $14
Intermediate Tax-Exempt Bond Fund................................ $ 5 $14
</TABLE>

THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST
OR FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. THE FUNDS ARE NEW AND
ACTUAL INVESTMENT RETURNS AND OPERATING EXPENSES MAY BE MORE OR LESS THAN
THOSE SHOWN.

3
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INVESTMENT OBJECTIVES, POLICIES AND RISKS

The Funds' investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve a Fund's
investment objective. All Funds do not use all of the investments and
investment techniques described below, which involve various risks, and which
are also described in the following sections. You should consider which Funds
best meet your investment goals. The Adviser will use its best efforts to
achieve a Fund's investment objective, although its achievement cannot be
assured. An investor should not consider an investment in any Fund to be a
complete investment program.

EQUITY INCOME FUND

The investment objective of the Equity Income Fund is to seek current
income and long-term capital appreciation consistent with reasonable risk. The
Fund pursues its objective by investing substantially all of its assets in
common stock, preferred stock and debt obligations convertible into common
stock. The Fund seeks to purchase individual stocks that are likely to produce
higher than average dividend yields and appear to represent good relative
values with the potential for price appreciation. A stock's dividend growth
rate, the ratios of price to earnings and book value and its earnings trend
are factors considered in stock selection.

Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in income-producing equity securities, including
common stock, preferred stock and debt obligations convertible into common
stock. Although the Fund will invest primarily in publicly-traded common
stocks of companies incorporated in the United States, the Fund may also
invest up to 25% of its total assets in the securities of foreign issuers,
either directly or through American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") as
described under "Other Investment Policies and Related Risks."

During normal market and economic conditions, the Fund may hold up to 25%
of its total assets in debt securities. These securities will either be issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or
will be debt obligations, including but not limited to debt obligations
convertible into common stock, that at the time of purchase carry one of the
three highest ratings assigned by an unaffiliated national statistical rating
organization ("Rating Agency"). Investments may also be made in unrated debt
obligations which the Adviser has determined to be of comparable quality. See
Appendix A to the Statement of Additional Information for a description of
applicable debt security ratings.

The Fund may reduce the percentage of its equity investments and
temporarily invest its assets, without limitation, in fixed income securities,
including the types of securities in which the Total Return Bond Fund may
invest and high quality short-term money market instruments, when in the
opinion of the Adviser, a defensive position is warranted, or to meet
anticipated redemption requests.

EQUITY GROWTH FUND

The investment objective of the Equity Growth Fund is to seek long-term
capital appreciation. The Fund pursues its objective by investing
substantially all of its assets in common stock, preferred stock and debt
obligations convertible into common stock. The Fund seeks to purchase
individual stocks that appear to represent good growth potential and seem
likely to appreciate in price.

Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in common stock, preferred stock and debt obligations
convertible into common stock. Although the Fund will invest primarily in
publicly-traded common stocks of companies incorporated in the United States,
the Fund may also invest up to 25% of its total assets in the securities of
foreign issuers, either directly or through ADRs, EDRs and GDRs as described
under "Other Investment Policies and Related Risks."

4
<PAGE>

Investments may also be made in unrated debt obligations which the Adviser has
determined to be of comparable quality. See Appendix A to the Statement of
Additional Information for a description of applicable debt security ratings.

TOTAL RETURN BOND FUND

The investment objective of the Total Return Bond Fund is to seek as high
a level of current income as is consistent with relative protection of
capital. Subject to this objective, the Adviser will consider the total rate
of return on portfolio securities in managing the Fund. The Fund will invest
substantially all its assets in debt obligations, such as bonds and
debentures, of domestic and foreign corporations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; debt
obligations of foreign, state and local governments and their political
subdivisions; asset-backed securities, including various collateralized
mortgage obligations and other mortgage-related securities; and money market
instruments.

Debt securities in which the Fund may invest include, without limitation,
Brady Bonds, which are securities issued in various currencies (primarily the
U.S. dollar) that have been created through the exchange of existing
commercial bank loans to Latin American public and private entities for new
bonds in connection with debt restructurings under a debt restructuring plan
announced by former U.S. Secretary of the Treasury Nicholas F. Brady (the
"Brady Plan"). Brady Bonds have been issued only recently and for that reason
do not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the over-the-counter secondary market for Latin
American debt instruments. Brady Bonds are neither issued nor guaranteed by
the U.S. Government. Additional information on Brady Bonds is included in the
Statement of Additional Information.

The Fund generally will purchase only those securities that are rated at
the time of purchase within the four highest rating categories assigned by a
Rating Agency or, if unrated, are determined by the Adviser to be of
comparable quality. Debt obligations rated within the four highest rating
categories assigned by a Rating Agency are considered to be investment grade.
Debt obligations rated in the lowest of the four highest rating categories
assigned by a Rating Agency are considered to have speculative
characteristics, even though they are of investment grade quality, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher-rated debt obligations. When deemed appropriate by the Adviser,
however, the Fund may invest up to 10% of its net assets in lower quality debt
securities. Lower quality debt securities, also known as "junk bonds," are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities
and may decline significantly in periods of general economic difficulty, which
may follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.

Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in corporate debt obligations such as bonds and
debentures, obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and mortgage-backed securities, including
collateralized mortgage obligations. Most obligations acquired by the Fund
will be issued by companies or governmental entities located within the United
States. Up to 25% of the Fund's total assets, however, may be invested in
obligations of foreign issuers. The Fund may also invest, without limitation,
in high-quality short-term money market instruments for temporary defensive
purposes.

The Fund's average weighted maturity will vary from time to time depending
on, among other things, current market and economic conditions and the
comparative yields on instruments with different maturities. The Adviser
expects that under normal market conditions the Fund will have an average
weighted maturity of between 4 and 15 years.

5
<PAGE>

NATIONAL TAX-EXEMPT BOND FUND

The investment objective of the National Tax-Exempt Bond Fund is to seek
as high a level of interest income that is exempt from regular federal income
tax as is consistent with relative protection of capital. The Fund invests
substantially all of its assets in tax-exempt debt obligations issued by
states, territories and possessions of the United States, the District of
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities ("municipal obligations"), that are rated at
the time of purchase within one of the four highest rating categories assigned
by a Rating Agency. The Fund may also acquire short-term municipal obligations
such as tax-exempt commercial paper, municipal notes, and variable rate demand
obligations that are rated at the time of purchase within the two highest
rating categories assigned by a Rating Agency. Obligations purchased by the
Fund that have not been assigned a rating will be determined by the Adviser to
be of comparable quality. See "Total Return Bond Fund" above for a discussion
of certain risks in investing in debt obligations (including municipal
obligations) rated in the lowest of the four highest rating categories
assigned by a Rating Agency. If a security held by the Fund is downgraded
below the minimum requested rating, the Adviser will reassess the
creditworthiness of the security and will consider such an event in
determining whether the Fund should continue to hold that security.

As a matter of fundamental policy, except during periods of unusual market
conditions or during temporary defensive periods, at least 80% of the Fund's
net assets will be invested in securities the interest on which is exempt from
regular federal income tax.

The Fund may from time to time invest a portion of its assets on a
temporary basis (for example, when appropriate municipal obligations are
unavailable) or for temporary defensive purposes during periods of unusual
market conditions in short-term taxable money market instruments, securities
issued by other investment companies which invest in taxable or tax-exempt
money market instruments, U.S. Government obligations, and other securities as
described below under "Other Investment Policies." Investments by the Fund in
any such taxable instruments will not exceed 20% of the net assets of the
Fund, except when made for temporary defensive purposes during periods of
unusual market conditions, when up to 100% of the Fund's assets may be
invested in such instruments. The Fund may also hold uninvested cash reserves
pending investment, to meet anticipated redemption requests, or during
temporary defensive periods.

Although the Fund has the flexibility to invest in municipal obligations
with short, medium or long maturities, the Adviser expects that under normal
market and economic conditions the Fund will invest primarily in obligations
with medium and long maturities.

INTERMEDIATE TAX-EXEMPT BOND FUND

The investment objective of the Intermediate Tax-Exempt Bond Fund is to
seek as high a level of interest income that is exempt from regular federal
tax as is consistent with relative protection of capital. The Fund invests
substantially all of its assets in tax-exempt debt obligations issued by
states, territories and possessions of the United States, the District of
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities ("municipal obligations"), that are rated at
the time of purchase within one of the four highest rating categories assigned
by a Rating Agency. The Fund may also acquire short-term municipal obligations
such as tax-exempt commercial paper, municipal notes, and variable rate demand
obligations that are rated at the time of purchase within the two highest
rating categories assigned by a Rating Agency. Obligations purchased by the
Fund that have not been assigned a rating will be determined by the Adviser to
be of comparable quality. See "Total Return Bond Fund" above for a discussion
of certain risks in investing in debt obligations (including municipal
obligations) rated in the lowest of the four highest rating categories
assigned by a Rating Agency. If a security held by the Fund is downgraded
below the minimum required rating, the Adviser will reassess the
creditworthiness of the security and will consider such an event in
determining whether the Fund should continue to hold that security.

6
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OTHER INVESTMENT POLICIES AND RELATED RISKS

U.S. GOVERNMENT OBLIGATIONS AND MONEY MARKET INSTRUMENTS

Each Fund may invest in securities issued or guaranteed by the U.S.
Government, as well as in obligations issued or guaranteed by U.S. Government
agencies and instrumentalities. Obligations of certain agencies and
instrumentalities, such as those of the Government National Mortgage
Association, are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank, are supported by the issuer's
right to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the entity's obligations; still others, such
as those of the Student Loan Marketing Association, are backed solely by the
issuer's credit. There is no assurance that the U.S. Government would provide
support to a U.S. Government-sponsored entity were it not required to do so by
law.

Each Fund may from time to time invest in money market instruments,
including bank obligations, commercial paper and corporate bonds with
remaining maturities of thirteen months or less. Bank obligations include
bankers' acceptances, negotiable certificates of deposit and non-negotiable
time deposits issued or supported by U.S. or foreign banks that have total
assets of more than $1 billion at the time of purchase. The Funds may invest
in obligations of foreign banks or foreign branches of U.S. banks when the
Adviser determines that the instrument presents minimal credit risks.
Investments in the obligations of foreign banks and foreign branches of U.S.
banks will not exceed 25% of the particular Fund's total assets at the time of
purchase. Taxable commercial paper purchased by the Funds will be rated at the
time of purchase within the highest rating category assigned by a Rating
Agency. In addition, each Fund may acquire unrated commercial paper and
corporate bonds that are determined by the Adviser at the time of purchase to
be of comparable quality. Commercial paper may include variable and floating
rate instruments.

MUNICIPAL OBLIGATIONS

The National Tax-Exempt Bond Fund and the Intermediate Tax-Exempt Bond
Fund (collectively, the "Tax-Exempt Funds") will invest primarily in municipal
obligations. The Equity Income Fund, Equity Growth Fund and Total Return Bond
Fund (collectively, the "Taxable Funds") may also invest from time to time in
municipal obligations. These securities may be advantageous for a Taxable Fund
when, as a result of prevailing economic, regulatory or other circumstances,
the yield of such securities on a pre-tax basis is comparable to that of other
debt securities the Fund can purchase. Dividends paid by a Taxable Fund that
come from interest on municipal obligations will be taxable to shareholders.

The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith, credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other revenue source). A third
type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it draws on a reserve fund, the restoration of
which is not a legal requirement.

7
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Private activity bonds (which are a type of obligation that, although exempt
from regular federal income tax, may be subject to the federal alternative
minimum tax) are usually revenue securities issued by or for public
authorities to finance a privately operated facility.

Within the principal classifications described above there are a variety
of categories, including certificates of participation and custodial receipts
which may be purchased by the Tax-Exempt Funds. Certificates of participation
represent undivided proportional interests in lease payments by a governmental
or non-profit agency. The lease payments and other rights under the lease
provide for and secure the payments on the certificates. Certain lease
obligations may include "non-appropriation" clauses, which provide that the
entity has no obligation to make lease payments in future years unless money
is appropriated for such purpose on a yearly basis. Participation in such
leases presents the risk that an entity will not appropriate funds for lease
payments. For this and other reasons, certificates of participation are
generally not as liquid or marketable as other types of municipal obligations
and are generally valued at par or less than par in the open market. To the
extent that these securities are illiquid, they will be subject to each Tax-
Exempt Fund's 15% limitation on investments in illiquid securities described
below under "Managing Liquidity."

Custodial receipts evidence the right to receive either specific future
interest payments, principal payments or both on certain municipal
obligations. Such obligations are held in custody by a bank on behalf of
holders of the receipts. These custodial receipts are known by various names,
including "Municipal Receipts," "Municipal Certificates of Accrual on Tax-
Exempt Securities" or "M-CATS", and "Municipal Zero-Coupon Receipts."

The Tax-Exempt Funds may also make privately arranged loans to municipal
borrowers. Generally such loans are unrated, in which case they will be
determined by a Fund's Adviser to be of comparable quality at the time of
purchase to rated instruments that may be acquired by the Fund. Such loans may
be secured or unsecured and may have limited marketability or may be
marketable only by virtue of a provision requiring repayment following demand
by the lender. To the extent these securities are illiquid, they will be
subject to each Tax-Exempt Fund's 15% limitation on investments in illiquid
securities.

In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax-exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely
on these opinions and do not intend to review the bases for them.

Municipal obligations purchased by the Funds in some cases may be insured
as to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default
in payment by the issuer. In other cases, municipal obligations may be backed
by letters of credit or guarantees issued by domestic or foreign banks or
other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or
guarantee with respect to a municipal obligation held by a Fund could have an
adverse effect on the Fund's portfolio and the value of its shares. As
described below under "Foreign Securities," foreign letters of credit and
guarantees involve certain risks in addition to those of domestic obligations.

VARIABLE AND FLOATING RATE INSTRUMENTS

Each Fund may purchase variable and floating rate instruments. Because of
the absence of a market in which to resell a variable or floating rate
instrument, a Fund might have trouble selling an instrument should the issuer
default or during periods when the Fund is not permitted by agreement to
demand payment of the instrument, and for this and other reasons a loss could
occur with respect to the instrument.

ASSET-BACKED SECURITIES

The Total Return Bond Fund may purchase asset-backed securities, which are
securities backed by installment sale contracts, credit card receivables or
other assets. The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. The

8
<PAGE>

prepayment rate is primarily a function of current market rates and
conditions. In periods of falling interest rates, the rate of prepayment tends
to increase. During such periods, the reinvestment of prepayment proceeds by
the Fund will generally be at a lower rate than the rate on the prepaid
obligation. Prepayments may also result in some loss of the Fund's principal
investment if any premiums were paid. As a result of these yield
characteristics, some high-yielding asset-backed securities may have less
potential for growth in value than conventional bonds with comparable
maturities. These characteristics may result in a higher level of price
volatility for these assets under certain market conditions.

Asset-backed securities are subject to greater risk of default during
periods of economic downturn than conventional debt instruments and the holder
frequently has no recourse against the entity that originated the security. In
addition, the secondary market for certain asset-backed securities may not be
as liquid as the market for other types of securities, which could result in
the Fund experiencing difficulty in valuing or liquidating such securities.
For these reasons, under certain circumstances, such instruments may be
considered illiquid securities subject to the Fund's 15% limitation on
illiquid investments described below under "Managing Liquidity."

MORTGAGE-RELATED SECURITIES

The Total Return Bond Fund may invest in mortgage-backed securities issued
or guaranteed by U.S. Government agencies and private issuers. Such securities
may include collateralized mortgage obligations ("CMOs") and U.S. Government
stripped mortgage-backed securities ("SMBS").

CMOs are a type of bond issued by non-governmental entities which provide
the holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs frequently
elect to be taxed as a pass-through entity known as a real estate mortgage
investment conduit or REMIC. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date.

SMBS represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only")
on mortgage-backed certificates issued by a U.S. Government agency and
representing interests in pools of mortgage loans. These principal-only or
interest-only distributions are stripped from the underlying mortgage-backed
security by private entities or by the agency that issued the mortgage-backed
certificate.

Mortgage-related securities involve risks similar to those described above
under "Asset-Backed Securities," including prepayment risks. In addition, SMBS
may exhibit greater price volatility and interest rate risk than other types
of mortgage-related securities because of the manner in which their principal
and interest are returned to investors.

REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS

Each Fund may buy portfolio securities subject to the seller's agreement
to repurchase them at an agreed upon date and price. These transactions are
known as repurchase agreements. Repurchase agreements involve the risk that
the seller will fail to repurchase the securities as agreed. In that event,
the Fund will bear the risk of possible loss due to adverse market action or
delays in liquidating the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act.

Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act.

WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS

Each Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Fund to purchase or sell

9
<PAGE>

particular securities with payment and delivery taking place at a future date,
permit the Fund to lock in a price or yield on a security it intends to
purchase or sell, regardless of future changes in interest rates. The Fund
will bear the risk, however, that the price or yield obtained in a transaction
may be less favorable than the price or yield available in the market when the
delivery takes place. When-issued and forward commitment transactions are not
expected to exceed 25% of the value of a Fund's total assets under normal
circumstances. Because a Fund is required to set aside cash or liquid
securities to satisfy these purchase commitments, a Fund's liquidity and
ability to manage its portfolio might be affected during periods in which its
commitments exceed 25% of the value of its assets. The Funds do not intend to
engage in when-issued and forward commitment transactions for speculative
purposes.

STAND-BY COMMITMENTS

Each Fund may acquire stand-by commitments under which a dealer agrees to
purchase certain municipal obligations at a Fund's option at a price equal to
their amortized cost value plus interest. These commitments will be used only
to assist in maintaining a Fund's liquidity and not for trading purposes.

SECURITIES LENDING

Each Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. Although securities
loans will be fully collateralized, such loans present risks of delay in
receiving additional collateral or in recovering the securities loaned or even
a loss of rights in the collateral if the borrower of the securities fails
financially. However, securities loans will be made only to parties the
Adviser deems to be of good standing and will only be made if the Adviser
believes the income to be earned from the loans justifies the risks.

OTHER INVESTMENT COMPANIES

Each Fund may invest in securities issued by other investment companies
which invest in eligible quality, short-term debt securities, whether taxable
or tax-exempt, and which seek to maintain a $1.00 net asset value per share,
i.e., "money market" funds. Such investments will be made by a Fund in
connection with the management of its daily cash position and will be subject
to the requirements of applicable securities laws. When a Fund invests in
another investment company, it pays a pro rata portion of the advisory and
other expenses of that company as one of its shareholders. These expenses are
in addition to the Fund's own expenses.

FOREIGN SECURITIES

There are risks and costs involved in investing in securities of foreign
issuers (including foreign governments), which are in addition to the usual
risks inherent in U.S. investments. Investments in foreign securities may
involve higher costs than investments in U.S. securities, including higher
transaction costs as well as the imposition of additional taxes by foreign
governments. In addition, foreign investments may involve risks associated
with the level of currency exchange rates, less complete financial information
about the issuer, less market liquidity and political instability. Future
political and economic developments, the possible imposition of withholding
taxes on interest income, the possible seizure or nationalization of foreign
holdings, the possible difficulty in taking appropriate legal action in a
foreign court, the possible establishment of exchange controls or the adoption
of other governmental restrictions might adversely affect the payment of
principal and interest on foreign obligations. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.

AMERICAN, EUROPEAN AND GLOBAL DEPOSITORY RECEIPTS

Each Taxable Fund may invest up to 25% of its total assets in ADRs, EDRs,
GDRs and similar securities. ADRs typically are issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
issuer. EDRs, which are sometimes referred to as Continental Depository
Receipts, are receipts issued in Europe typically by non-U.S. banks or trust
companies and foreign branches of U.S. banks that evidence ownership of
underlying foreign or U.S. securities. GDRs are depository receipts structured
like global debt issues to facilitate trading on an international basis. These
instruments may not be denominated in the same currency as the securities they
represent. Investments in ADRs, EDRs and GDRs involve risks similar to those
accompanying direct investments in foreign securities.

10
<PAGE>

FOREIGN CURRENCY EXCHANGE CONTRACTS

Each Taxable Fund may from time to time use foreign currency exchange
contracts to hedge against movements in the value of foreign currencies
(including the European Currency Unit) relative to the U.S. dollar in
connection with specific portfolio transactions or with respect to portfolio
positions. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specified currency at a future date at a price set at
the time of the contract. Foreign currency exchange contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow a Fund to
establish a rate of exchange for a future point in time.

OPTIONS

Each Fund may write covered call options, buy put options, buy call
options and sell, or "write," secured put options on particular securities or
various securities indices. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is the consideration for undertaking the
obligations under the option contract. A put option for a particular security
gives the purchaser the right to sell the underlying security at the stated
exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. In contrast to an option on a
particular security, an option on a securities index provides the holder with
the right to make or receive a cash settlement upon exercise of the option.

Options purchased by a Fund will not exceed 5%, and options written by a
Fund will not exceed 25%, of its net assets. Options may or may not be listed
on a national securities exchange and issued by the Options Clearing
Corporation. Unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation which
performs the obligations of its members if they default.

Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss
of the amounts paid as premiums to the writer of the option. In writing a
covered call option, a Fund gives up the opportunity to profit from an
increase in the market price of the underlying security above the exercise
price (except to the extent the premium represents such a profit). Moreover,
it will not be able to sell the underlying security until the covered call
option expires or is exercised or a Fund closes out the option. In writing a
secured put option, a Fund assumes the risk that the market value of the
security will decline below the exercise price of the option. The use of
covered call and secured put options will not be a primary investment
technique of any Fund.

FUTURES AND RELATED OPTIONS

Each Fund may invest to a limited extent in futures contracts and options
on futures contracts in order to gain fuller exposure to movements of
securities prices pending investment, for hedging purposes or to maintain
liquidity. Futures contracts obligate a Fund, at maturity, to take or make
delivery of certain securities or the cash value of a securities index. A Fund
may not purchase or sell a futures contract (or related option) unless
immediately after any such transaction the sum of the aggregate amount of
margin deposits on its existing futures positions and the amount of premiums
paid for related options is 5% or less of its total assets (after taking into
account certain technical adjustments).

Each Fund may also purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When a Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities
which that Fund intends to purchase. Similarly, if the value of a Fund's
portfolio securities is expected to decline, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.

More information regarding futures contracts and related options can be
found in Appendix B to the Statement of Additional Information.

11
<PAGE>

RIGHTS AND WARRANTS

Each Taxable Fund may invest in rights and warrants to purchase
securities. It is the current intention of each Taxable fund to limit
investment in rights and warrants to no more than 5% of its net assets.

MANAGING LIQUIDITY

Disposing of illiquid investments may involve time-consuming negotiations
and legal expenses, and it may be difficult or impossible to dispose of such
investments promptly at an acceptable price. Additionally, the absence of a
trading market can make it difficult to value a security. For these and other
reasons the Funds will not knowingly invest more than 15% of the value of
their respective net assets in illiquid securities. Illiquid securities
include repurchase agreements and time deposits that do not permit a Fund to
terminate them after seven days' notice, restricted securities and other
securities for which market quotations are not readily available. Certain
securities that might otherwise be considered illiquid, however, such as some
issues of commercial paper and variable amount master demand notes with
maturities of nine months or less and securities for which the Adviser has
determined pursuant to guidelines adopted by the Company's Board of Directors
that a liquid trading market exists (including certain securities that may be
purchased by institutional investors under SEC Rule 144A) are not subject to
this limitation. Investments in Rule 144A securities could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers were no longer interested in purchasing these restricted
securities.

RISK FACTORS ASSOCIATED WITH DERIVATIVE INSTRUMENTS

Each Fund may purchase certain "derivative" instruments as described above
under various headings. Derivative instruments are instruments that derive
value from the performance of underlying assets, interest or currency exchange
rates, or indices, and include, but are not limited to, futures contracts,
options, forward foreign currency contracts, participation certificates,
custodial receipts, and structured debt obligations (including collateralized
mortgage obligations and other types of asset-backed securities, "stripped"
securities and various floating rate instruments).

Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument will not correlate exactly to the value of
the underlying assets, rates or indices on which it is based; and operations
risk that loss will occur as a result of inadequate systems and controls,
human error or otherwise. Some derivative instruments are more complex than
others, and for those instruments that have been developed recently, data are
lacking regarding their actual performance over complete market cycles.

The Adviser will evaluate the risks presented by the derivative
instruments purchased by a Fund, and will determine, in connection with its
day-to-day management of the Fund, how they will be used in furtherance of the
Fund's investment objective. It is possible, however, that the Adviser's
evaluations will prove to be inaccurate or incomplete and, even when accurate
and complete, it is possible that a Fund will, because of the risks discussed
above, incur loss as a result of its investments in derivative instruments.

OTHER RISK CONSIDERATIONS

As with an investment in any mutual fund, an investment in the Funds
entails market and economic risks associated with investments generally.
However, there are certain specific risks of which you should be aware.

Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
recognize that in periods of declining interest rates the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and in periods of rising interest rates the market value will
tend to decrease. You should also recognize that in periods of declining
interest rates, the yields of investment portfolios comprised primarily of
fixed income securities will

12
<PAGE>

tend to be higher than prevailing market rates and, in periods of rising
interest rates, yields will tend to be somewhat lower. Each Tax-Exempt Fund
may purchase zero-coupon bonds (i.e., discount debt obligations that do not
make periodic interest payments). Zero-coupon bonds are subject to greater
market fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest. Debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also affect
the value of these investments. Fluctuations in the market value of fixed
income securities subsequent to their acquisition will not affect cash income
from such securities but will be reflected in a Fund's net asset value.

Each Tax-Exempt Fund may invest in municipal obligations that are private
activity bonds the interest on which is subject to the federal alternative
minimum tax. Investments in such securities will be subject to a Fund's 20%
limitation on taxable investments. Although neither Tax-Exempt Fund presently
intends to do so on a regular basis, each Fund may invest 25% or more of its
assets in industrial development bonds issued before August 7, 1986 that are
not subject to the federal alternative minimum tax, and in municipal
obligations the interest on which is paid solely from revenues of similar
projects. When a Tax-Exempt Fund's assets are concentrated in obligations
payable from revenues on similar projects or in industrial development bonds,
the Fund will be subject to the particular risks (including legal and economic
conditions) presented by such securities to a greater extent than it would be
if its assets were not so concentrated. Furthermore, payment of municipal
obligations held by a Tax-Exempt Fund relating to certain projects may be
secured by mortgages or deeds of trust. In the event of a default, enforcement
of a mortgage or deed of trust may be delayed and the amount of the proceeds
received may not be enough to pay the principal and accrued interest on the
defaulted municipal obligations.

PORTFOLIO TURNOVER

A Fund may sell a portfolio security soon after it is purchased if the
Adviser believes that a sale is consistent with the Fund's investment
objective. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses, tax consequences
(including the possible realization of additional taxable capital gains and
income) and other transaction costs, which must be borne directly by the Fund
involved and ultimately by its shareholders. Although no Fund can accurately
predict its annual portfolio turnover rate, it is not expected to exceed 100%
for any of the Funds.

FUNDAMENTAL LIMITATIONS

Each Fund's investment objective discussed above may be changed by the
Company's Board of Directors without shareholder approval, although
shareholders will be given at least 30 days' written notice before such a
change occurs. Unless otherwise noted, each Fund's investment policies
discussed above also may be changed by the Company's Board of Directors
without shareholder approval. However, each Fund also has in place certain
investment limitations that are "fundamental," which means that they may not
be changed for a Fund without the approval of a majority of that Fund's
outstanding shares. Some of these fundamental limitations are summarized
below, and all of the Funds' fundamental limitations are set out in full in
the Statement of Additional Information.

1. A Fund may not purchase securities (with certain exceptions,
including U.S. Government securities) if more than 5% of its total assets
will be invested in the securities of any one issuer, except that up to 25%
of the total assets of each Fund can be invested without regard to this 5%
limitation.

2. A Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same
industry, subject to certain exceptions.

3. A Fund may not borrow money except for temporary purposes in amounts
up to 10% of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Fund's total assets, the Fund will not make any
further investments.

13
<PAGE>

If a percentage limitation set forth above is met at the time an investment
is made, a subsequent change in that percentage resulting from a change in
value of a Fund's portfolio securities does not mean that the limitation has
been violated.

INVESTING IN THE FUNDS

GETTING YOUR INVESTMENT STARTED

Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services Limited Partnership (called the "Distributor"). The
Distributor's principal offices are located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035.

Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks and customers of affiliates of State Street Bank and
Trust Company (referred to as the "Banks") may purchase Fund shares through
their qualified accounts at such Banks and should contact the Banks directly
for appropriate purchase instructions. Should you wish to establish an account
directly through the Company, please refer to the purchase options described
under "Opening and Adding to Your Fund Account."

Payments for Fund shares must be in U.S. dollars and should be drawn on a
U.S. bank. Please remember that the Company reserves the right to reject any
purchase order, including purchase orders accompanied by foreign and third
party checks.

HOW TO BUY FUND SHARES

MINIMUM INVESTMENTS

Each Fund generally requires a $25,000 minimum initial investment.
Subsequent investments must be a minimum of $100. The minimum investment
requirements do not apply to purchases by Banks acting on behalf of their
customers and the Banks do not impose a minimum initial or subsequent
investment requirement for shares purchased on behalf of their customers. The
Company reserves the right to waive these minimums in other instances.

OPENING AND ADDING TO YOUR FUND ACCOUNT

Direct investments in the Funds may be made in a number of different ways,
as shown in the following chart. Simply choose the method that is most
convenient for you. Any questions you have may be answered by calling 1-800-
551-2145. As described above under "Getting Your Investment Started," you may
also purchase Fund shares through the Banks.

TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
------------------ --------------------

BY MAIL . Complete a Purchase . Make your check payable to
Application and mail it the particular Fund in
along with a check payable which you are investing
to the particular Fund you and mail it to the address
want to invest in to: at left.

M.S.D. & T. Funds, Inc. . Please include your
P.O.Box 8515 account number on your
Boston, MA 02266-8515. check.

To obtain a Purchase
Application, call 1-800-
551-2145

14
<PAGE>

- -------------------------------------------------------------------------------
BY WIRE . Before wiring funds, . Instruct your bank to wire
please call 1-800-551-2145 Federal funds to: State
for complete wiring Street Bank and Trust
instructions. Company, Boston,
Massachusetts, Bank Routing
No. 011-0000-28, M.S.D. &
T. Deposit A/C No.
99046435.

. Promptly complete a
Purchase Application and
forward it to:

M.S.D. & T. Funds, Inc. P.O. . Be sure to include your
Box 8515 Boston, MA 02266- name and your Fund account
8515 number.

. The wire should indicate
that you are making a
subsequent purchase as
opposed to opening a new
account.
Consult your bank for information on remitting funds by
wire and associated bank charges.

YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC
INVESTMENTS, EXCHANGES AND DIRECTED REINVESTMENTS, TO
INVEST IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION
BELOW ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.

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

EXPLANATION OF SALES PRICE

The public offering price for shares of a Fund is based upon net asset
value per share. A Fund will calculate its net asset value per share by adding
the value of a Fund's investments, cash and other assets, subtracting the
Fund's liabilities, and then dividing the result by the number of shares of
the Fund that are outstanding. This process is sometimes referred to as
"pricing" a Fund's shares.

The assets of the Funds are valued at market value or, if market quotes
cannot be readily obtained, at fair value as determined by the Adviser under
the supervision of the Company's Board of Directors. Debt securities held by
the Funds that have sixty days or less until they mature are valued at
amortized cost, which generally approximates market value. More information
about valuation can be found in the Funds' Statement of Additional
Information, which you may request by calling 1-800-551-2145.

Net asset value is computed as of the close of regular trading hours on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
Time) each weekday, with the exception of those holidays on which the Federal
Reserve Bank of Cleveland, the purchasing Bank (if applicable), the Funds'
Adviser, transfer agent or custodian or the Exchange is closed. The Funds
currently observe the following holidays: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.

Shares of the Funds are sold at the public offering price per share next
computed after receipt of a purchase order by State Street Bank and Trust
Company, the Funds' transfer agent (the "Transfer Agent"). Purchase orders
will be accepted by the Transfer Agent only on a day on which the shares of a
Fund are priced ("Business Day").

If you purchase shares of a Fund through a Bank, the Bank is responsible
for transmitting your purchase order and required funds to the Transfer Agent
on a timely basis. If the Transfer Agent receives your purchase order from a
Bank on a Business Day prior to the close of regular trading hours (currently
4:00 P.M. Eastern Time) on the Exchange, your Fund shares will be purchased at
the public offering price calculated at the close of regular trading hours on
that day provided that the Fund's custodian receives payment on the next
Business Day in immediately available funds. If such payment is not received
on the next Business Day, the Bank which submitted the order will be notified
that the order has not been accepted.

If you purchase shares of a Fund directly through the Company and if your
purchase order, in proper form and accompanied by payment, is received by the
Transfer Agent on a Business Day prior to the close of regular trading hours
on the Exchange, your Fund shares will be purchased at the public offering
price calculated at the

15
<PAGE>

close of regular trading hours on that day. Otherwise, your Fund shares will
be purchased at the public offering price next calculated after the Transfer
Agent receives your purchase order in proper form with the required payment.

On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business
Day.

HOW TO SELL FUND SHARES

You can arrange to get money out of your Fund account by selling some or
all of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares
by any of the methods described below.

TO REDEEM SHARES

BY MAIL . Send a written request to M.S.D. & T. Funds,
Inc., P.O. Box 8515, Boston, MA 02266-8515.

. Your written request must
--be signed by each account holder;
--state the number or dollar amount of shares
to be redeemed and identify the specific
Fund;
--include your account number.

. Signature guarantees are required
--for any redemption requests over $100,000;
--for any redemption request where the
proceeds are to be sent to someone other
than the shareholder of record or to an
address other than the address of record.

- -------------------------------------------------------------------------------
BY WIRE . Call 1-800-551-2145. You will need to provide
(available only if you the account name, account number, name of
checked the appropriate Fund and amount of redemption ($1,000 minimum
box on the Purchase per transaction).
Application)
. If you have already opened your account and
would like to have the wire redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.

. To change bank instructions, send a written
request to the above address. The request
must be signed (and signatures guaranteed) by
each account owner.

- -------------------------------------------------------------------------------
BY TELEPHONE . Call 1-800-551-2145. You will need to provide
(available only if you the account name, account number, name of
checked the appropriate Fund and amount of redemption.
box on the Purchase
Application) . If you have already opened your account and
would like to add the telephone redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.

16
<PAGE>

OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
SYSTEMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER
TO THE SECTION BELOW ENTITLED "SHAREHOLDER SERVICES" FOR
MORE INFORMATION.

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

EXPLANATION OF REDEMPTION PRICE

Redemption orders received in proper form by the Transfer Agent are
processed at their net asset value per share next determined after receipt. On
a Business Day when the Exchange closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the time at which
redemption orders must be received in order to be processed on that Business
Day.

Redemption proceeds generally will be wired or sent to the shareholder(s)
of record within three Business Days after receipt of the redemption order.
However, the Company reserves the right to wire or send redemption proceeds
within seven days after receiving the redemption order if the Adviser believes
that earlier payment would adversely affect the Company. If you purchased your
shares directly through the Company, your redemption proceeds will be sent by
check unless you otherwise direct the Company or the Transfer Agent. The
Automated Clearing House ("ACH") system may also be utilized for payment of
redemption proceeds. In unusual circumstances, the Company may pay redemption
proceeds in readily marketable portfolio securities having a market value
equal to the redemption price.

Banks are responsible for transmitting their customers' redemption orders
to the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the
customer may be obliged to redeem some or all of the Fund shares held in the
account in order to maintain the required minimum balance.

The Company imposes no charge when you redeem shares. The value of the
shares you redeem may be more or less than your cost, depending on a Fund's
current net asset value.

OTHER PURCHASE AND REDEMPTION INFORMATION

Federal regulations require that you provide a certified taxpayer
identification number whenever you open or reopen an account.

Shareholders who purchased Fund shares directly through the Company should
note that if an account balance falls below $500 as a result of redemptions
and is not increased to at least $500 within 60 days after notice, the account
may be closed and the proceeds sent to the shareholder.

If you purchased shares by wire, you must file a Purchase Application with
the Transfer Agent before any of those shares can be redeemed. You should
contact your bank for information about sending and receiving funds by wire,
including any charges by your bank for these services. The Company may decide
at any time to change the minimum amount per transaction for redemption of
shares by wire or to no longer permit wire redemptions.

You may choose to initiate certain transactions by telephone. The Company
and its agents will not be responsible for any losses resulting from
unauthorized transactions when reasonable procedures to verify the identity of
the caller are followed. To the extent that the Company does not follow such
procedures, it and/or its agents may be responsible for any unauthorized
transactions.

The Company reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by the Company at any time. It may be
difficult to reach the Company by telephone during periods of unusual market
activity. If this happens, you may redeem your shares by mail as described
above.

17
<PAGE>

The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.

Certain redemption requests and other communications with the Company
require a signature guarantee. Signature guarantees are designed to protect
both you and the Company from fraud. To obtain a signature guarantee you
should visit a financial institution that participates in the Stock Transfer
Agents Medallion Program ("STAMP"). Guarantees must be signed by an authorized
person at one of these institutions and be accompanied by the words "Signature
Guaranteed." A notary public cannot provide a signature guarantee.

SHAREHOLDER SERVICES

The Company provides a variety of ways to make managing your investments
more convenient. Some of these options require you to request them on the
Purchase Application or you may request them after opening an account by
calling 1-800-551-2145. Except for retirement plans, these options are
available only to shareholders who purchase their Fund shares directly through
the Company.

RETIREMENT PLANS

Shares of each Taxable Fund may be purchased in connection with certain
tax-sheltered retirement plans, including individual retirement accounts.
Shares may also be purchased in connection with profit-sharing plans, section
401(k) plans, money purchase pension plans and target benefit plans. Further
information about how to participate in these plans, the fees charged, the
limits on contributions and the services available to participants in such
plans can be obtained from the Company. To invest through any tax-sheltered
retirement plan, please call the Company at 1-800-551-2145 for information and
the required separate application. You should consult with a tax adviser to
determine whether a tax-sheltered retirement plan is available and/or
appropriate for you.

EXCHANGE PRIVILEGE

Shares of a Fund may be exchanged for shares of another Fund or for shares
of one of the other portfolios offered by the Company. You may exchange shares
by mail at the address provided above under "How To Buy Shares--Opening and
Adding to Your Fund Account" or by telephone at 1-800-551-2145. If you are
opening a new account in a different Fund or portfolio by exchange, the
exchanged shares must be at least equal in value to the minimum investment for
the Fund or portfolio in which the account is being opened.

You should read the prospectus for the Fund or portfolio into which you
are exchanging. Exchanges will be processed only when the shares being offered
can legally be sold in your state. Exchanges may have tax consequences for
you. Consult your tax adviser for further information.

To elect the exchange privilege after you have opened a Fund account, or
for further information about the exchange privilege, call 1-800-551-2145. The
Company reserves the right to reject any exchange request. The Company may
modify or terminate the exchange privilege, but will not materially modify or
terminate it without giving shareholders 60 days' notice.

AUTOMATIC INVESTMENT PLAN

One easy way to pursue your financial goals is to invest money regularly.
The Company offers an Automatic Investment Plan--a convenient service that
lets you transfer money from your bank account into your Fund account
automatically on a regular basis. At your option, your bank account will be
debited in a particular amount ($100 minimum) that you have specified, and
Fund shares will automatically be purchased on the 15th day of each month or,
if that day is not a Business Day, on the preceding Business Day. Your bank
account must be maintained at a domestic financial institution that is an ACH
member. You will be responsible for any loss or expense to the Funds if an ACH
transfer is rejected. To select this option, or for more information, please
call 1-800-551-2145.

18
<PAGE>

The Automatic Investment Plan is one means by which you may use "Dollar
Cost Averaging" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Funds whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is
invested in Fund shares at predetermined intervals. This may help you to
reduce your average cost per share because the agreed upon fixed investment
amount allows more shares to be purchased during periods of lower share prices
and fewer shares during periods of higher prices. In order to be effective,
Dollar Cost Averaging should usually be followed on a sustained, consistent
basis. You should be aware, however, that shares bought using Dollar Cost
Averaging are made without regard to their price on the day of investment or
to market trends. In addition, while you may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if you ultimately redeem your shares at
a price which is lower than their purchase price.

SYSTEMATIC WITHDRAWALS

The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last Business Day of the period you select and distributed in cash or
reinvested in shares of another Fund or portfolio offered by the Company. To
elect this option, or for more information, please call 1-800-551-2145.

DIRECTED REINVESTMENTS

Generally, dividends and capital gain distributions are automatically
reinvested in shares of the Fund from which the dividends and distributions
are paid. You may elect, however, to have your dividends and capital gain
distributions automatically reinvested in shares of another Fund or portfolio
offered by the Company. To elect this option, or for more information, please
call 1-800-551-2145.

DIVIDENDS AND DISTRIBUTIONS

Shareholders receive dividends and net capital gain distributions. Dividends
for each Fund are derived from its net investment income. A Fund realizes
capital gains whenever it sells securities for a higher price than it paid for
them.

Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank,
your dividends and distributions will be paid in cash and wired to your Bank.
If you purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the
Fund on which the dividend or distribution was declared unless you notify the
Company in writing that you wish to receive dividends and/or distributions in
cash. If you have elected to receive dividends and/or distributions in cash
and the postal or other delivery service is unable to deliver checks to your
address of record, you will be deemed to have rescinded your election to
receive dividends and/or distributions in cash and your dividends and
distributions will be automatically reinvested in additional shares. No
interest will accrue on amounts represented by uncashed dividend and/or
distribution checks.

DISTRIBUTION SCHEDULE

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

<TABLE>
<CAPTION>
FUND DIVIDENDS CAPITAL GAINS
- ---- --------- -------------
<S> <C> <C>
Equity Income and Declared and paid monthly. Declared and paid annually.
Equity Growth

Total Return Declared daily and paid monthly. Declared and paid annually.
Bond,
National Tax-
Exempt Bond and
Intermediate Tax-
Exempt Bond
</TABLE>

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

19
<PAGE>

TAX INFORMATION

As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
your own tax situation, including the applicability of any state and local
taxes. You will be advised at least annually regarding the federal tax
treatment of dividends and distributions paid to you.

FEDERAL

Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Fund qualifies, it generally will be relieved of federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise
exempt, will pay income or capital gains taxes on distributions (except
distributions that are "exempt interest dividends" or are treated as a return
of capital), regardless of whether the distributions are paid in cash or
reinvested in additional shares.

Distributions paid out of a Fund's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of any Fund,
and out of the portion of such net capital gain that constitutes mid-term
capital gain, will be taxed to shareholders as long-term capital gain or mid-
term capital gain as the case may be, regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.

Dividends paid by the Equity Income and Equity Growth Fund will be
eligible for the dividends received deduction allowed to certain corporations
only to the extent of the total qualifying dividends received by a Fund from
domestic corporations for a taxable year. Corporate shareholders will have to
take into account the entire amount of any dividend received in making certain
adjustments for federal alternative minimum tax purposes. The dividends
received deduction is not available for capital gain dividends.

Each Tax-Exempt Fund intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the
receipt of "exempt interest dividends" on their federal income tax returns,
and in two circumstances such amounts, while exempt from regular federal
income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute
an item of tax preference for corporate and non-corporate taxpayers in
determining alternative minimum tax and environmental tax liability. Second,
"exempt interest dividends" must be taken into account by corporate taxpayers
in determining certain adjustments for alternative minimum tax purposes.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should note that "exempt interest dividends" will be taken into
account in determining the taxability of their benefit payments.

Each Tax-Exempt Fund will determine annually the percentages of its net
investment income which are exempt from the regular federal income tax, which
constitute an item of tax preference for federal alternative minimum tax
purposes, and which are fully taxable. These percentages will apply uniformly
to all distributions declared from net investment income during that year and
may differ significantly from the actual percentages for any particular day.

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

An investor considering buying shares on or just before a dividend record
date should be aware that the amount of the forthcoming dividend payment,
although in effect a return of capital, will be taxable.

A taxable gain or loss may be realized by a shareholder upon the
redemption or transfer of shares depending upon their tax basis and their
price at the time of redemption or transfer.

Any loss upon the sale or exchange of shares held for six months or less
will be disallowed for federal income tax purposes to the extent of any exempt
interest dividends received by the shareholder.

20
<PAGE>

This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Funds. Except as discussed below, dividends paid by each Fund may be taxable
to investors under state or local law as dividend income even though all or a
portion of the dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Fund. Shareholders who are non-resident
alien individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to different U.S. federal income tax treatment.

MANAGEMENT OF THE COMPANY

The business of the Company is managed under the general supervision of
the Company's Board of Directors. The Statement of Additional Information
contains information about the Board of Directors.

The Company has also employed a number of professionals to provide
investment management and other important services to the Funds. Mercantile-
Safe Deposit and Trust Company ("Mercantile") serves as the Funds' investment
adviser and administrator and has its principal offices at Two Hopkins Plaza,
Baltimore, Maryland 21201. BISYS Fund Services Limited Partnership, a wholly-
owned subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035, is the registered broker-dealer that sells the
Funds' shares, and BISYS Fund Services Ohio, Inc., also a wholly-owned
subsidiary of The BISYS Group, Inc. and located at the same address, provides
fund accounting services to the Funds. The Funds also have a custodian, The
Fifth Third Bank, located at 38 Fountain Square Plaza, Cincinnati, Ohio 45263,
and a transfer and dividend disbursing agent, State Street Bank and Trust
Company, located at Two Heritage Drive, North Quincy, Massachusetts 02171.

INVESTMENT ADVISER

Mercantile is the lead bank of Mercantile Bankshares Corporation, a multi-
bank holding company organized in Maryland in 1969. Mercantile manages the
investment portfolios of the Funds, including selecting portfolio investments
and making purchase and sale orders. Mercantile and its predecessors have been
in the business of managing the investments of fiduciary and other accounts in
the Baltimore area since 1864. As of June 30, 1997, Mercantile had
approximately $11.4 billion in assets under active management.

A Fund's portfolio manager is primarily responsible for the day-to-day
management of a Fund's investments.

. The organizational arrangements of Mercantile require that all investment
decisions with respect to the Equity Income Fund and Equity Growth Fund be
made by a committee, and no one person is primarily responsible for making
recommendations to that committee. The committee members are:

. George S. Michaels, C.F.A., Senior Vice President of Mercantile, has
managed institutional equity portfolios at Mercantile during the past
twenty-nine years.

. J. Patrick Bradley, Senior Vice President of Mercantile, is responsible
for economic analysis and security selection at Mercantile. In addition,
he is Chairman of the Investment Strategy Committee at Mercantile. Mr.
Bradley has been at Mercantile since 1997. Prior to joining Mercantile,
he was the Director of Economic and Investment Research at PNC Bank. Mr.
Bradley has sixteen years of investment experience.

. Glenn E. Ross, Senior Vice President of Mercantile, has been responsible
for quantitative analysis on equity securities at Mercantile during the
past sixteen years.

. Charles W. Brooks, Jr., C.F.A., Vice President of Mercantile, is
responsible for the management of equity selection at Mercantile. Mr.
Brooks has been at Mercantile since 1993. Prior to joining Mercantile, he
was Vice President at Robert Torray and Company. Mr. Brooks has thirty-
five years of investment experience.

21
<PAGE>

. Charles G. Rishell, C.F.A., Vice President of Mercantile, has been
responsible for the management of institutional equity portfolios during
the past twenty one years.

. J. Jordan Schlick, C.F.A., Assistant Vice President of Mercantile, is
responsible for equity security analysis. Mr. Schlick has been at
Mercantile since 1994. Prior to joining Mercantile, he was a Portfolio
Manager at First Maryland Bancorp. Mr. Schlick has 10 years of investment
experience.

. The Total Return Bond Fund is managed by Kevin J. Dachille, Senior Vice
President of Mercantile. During the past nineteen years, Mr. Dachille has
managed institutional fixed income portfolios at Mercantile, including
pension plans, endowment funds and self-insurance funds.

. The organizational arrangements of Mercantile require that all investment
decisions with respect to the National Tax-Exempt Bond Fund and Intermediate
Tax-Exempt Bond Fund be made by a committee, and no one person is primarily
responsible for making recommendations to that committee.

ADMINISTRATOR

Mercantile also serves as the Funds' administrator and generally assists
in all aspects of their operation and administration, including maintaining
the Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.

EXPENSES

The Funds incur certain expenses in order to support the services
described above, as well as other matters essential to the operation of the
Funds. Expenses are paid out of a Fund's assets and thus are reflected in the
Fund's dividends and net asset value, but they are not billed directly to you
or deducted from your account.

In its capacity as investment adviser, Mercantile is entitled to advisory
fees that are calculated daily and paid monthly at the annual rates of .60% of
the average daily net assets of the Equity Income Fund, .60% of the average
daily net assets of the Equity Growth Fund, .35% of the average daily net
assets of the Total Return Bond Fund, .50% of the average daily net assets of
the National Tax-Exempt Bond Fund, and .50% of the average daily net assets of
the Intermediate Tax-Exempt Bond Fund.

In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of
.125% of the average daily net assets of each Fund.

The Funds also bear other operating expenses in connection with their
operations, including organizational costs; taxes; interest; fees (including
fees paid to the Company's directors and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; charges of
the custodian, transfer agent and fund accountant; certain insurance premiums;
outside auditing and legal expenses; fees of independent pricing services;
costs of shareholders' reports and shareholder meetings; fees of industry
organizations such as the Investment Company Institute; and any extraordinary
expenses. The Funds also pay for brokerage fees and commissions, if any, in
connection with the purchase of their portfolio securities.

FEE WAIVERS

Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Mercantile and the Funds' other service providers. The
amount of the fee waivers may be changed at any time at the sole discretion of
Mercantile with respect to advisory and administration fees, and by the Funds'
other service providers, with respect to all other fees. As to any amounts
voluntarily waived or reimbursed, the service providers retain the ability to
be reimbursed by a Fund for such amounts prior to fiscal year-end. Such
waivers and reimbursements would increase the return to investors when made
but would decrease the return if a Fund were required to reimburse a service
provider.

22
<PAGE>

OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES

The Company was incorporated in Maryland on March 7, 1989 and is a mutual
fund of the type known as an "open-end management investment company." The
Company's charter authorizes the Board of Directors to issue up to
10,000,000,000 full and fractional shares of capital stock ($.001 par value
per share) and to classify or reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Board of Directors has
authorized the issuance of one class of shares in each Fund. The Board of
Directors has also authorized the issuance of additional classes of shares
representing interests in other investment portfolios of the Company. For
information regarding these other portfolios, call 1-800-551-2145.

Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the Investment Company Act or other applicable law.

PERFORMANCE REPORTING

Performance information provides you with a method of measuring and
monitoring your investments. This section will help you to understand the
various terms that are commonly used to describe a Fund's performance. You may
see references to these terms in newsletters, advertisements and shareholder
communications. These publications may also include comparisons of a Fund's
performance to the performance of various indices and investments for which
reliable performance data are available and to averages, performance rankings
or other information compiled by recognized mutual fund statistical services.

. Aggregate total return reflects the total percentage change in the
value of an investment in a Fund over a specified measuring period.

. Average annual total return represents the average annual percentage
change in the value of an investment in a Fund over a specified
measuring period. It is calculated by taking the aggregate total
return for the measuring period and determining what constant annual
return would have produced the same aggregate return. Average annual
returns for more than one year tend to smooth out variations in a
Fund's return and are not the same as actual annual results.

Both methods of calculating total return assume that during the
period you have reinvested Fund dividends and distributions in
additional Fund shares.

. Yield shows the rate of income a Fund earns on its investments as a
percentage of its share price. It is calculated by dividing the
Fund's net investment income for a 30-day period by the product of
the average daily number of shares entitled to receive dividends and
the Fund's net asset value per share at the end of the 30-day
period. The result is then annualized. This represents the amount
you would earn if you remained invested in a Fund for a year and the
Fund continued to have the same yield for the year. Yield does not
include changes in net asset value.

. Tax-Equivalent Yield of each Tax-Exempt Fund shows the level of
taxable yield needed to produce an after-tax yield equivalent to the
Fund's tax-free yield. It is calculated by increasing Fund's yield
by the amount necessary to reflect the payment of federal income
taxes at a stated tax rate. A Tax-Exempt Fund's tax-equivalent yield
will always be higher than its yield.

Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield
and/or total return.

Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that
your shares, when redeemed, may be worth more or less than their original
cost. Since

23
<PAGE>

performance will fluctuate, you cannot necessarily compare an investment in
Fund shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time.

MISCELLANEOUS

As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Company or a particular Fund, with respect to the
approval of the Fund's investment advisory agreement or a change in a
fundamental investment policy of the Fund, means the affirmative vote of the
lesser of (a) 50% or more of the outstanding shares of the Company or such
Fund or (b) 67% or more of the shares of the Company or such Fund present at a
meeting if more than 50% of the outstanding shares of the Company or such Fund
are represented at the meeting in person or by proxy.

The Company or your Bank will send you a statement of your account
quarterly and a confirmation after every transaction that affects your share
balance or your account registration. A statement with tax information will be
mailed to you by January 31 of each year and filed with the Internal Revenue
Service. At least twice a year, you will receive financial statements in the
form of Annual and Semi-Annual Reports of the Funds.

If you have any questions concerning the Company or any of the Funds,
please call 1-800-551-2145.

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE COMPANY, THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

24
<PAGE>

M.S.D. & T. FUNDS, INC.

Statement of Additional Information
for the
Equity Income Fund
Equity Growth Fund
Total Return Bond Fund
National Tax-Exempt Bond Fund
Intermediate Tax-Exempt Bond Fund

February 18, 1998

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>

Page
----
<S> <C>

Investment Objectives and Policies.............. 3
Fundamental Limitations......................... 23
Additional Purchase and Redemption Information.. 25
Net Asset Value................................. 26
Additional Information Concerning Taxes......... 27
Management of the Company....................... 32
Independent Accountants......................... 38
Counsel......................................... 38
Additional Information Concerning Shares........ 38
Additional Performance Information.............. 40
Miscellaneous................................... 45
Appendix A...................................... A-1
Appendix B...................................... B-1

</TABLE>

This Statement of Additional Information is meant to be read in
conjunction with M.S.D. & T. Funds, Inc.'s Prospectus dated February 18, 1998
(the "Prospectus") for the Equity Income Fund, Equity Growth Fund, Total Return
Bond Fund, National Tax-Exempt Bond Fund and Intermediate Tax-Exempt Bond Fund.
This Statement of Additional Information is incorporated by reference in its
entirety into the Prospectus. Because this Statement of Additional Information
is not itself a prospectus, no investment in shares of any Fund should be made
solely upon the information contained herein. Copies of the Prospectus may be
obtained by

-1-
<PAGE>

calling 1-800-551-2145 or by writing M.S.D. & T. Funds, Inc., c/o BISYS Fund
Services Limited Partnership, 3435 Stelzer Road, Columbus, OH 43219-3035.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.

Shares of the Funds are not bank deposits or obligations of, or guaranteed,
endorsed or otherwise supported by, Mercantile-Safe Deposit and Trust Company,
its parent company or its affiliates, and such shares are not federally insured
or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other governmental agency. Investment in the
Funds involves investment risks, including possible loss of principal. In
addition, the dividends paid by the Funds will go up and down. Mercantile-Safe
Deposit and Trust Company serves as investment adviser and administrator to the
Funds, is paid fees for its services, and is not affiliated with BISYS Fund
Services Limited Partnership, the Funds' distributor.

-2-
<PAGE>

M.S.D. & T FUNDS, INC.

M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. The Company currently offers shares
in four short-term money market portfolios (the Prime Money Market Fund,
Government Money Market Fund, Tax-Exempt Money Market Fund and Tax-Exempt Money
Market Fund (Trust), five equity portfolios (the Growth & Income Fund, Equity
Income Fund, Equity Growth Fund, International Equity Fund and Diversified Real
Estate Fund); and five bond portfolios (the Limited Maturity Bond Fund, Total
Return Bond Fund, National Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond
Fund and Maryland Tax-Exempt Bond Fund).

This Statement of Additional Information relates only to the Equity
Income Fund, Equity Growth Fund, Total Return Bond Fund, National Tax-Exempt
Bond Fund and Intermediate Tax-Exempt Bond Fund (individually, a "Fund" and
collectively, the "Funds").

INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------

The investment objective of each Fund is described in the Prospectus.
The following information supplements the description of the Funds' investment
objectives and policies as set forth in the Prospectus.

Portfolio Transactions and Turnover
- -----------------------------------

Subject to the general supervision and approval of the Company's Board
of Directors, Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for each Fund.

Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed.

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

-3-
<PAGE>

Securities purchased and sold by the Total Return Bond, National Tax-
Exempt Bond and Intermediate Tax-Exempt Bond Funds are generally traded on a net
basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. The cost of securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down.

Each Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
A Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.

In making portfolio investments, the Adviser seeks to obtain the best
net price and the most favorable execution of orders. The Adviser may, in its
discretion, effect transactions in portfolio securities with dealers who provide
research advice or other services to the Funds or the Adviser. The Adviser is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any Fund which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Adviser determines in good faith
that such commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Adviser's overall responsibilities to
the particular Fund and to the Company. Such brokerage and research services
might consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their comparative
earnings and yields, or broad overviews of the stock, bond and government
securities markets and the economy.

Supplementary research information so received (if any) is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Funds. The Board of Directors
will periodically review the commissions paid by the Funds to consider whether
the commissions paid over representative periods of time appear to be reasonable
in relation to the benefits inuring to the Funds. It is possible that certain
of the supplementary research or other services received will primarily benefit
one or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.

-4-
<PAGE>

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

The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, CastleInternational Asset Management
Limited (the sub-adviser to the Company's International Equity Fund), BISYS Fund
Services Limited Partnership ("BISYS") or any affiliated person (as such term is
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of
any of them, except to the extent permitted by the 1940 Act or the Securities
and Exchange Commission (the "SEC"). Under certain circumstances, the Funds may
be at a disadvantage because of these limitations in comparison with other
investment companies which have similar investment objectives but are not
subject to such limitations.

The Company's investment portfolios, including the Funds, may from
time to time purchase securities issued by the Company's regular broker/dealers.
At the close of the Company's most recent fiscal year, none of the Company's
investment portfolios held any such securities.

The ratings assigned by each unaffiliated nationally recognized
statistical rating agency (each a "Rating Agency") represent their opinions as
to the quality of debt securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a
Fund, a rated security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Adviser will consider
such an event in determining whether the Fund should continue to hold the
security in accordance with the interests of the Fund and applicable regulations
of the SEC.

-5-
<PAGE>

The portfolio turnover rate for each Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less.

Under certain market conditions, the Funds may experience high
portfolio turnover rates as a result of their investment strategies. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. Higher portfolio turnover rates can result
in corresponding increases in brokerage commissions and other transaction costs
which must be borne by the Fund involved and ultimately by its shareholders.

Portfolio turnover rates for the Funds may vary greatly from year to
year as well as within a particular year, and may be affected by cash
requirements for redemption of shares and by requirements which enable the Funds
to receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions for the Funds, and each Fund may engage in
short-term trading to achieve its investment objective.

Additional Information on Investment Policies
- ---------------------------------------------

Government Obligations
----------------------

Examples of the types of U.S. Government obligations that may be
acquired by the Funds include, in addition to U.S. Treasury bonds, notes, and
bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Tennessee Valley Authority, Washington D.C. Armory Board, International Bank for
Reconstruction and Development (the "World Bank"), and Resolution Trust
Corporation.

Variable and Floating Rate Instruments
--------------------------------------

With respect to the variable and floating rate instruments described
in the Prospectus, the Adviser will consider the earning power, cash flows, and
other liquidity ratios of the issuers and guarantors of such obligations and, if
the obligation is subject to a demand feature, will monitor their

-6-
<PAGE>

financial ability to meet payment on demand. In determining average weighted
portfolio maturity, a variable rate instrument will usually be deemed to have a
maturity equal to the longer of the period remaining to the next interest rate
adjustment or the time the Fund can recover payment of principal as specified in
the instrument. A floating rate instrument will usually be deemed to have a
maturity equal to the date on which the principal amount must be paid, or the
date on which the redemption payment must be made, in the case of an instrument
called for redemption. A floating rate instrument that is subject to a demand
feature will usually be deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand. An instrument that
is issued or guaranteed by the U.S. Government or any agency thereof which has a
variable rate of interest readjusted no less frequently than every 397 days will
generally be deemed to have a maturity equal to the period remaining until the
next readjustment of the interest rate or earlier maturity.

Variable and floating rate demand instruments acquired by the National
Tax-Exempt Bond and Intermediate Tax-Exempt Bond Funds (collectively the "Tax-
Exempt Funds") may include participations in municipal obligations purchased
from and owned by financial institutions, primarily banks. Participation
interests provide a Fund with a specified undivided interest (up to 100%) in the
underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the participation interest from the institution
upon a specified number of days' notice, not to exceed thirty days. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank that the Adviser has determined meets the prescribed quality standards
for the Fund involved. The bank typically retains fees out of the interest paid
on the obligation for servicing the obligation, providing the letter of credit,
and issuing the repurchase commitment.

Bank Obligations
----------------

With respect to the investment policies of each Fund relating to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. The Funds' investments
in the obligations of foreign banks and foreign branches of U.S. banks may
subject the Funds to investment risks that are different in some respects from
those of investments in obligations of U.S. domestic issuers. Such risks
include future political and economic developments, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign banks and foreign branches of U.S. banks may be subject to
less stringent reserve requirements

-7-
<PAGE>

and to different accounting, auditing, reporting and recordkeeping standards
than those applicable to U.S. banks. The Funds will acquire securities issued
by foreign banks and foreign branches of U.S. banks only when the Adviser
believes that the risks associated with such instruments are minimal.

Municipal Obligations
---------------------

Municipal obligations which may be acquired by the Funds include debt
obligations issued by governmental entities to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses
and the extension of loans to public institutions and facilities.

The two principal classifications of municipal obligations consist of
"general obligation" and "revenue" issues. The Funds may also hold "moral
obligation" issues, which are typically issued by special purpose authorities.
There are, of course, variations in the quality of municipal obligations, both
within a particular classification and between classifications, and the yields
on municipal obligations depend upon a variety of factors, including market
conditions generally and the municipal bond market in particular, the financial
condition of the issuer, the size of a particular offering, the maturity of the
obligation, and the rating of the issue.

Municipal obligations acquired by the Funds may include general
obligation notes, tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax-exempt commercial paper, construction loan notes, and
other forms of short-term tax-exempt loans. Such instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the Funds may invest in bonds and other types of
longer-term tax-exempt instruments.

Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued to privately held or publicly owned corporations
in the financing of commercial or industrial facilities. State and local
governments are authorized in most states to issue private activity bonds for
such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable
from the general revenues of the users of such facilities.

-8-
<PAGE>

The payment of principal and interest on most securities purchased by
a Fund will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member, as well as the Commonwealth of Puerto Rico, Guam and
the Virgin Islands, is a separate "issuer" as that term is used in the
Prospectus and this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."

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

From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's federal alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference (see
"Additional Information Concerning Taxes"). Such proposals, while pending or if
enacted, might materially and adversely affect the availability of municipal
obligations for investment by a Fund and the liquidity and value of a Fund's
portfolio. In such an event, the Company would reevaluate the investment
objectives and policies of such Funds.

Stand-By Commitments
--------------------

The Funds may acquire "stand-by commitments" with respect to municipal
obligations held in their portfolios. Under a stand-by commitment, a dealer or
bank agrees to purchase from a Fund, at the Fund's option, specified municipal
obligations at a specified price. Stand-by commitments may be exercisable by
the Fund involved at any time before the maturity of the underlying municipal
obligations, and may be sold, transferred or assigned only with the instruments
involved.

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

-9-
<PAGE>

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 by the particular Fund will not exceed 1/2 of 1% of the value
of such Fund's total assets calculated immediately after each stand-by
commitment is acquired.

The Funds intend to enter into stand-by commitments only with banks,
brokers or dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. Each
Fund's reliance upon the credit of these banks, brokers and dealers will be
secured by the value of the underlying municipal obligations that are subject to
the commitment.

The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying municipal obligations. Stand-by
commitments acquired by a Fund would be valued at zero in determining net asset
value. Where a 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.

Convertible Securities
----------------------

Convertible securities which may be purchased by the Equity Income,
Equity Growth and Total Return Bond Funds (collectively, the "Taxable Funds")
entitle the holder to receive interest paid or accrued on debt or the dividend
paid on preferred stock until the securities mature or are redeemed, converted
or exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities in that they normally provide a stable
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities rank senior to common stock in
a corporation's capital structure and therefore generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.

In selecting convertible securities, the Adviser will consider, among
other factors, the creditworthiness of the issuers of the securities; the
interest or dividend income

-10-
<PAGE>

generated by the securities; the potential for capital appreciation of the
securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of a Fund's portfolio as to issuers; and
the ratings of the securities. Since credit rating agencies may fail to timely
change the credit ratings of securities to reflect subsequent events, the
Adviser will consider whether such issuers will have sufficient cash flow and
profits to meet required principal and interest payments.

Asset-Backed Securities
-----------------------

Asset-backed securities which may be purchased by the Total Return
Bond Fund represent a participation in, or are secured by and payable from, a
stream of payments generally consisting of both interest and principal generated
by particular assets, most often a pool of assets similar to one another.
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are also known as collateralized
obligations, and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution unaffiliated with the
entities issuing the securities.

The estimated life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. The rate of such
prepayments, and hence the life of the asset-backed security, will be primarily
a function of current market interest rates, although other economic and
demographic factors may be involved.

Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile

-11-
<PAGE>

receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.

Mortgage-Related Securities
---------------------------

The Total Return Bond Fund may invest in mortgage-related securities.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by the Government National Mortgage Association ("GNMA") include GNMA
Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are
guaranteed as to the timely payment of principal and interest by GNMA and such
guarantee is backed by the full faith and credit of the United States. GNMA is
a wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA, are
not backed by or entitled to the full faith and credit of the United States and
are supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private shareholders.
Fannie Maes are guaranteed as to timely payment of principal and interest by
FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the
United States, created pursuant to an Act of Congress, which is owned entirely
by Federal Home Loan Banks. Freddie Macs are not guaranteed by the United
States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.

-12-
<PAGE>

Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, the market value of
the security, which may fluctuate, is not secured. To the extent that the Total
Return Bond Fund purchases mortgage-related or mortgage-backed securities at a
premium, mortgage foreclosures and prepayments of principal by mortgagors (which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The yield of the Fund
may be affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the value of
mortgage-related securities, including government and government-related
mortgage pools, will generally fluctuate in response to market interest rates.

Lower Quality Debt Securities ("Junk Bonds").
--------------------------------------------

As stated in the Prospectus, the Total Return Bond Fund may invest up to
10% of its net assets in lower quality debt securities. Such securities, while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of (or actual)
default or bankruptcy. They are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal.

Issuers of low rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of lower-rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.

Lower-rated securities frequently have call or redemption features
which would permit an issuer to repurchase the security from the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund likely would have to replace such called security with a lower yielding

-13-
<PAGE>

security, thus decreasing the net investment income to the Fund and dividends to
shareholders.

The Fund may have difficulty disposing of certain lower-rated
securities because there may be a thin trading market for such securities. The
secondary trading market for high yield securities is generally not as liquid as
the secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.

Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower-rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower-rated securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.

Brady Bonds
-----------

The Total Return Bond Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to Latin American public and private entities for new bonds in connection
with debt restructurings under a debt restructuring plan announced by former
U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are currently actively traded in the
over-the-counter secondary market for Latin American debt instruments.

Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.

All Mexican Brady Bonds issued to date, except New Money Bonds, have
principal repayments at final maturity fully collateralized by U.S. Treasury
zero coupon bonds (or comparable collateral in other currencies) and interest
coupon payments

-14-
<PAGE>

collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. Approximately half of the Venezuelan Brady Bonds
issued to date have principal repayments at final maturity collateralized by
U.S. Treasury zero coupon bonds (or comparable collateral in other currencies),
while slightly more than half have interest coupon payments collateralized on a
14-month rolling-forward basis by securities held by the Federal Reserve Bank of
New York as collateral agent.

Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").

Repurchase Agreements
---------------------

As described in the Prospectus, each Fund may enter into repurchase
agreements. The repurchase price under repurchase agreements generally is equal
to the price paid by a Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements will be held by the Funds' custodian or registered in the name of the
Fund involved on the Federal Reserve/Treasury book-entry system. 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). Default by the seller would, however, expose the
Fund to possible loss because of adverse market action or delays in connection
with the disposition of the underlying obligations. The Adviser will enter into
repurchase agreements only with financial institutions it deems creditworthy,
pursuant to guidelines established by the Board of Directors, and during the
term of any repurchase agreement, the Adviser will continue to monitor the
creditworthiness of the seller. Repurchase agreements are considered to be
loans by the Funds under the 1940 Act.

Reverse Repurchase Agreements
-----------------------------

Whenever a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account cash or liquid portfolio securities
having a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that such value is maintained.
The Funds would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by a Fund may decline

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<PAGE>

below the price of the securities the Fund is obligated to repurchase. Reverse
repurchase agreements are considered to be borrowings by the Fund under the 1940
Act.

When-Issued Purchases and Forward Commitments
---------------------------------------------

As stated in the Prospectus, each Fund may purchase securities on a
"when-issued" basis and each Fund may enter into a "forward commitment" to
purchase or sell securities. When a Fund agrees to purchase securities on a
when-issued basis or enters into a forward commitment to purchase securities,
the Fund's custodian will set aside cash or liquid portfolio securities equal to
the amount of the commitment in a separate account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case a Fund may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. It may be expected that a Fund's
net assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
Because a Fund's liquidity and ability to manage its portfolio might be affected
when it sets aside cash or portfolio securities to cover such purchase
commitments, the Funds expect that their commitments to purchase securities on a
when-issued or forward commitment basis will not exceed 25% of the value of
their assets. In the case of a forward commitment to sell portfolio securities,
the custodian will hold the portfolio securities themselves in a segregated
account while the commitment is outstanding.

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

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

The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining a Fund's net asset value
starting on the day the

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<PAGE>

Fund agrees to purchase the securities. A Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date. When a Fund makes a forward commitment to sell securities
it owns, the proceeds to be received upon settlement are included in such Fund's
assets, and fluctuations in the value of the underlying securities are not
reflected in such Fund's net asset value as long as the commitment remains in
effect.

Other Investment Companies
--------------------------

In accordance with their respective investment objectives and
policies, each Fund may invest in securities issued by other investment
companies within the limits prescribed by the 1940 Act. Each Fund currently
intends to limit its investments so that, as determined immediately after a
securities purchase is made: (a) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (b) not
more than 10% of the value of its total assets will be invested in the aggregate
in securities of investment companies as a group; and (c) not more than 3% of
the outstanding voting stock of any one investment company will be owned by the
Fund or by the Company as a whole. As a shareholder of another investment
company, a Fund would bear, along with other shareholders, its pro rata portion
of the other investment company's expenses, including advisory fees. These
expenses would be in addition to the advisory and other expenses that a Fund
bears in connection with its own operations.

Lending Portfolio Securities
----------------------------

When a Fund lends its portfolio securities, it continues to receive
interest or dividends on the securities loaned and also earns income on the
loans. Any cash collateral received by a Fund in connection with such loans
will be invested in short-term money market obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted if a material event affecting the investment occurs.
Loans will be made only to borrowers deemed by the Adviser to be of good
standing and only when, in the Adviser's judgment, the income to be earned from
the loans justifies the attendant risks. While there is no limit on the amount
of securities which the Funds may loan, fees attributable to securities lending
activities are subject to certain limits under the Internal Revenue Code of
1986, as amended.

Foreign Currency Exchange Contracts
-----------------------------------

The Taxable Funds are authorized to enter into forward foreign
currency exchange contracts. These contracts involve an obligation to purchase
or sell a specified currency at a future

-17-
<PAGE>

date at a price set at the time of the contract. Forward currency contracts do
not eliminate fluctuations in the values of portfolio securities but rather
allow a Fund to establish a rate of exchange for a future point in time. The
Funds may enter into forward foreign currency exchange contracts when deemed
advisable by the Adviser under two circumstances.

First, when entering into a contract for the purchase or sale of a
security, a Fund may enter into a forward foreign currency exchange contract for
the amount of the purchase or sale price to protect against variations in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency between the date the security is purchased or sold and the date on
which payment is made or received. This is sometimes referred to as
"transaction hedging".

Second, when the Adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract to
sell, for a fixed amount, the amount of foreign currency approximating the value
of some or all of the Fund's securities denominated in such foreign currency.
This is sometimes referred to as "position hedging". The Funds do not intend to
enter into forward contracts for position hedging purposes on a regular or
continuing basis.

None of the Funds will enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate such Fund to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency.
While forward contracts may offer protection from losses resulting from declines
in the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. In addition,
the Funds will incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.

A Fund's custodian will place in a separate account cash or liquid
portfolio securities in an amount equal to the value of such Fund's assets that
could be required to consummate forward contracts entered into under the second
circumstance, as set forth above. For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund.

At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the

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<PAGE>

foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.

It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.

If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If the Fund engages in
an offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline between the date
the Fund enters into a forward contract for the sale of a foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, it will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. For a discussion of the Federal tax treatment
of forward contracts, see "Additional Information Concerning Taxes -Taxable
Funds."

Options Trading
---------------

As stated in the Prospectus, each Fund may purchase put and call
options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not exceeding 5% of
a Fund's net assets. Such options may relate to particular securities or to
various indices. This is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security or index increases or decreases, the option buyer's risk is
limited to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the

-19-
<PAGE>

underlying instruments themselves. Put and call options purchased by the Funds
will be valued at the last sale price or, in the absence of such a price, at the
mean between bid and asked prices.

A listed call option for a particular security gives the purchaser of
the option the right to buy from a clearing corporation, and a writer has the
obligation to sell to the clearing corporation, the underlying security at the
stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligations under the option contract.
A listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. In contrast to an option on a particular security, an option on
an index provides the holder with the right to make or receive a cash settlement
upon exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.

When a Fund writes a call option on a security, the option is
"covered" if the Fund involved owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or liquid
portfolio securities in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the Fund involved maintains
with its custodian cash or liquid portfolio securities equal to the contract
value. A call option is also covered if the Fund involved holds a call on the
same security or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the difference
is maintained by the Fund in cash or liquid portfolio securities in a segregated
account with its custodian. A secured put option written by a Fund means that
the Fund maintains in a segregated account with the custodian cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period.

The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the covered option writer gives up the opportunity for profit from
a price increase in the underlying security above the exercise

-20-
<PAGE>

price so long as its obligation as a writer continues, but retains the risk of
loss should the price of the security decline. Unlike a party who owns
securities not subject to an option, the covered option writer has no control
over when it may be required to sell its securities, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer.

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

When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked-
to-market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is

-21-
<PAGE>

sold) and the deferred credit related to such option will be eliminated. Any
gain on a covered call option may be offset by a decline in the market price of
the underlying security during the option period. If a covered call option is
exercised, the Fund involved may deliver the underlying security held by it or
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss. If a secured put option is exercised,
the amount paid by the Fund for the underlying security will be partially offset
by the amount of the premium previously paid to the Fund. Premiums from expired
options written by a Fund and net gains from closing purchase transactions are
treated as short-term capital gains for federal income tax purposes, and losses
on closing purchase transactions are short-term capital losses.

As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, whether traded over-the-counter or on a national
securities exchange may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; the facilities of an exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.

A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

Rights and Warrants
-------------------

The Taxable Funds may participate in rights offerings and may purchase
warrants, which are privileges issued by corporations enabling the owner to
subscribe to and purchase a

-22-
<PAGE>

specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights normally have a short life to
expiration. The purchase of rights and warrants involves the risk that the
purchaser could lose the purchase value of the right or warrant if the right to
subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of rights and warrants involves the risk that
the effective price paid for the right or warrant added to the subscription
price of the related security may exceed the value of the subscribed security's
market price, such as when there is no movement in the level of the underlying
security.

FUNDAMENTAL LIMITATIONS
- -----------------------

Each Fund is subject to the following fundamental limitations, which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous").

No Fund may:

1. Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if, immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in the securities of such issuer, or, more than
10% of the issuer's outstanding voting securities would be owned by the Fund,
except that up to 25% of the value of the total assets of each Fund may be
invested without regard to these limitations. For purposes of these
limitations, a security is considered to be issued by the entity (or entities)
whose assets and revenues back the security. A guarantee of a security will not
be deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by a Fund, does not
exceed 10% of the value of the Fund's total assets.

2. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) 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 subdivisions and (ii)
repurchase agreements secured by any such obligations; (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be classified according to their services (for example, gas,
gas

-23-
<PAGE>

transmission, electric and gas, and electric and telephone each will be
considered a separate industry).

3. Borrow money or issue senior securities, except that each Fund
may borrow from banks and enter into reverse repurchase agreements for temporary
purposes and then in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or pledge 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 its total assets at the time of such
borrowing. A Fund will not purchase portfolio securities while borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of such Fund's total assets are outstanding. Securities held by a Fund in
escrow or separate accounts in connection with the Fund's investment practices
are not deemed to be pledged for purposes of this limitation.

4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by real estate or interests therein, and the Total Return Bond
Fund may invest in mortgage-related securities, including collateralized
mortgage obligations and mortgage-backed securities which are issued or
guaranteed by the United States, its agencies or its instrumentalities.

5. Act as an underwriter of securities, except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.

6. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except that each Fund may engage in transactions in
options on securities, securities indices, futures contracts and options on
futures contracts.

7. Purchase securities of companies for the purpose of exercising
control.

8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to a Fund's transactions in futures contracts and related options, and (b)
a Fund may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.

9. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or mineral exploration or development programs, except that each Fund
may, to the extent appropriate to its investment objective, purchase publicly
traded

-24-
<PAGE>

securities of companies engaging in whole or in part in such activities and may
enter into futures contracts and related options.

10. Make loans, except that (a) each Fund may purchase and hold debt
instruments in accordance with its investment objective and policies, enter into
repurchase agreements with respect to portfolio securities and lend portfolio
securities against collateral consisting of cash or securities which is
consistent with the Fund's permitted investments and is equal at all times to at
least 100% of the value of the securities loaned, and (b) each Tax-Exempt Fund
may invest in privately arranged loans in accordance with its investment
objective and policies.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
- ----------------------------------------------

Information on how to purchase and redeem a Fund's shares is included
in the Funds' Prospectus. Shares of each Fund are sold on a continuous basis by
BISYS, which has agreed to use appropriate efforts to promote the Company and to
solicit orders for the purchase of such shares.

If any portion of the shares to be redeemed represents an investment
made by check, the Funds may delay the payment of the redemption proceeds until
the Transfer Agent is reasonably satisfied that the check has been collected,
which could take up to fifteen days from the purchase date. This procedure does
not apply to shares purchased by money order or wire payment. During the period
prior to the time the shares are redeemed, dividends on such shares will accrue
and be payable.

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

In addition to the situations described in the Prospectus, the Company
may redeem shares involuntarily to reimburse a Fund for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder which is applicable to Fund shares as provided
in the Prospectus from time to time.

-25-
<PAGE>

The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of a
Fund's shares by making payment in whole or in part in readily marketable
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value (a "redemption in-
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting the securities into cash. The Company has elected, however,
to be governed by Rule 18f-1 under the 1940 Act as a result of which the Company
is obligated to redeem shares, with respect to any one shareholder during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Company at the beginning of the period.

NET ASSET VALUE
- ---------------

The net asset value per share of a Fund is calculated by dividing
the total value of the assets belonging to the Fund, less the liabilities of the
Fund, by the number of outstanding shares of the Fund. "Assets belonging to" a
Fund consist of the consideration received upon the issuance of shares of the
particular Fund together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Company not belonging to a
particular investment portfolio. Assets belonging to a particular Fund are
reduced by the direct liabilities of that Fund and by a share of the general
liabilities of the Company allocated daily in proportion to the relative net
asset values of all of the Funds at the time of allocation. Subject to the
provisions of the Company's Articles of Incorporation, determinations by the
Board of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets, with respect to a particular Fund are conclusive.

As stated in the Prospectus, the Equity Income and Equity Growth
Funds' investments are valued at market value or, in the absence of a market
value with respect to any portfolio securities, at fair value as determined by
or under the direction of the Company's Board of Directors. A security that is
primarily traded on a domestic securities exchange (including securities traded
through the National Market System) is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges, provided that if such securities are not traded on the valuation
date, they will be valued at the preceding closing values and provided further,
that when an

-26-
<PAGE>

occurrence subsequent to the time of valuation is likely to have changed the
value, then the fair value of those securities will be determined through
consideration of other factors by or under the direction of the Company's Board
of Directors. Over-the-counter securities and securities listed or traded on
foreign exchanges with operations similar to the U.S. over-the-counter market
are valued at the mean of the most recent available quoted bid and asked prices
in the over-the-counter market.

As stated in the Prospectus, the Total Return Bond, National Tax-
Exempt Bond and Intermediate Tax-Exempt Bond Funds' investments are valued at
market value or, in the absence of a market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Company's Board of Directors. Portfolio securities for which market quotations
are readily available (other than securities with remaining maturities of 60
days or less) are valued at the mean of the most recent bid and asked prices.

For each Fund, market or fair value may be determined on the basis of
valuations provided by one or more recognized pricing services approved by the
Board of Directors, which may rely on matrix pricing systems, electronic data
processing techniques, and/or quoted bid and asked prices provided by investment
dealers. Short-term investments that mature in 60 days or less are valued at
amortized cost unless the Board of Directors determines that this does not
constitute fair value.

ADDITIONAL INFORMATION CONCERNING TAXES
- ---------------------------------------

The following summarizes certain additional considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.

Tax-Exempt Funds
- ----------------

As described above and in the Prospectus, the Tax-Exempt Funds are
designed to provide investors with current income exempt from regular federal
income tax. These Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation. Shares
of the Funds may not be suitable for tax-exempt institutions, or for retirement
plans qualified under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code"), H.R. 10 plans and individual retirement accounts since
such plans and accounts are generally tax-exempt and, therefore, not only would
not gain any

-27-
<PAGE>

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

The percentage of total dividends paid by a Tax-Exempt Fund with
respect to any taxable year which qualify as federal exempt-interest dividends
will be the same for all shareholders receiving dividends for such year. In
order for a Tax-Exempt Fund to pay exempt-interest dividends for any taxable
year, at the close of each taxable quarter at least 50% of the aggregate value
of such Fund's portfolio must consist of exempt-interest obligations. In
addition, each Fund must distribute an amount equal to at least the sum of 90%
of its net exemption interest income, if any, and 90% of its investment company
taxable income, if any, with respect to each taxable year. After the close of
the taxable year, each Tax-Exempt Fund will notify shareholders of the portion
of the dividends paid by the Fund which constitutes an exempt-interest dividend
with respect to such taxable year. However, the aggregate amount of dividends
so designated cannot exceed the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Fund for the taxable year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.

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

-28-
<PAGE>

Income itself exempt from federal income taxation will be considered
in addition to adjusted gross income when determining whether Social Security
payments received by a shareholder are subject to federal income taxation.

Each Tax-Exempt Fund intends to distribute to shareholders any taxable
income earned by it, which will be taxable to shareholders as ordinary income
(whether paid in cash or additional shares).

Taxable Funds
- -------------

With respect to the Taxable Funds, some investments may be subject to
special rules which govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (1) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (2) the accruing of certain trade receivables and
payables; and (3) the entering into or acquisition of any forward contract,
futures contract, option and similar financial instrument, if such instrument is
not subject to the mark-to-market rules under the Code. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules.

With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A Fund
may elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts that are capital assets in the hands
of the Fund and which are not part of a straddle ("Capital Asset Election").
The Treasury Department has issued regulations under which certain transactions
with respect to which a Fund has not made the Capital Asset Election and that
are part of a "section 988 hedging transaction" (as defined in the Code and
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar-denominated
investments that the Funds may make (such as non-U.S. dollar-denominated debt
securities and obligations and certain preferred stocks) and some of the foreign
currency contracts the Fund may enter into will be subject to the special
currency rules described above. Gain or loss attributable to the foreign
currency component of transactions engaged in by a Fund which are not subject to
the special

-29-
<PAGE>

currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction.

In addition, certain foreign currency contracts held by a Fund at the
close of such Fund's taxable year will be treated for federal income tax
purposes as sold for their full fair market value on the last business day of
such year, a process known as "mark-to-market." If a Fund makes the Capital
Asset Election with respect to such contracts, 40% of any gain or loss resulting
from such constructive sale will be treated as short-term capital gain or loss
and 60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Fund holds the contract (the "40-60
rule"). Otherwise, such gain or loss will be ordinary in nature. The amount of
any gain or loss actually realized by the Fund in a subsequent sale or other
disposition of those contracts will be adjusted to reflect any gain or loss
taken into account by the Fund in a prior year as a result of the constructive
sale of the contracts. To receive such federal income tax treatment, a foreign
currency contract must meet the following conditions: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under these provisions respecting foreign currency contracts.
As of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Forward foreign currency contracts may also result
in the creation of one or more straddles for federal income tax purposes, in
which case certain loss deferral, short sales, and wash sales rules and
requirements to capitalize interest and carrying charges may apply.

All Funds
- ---------

Net realized long-term capital gains, if any, will be distributed to
shareholders at least annually. The Funds will generally have no tax liability
with respect to such gains and the distributions (whether paid in cash or
additional shares) will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. Such distributions
will be designated as capital gain dividends in a written notice mailed by the
Company to shareholders not later than 60 days after the close of the Company's
taxable year. Shareholders should note that, upon the sale of Fund shares, if
the shareholder has not held such shares for more than six months, any loss on
the sale of those shares will be treated as

-30-
<PAGE>

long-term capital loss to the extent of the capital gain dividends received with
respect to the shares.

Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. Under the recently-enacted Taxpayer Relief
Act of 1997, for capital gains on securities recognized after July 28, 1997, the
maximum tax rate for individuals is 20% if the securities were held more than 18
months; for securities held for more than 12 months but no longer than 18
months, the maximum tax rate continues to be 28%. For corporations, long-term
capital gains and ordinary income are both taxable at a maximum nominal rate of
35%.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute with respect to each calendar year at least
98% of their ordinary taxable income and capital gain net income (excess of
capital gains over capital losses) for the 1-year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. Each Fund intends to make sufficient distributions or
deemed distributions of any ordinary taxable income and any capital gain net
income to avoid liability for this excise tax.

Each Fund is treated as a separate entity under the Code. Although
each Fund expects to qualify as a regulated investment company and to be
relieved of all or substantially all federal income taxes, depending upon the
extent of the Company's 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, the Funds may be subject
to the tax laws of such states or localities. In addition, in those states and
localities which have income tax laws, the treatment of the Funds and their
shareholders under such laws may differ from their treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.

If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
without any deduction for distributions to its shareholders. In such event,
dividend distributions (whether or not derived from interest on municipal
obligations in the case of the Tax-Exempt Funds) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits, and

-31-
<PAGE>

would be eligible for the dividends received deduction allowed to corporations
under the Code.

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

MANAGEMENT OF THE COMPANY
- -------------------------

Directors and Officers
- ----------------------

The Directors and officers of the Company, their addresses, principal
occupations during the past five years, and other affiliations are as follows:
<TABLE>
<CAPTION>

Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ----------------------------- -------------- -----------------------------
<S> <C> <C>

LESLIE B. DISHAROON* Chairman of Retired; Director, Baltimore
11321 John Carroll Road the Board and Gas & Electric Company;
Owings Mills, MD 21117 President Director, Travelers Inc.
Age: 65 (diversified financial
services); Director, GRC
International, Inc.
(technology based services
and products); Director,
Aegon USA, Inc. (holding
company-insurance).

DECATUR H. MILLER* Director and Retired; Partner and former
26 Whitfield Road Treasurer Chairman of the law firm of
Baltimore, MD 21210 Piper & Marbury, Baltimore,
Age: 65 Maryland until 1995.

JOHN R. MURPHY Director President and Chief Executive
National Geographic Officer, National Geographic
Society Society; Chairman, The
1145 17th Street, N.W. Baltimore Sun, 1989-1992,
Washington, D.C. 20036 and Publisher prior thereto;
Age: 63 Director, Monarch Avalon
Inc. (games, graphic arts,
envelope manufacturing)
until 1994.

</TABLE>

-32-
<PAGE>

<TABLE>

Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ----------------------------- -------------- -----------------------------
<S> <C> <C>
GEORGE R. PACKARD, III Director Visiting President,
4425 Garfield Street NW International University of
Washington, DC 20007 Japan, 1994 to date; Former
Age: 65 Dean, School of Advanced
International Studies at
The Johns Hopkins
University; Director,
Amdahl Corporation (computer
equipment); Director,
Offitbank (private bank);
Director, GRC International,
Inc. (technology based
services and products).

J. STEVENSON PECK Director Retired; Director, Crown
Signet Bank/Maryland Central Petroleum
7 St. Paul Street, 6th Fl. Corporation until 1993.
P.O. Box 1077
Baltimore, MD 21202
Age: 74

W. BRUCE McCONNEL, III Secretary Partner of the law firm of
Drinker Biddle & Reath LLP Drinker Biddle & Reath LLP,
PNB Building Philadelphia, Pennsylvania.
1345 Chestnut Street
Philadelphia, PA 19107-3496
Age: 54

</TABLE>
___________________

* Messrs. Disharoon and Miller are considered by the Company to be
"interested persons" of the Company as defined in the Investment Company
Act of 1940.
_________________________

Each Director receives an annual fee of $3,500 plus $1,625 for each
Board meeting attended and conference call participated in, as well as
reimbursement of expenses incurred as a Director. For the fiscal year ended May
31, 1997, the Company paid or accrued for the account of its directors as a
group, for services in all capacities, a total of $48,375. Drinker Biddle &
Reath LLP, of which Mr. McConnel is a partner, receives legal fees as counsel to
the Company. As of the date of this Statement of Additional Information, the
Directors and officers of the Company, as a group, owned less than 1% of the
outstanding shares of each Fund.

The following chart provides certain information about the fees
received by the Company's Directors for their services as members of the Board
of Directors and committees thereof for the fiscal year ended May 31, 1997:

-33-
<PAGE>

PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS FROM THE
FROM THE ACCRUED AS PART COMPANY AND
COMPANY OF COMPANY FUND COMPLEX/*/
EXPENSES PAID TO
DIRECTORS
NAME OF PERSON/POSITION
<S> <C> <C> <C>

Leslie B. Disharoon $10,000 N/A $10,000
Chairman of the Board
of Directors and
President

Decatur H. Miller $10,000 N/A $10,000
Director and Treasurer

John R. Murphy $11,625 N/A $11,625
Director

George R. Packard, III $ 8,375 N/A $ 8,375
Director

J. Stevenson Peck $ 8,375 N/A $ 8,375
Director
==============================================================================
</TABLE>
* The "Fund Complex" consists solely of the Company.

Advisory Services
- -----------------
Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") serves as investment adviser to the Funds pursuant to an Advisory
Agreement dated February __, 1998. The Adviser has agreed to pay all expenses
incurred by it in connection with its activities. For advisory services
provided by it, the Adviser is entitled to receive a fee from each Fund,
computed daily and payable monthly, based on the average net assets of such
Fund. (See "Management of the Company --Expenses" in the Prospectus for the fee
schedule.)

Under the Advisory Agreement, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the performance of such Agreement, and the Company has agreed to
indemnify the Adviser against any claims or other liabilities arising out of any
such error of judgment or mistake or loss. The Adviser shall remain liable,
however, for any loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its obligations and duties under the Advisory
Agreement.

Unless sooner terminated, the Advisory Agreement will continue in
effect through July 20, 1999. The Advisory Agreement will continue from year to
year after its anticipated termination date if such continuance is approved at
least annually by the

-34-
<PAGE>

Company's Board of Directors or by the affirmative vote of a majority of the
outstanding shares of each Fund, provided that in either event such Agreement's
continuance also is approved by a majority of the Company's Directors who are
not parties to such Agreement, or "interested persons" (as defined in the 1940
Act) of any such party, by votes cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement may be terminated by
the Company or the Adviser on 60 days written notice, and will terminate
immediately in the event of its assignment. Upon termination of the Advisory
Agreement (as well as the Adviser's other advisory agreements with the Company),
the Company would be required, at the request of the Adviser, to change its name
to a name not including "M.S.D. & T." or "Mercantile-Safe Deposit and Trust
Company."

Administrator
- -------------

Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement"). Mercantile has agreed to maintain office facilities for the
Company, furnish the Company with statistical and research data, clerical and
certain other services required by the Company, and to assist in updating the
Company's Registration Statement for filing with the SEC.

The Administration Agreement provides that Mercantile shall not be
liable for acts or omissions which do not constitute willful misfeasance, bad
faith or gross negligence on the part of Mercantile, or reckless disregard by
Mercantile of its duties under the Administration Agreement.

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

The Fifth Third Bank ("Fifth Third") serves as custodian of the Funds'
assets pursuant to a Custody Agreement, under which the custodian has agreed,
among other things, to (i) maintain a separate account in the name of each Fund,
(ii) hold and disburse portfolio securities on account of each Fund, (iii)
collect and receive all income and other payments and distributions on account
of each Fund's portfolio investments and (iv) make periodic reports to the
Company concerning each Fund's operations. The custodian is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Funds, provided that the custodian shall remain liable for the
performance of all of its duties under the Custody Agreement and will hold the
Funds harmless from losses caused by the negligence or willful misconduct of any
bank or trust company serving as sub-custodian.

State Street Bank and Trust Company ("State Street") serves as
transfer agent and dividend disbursing agent for the Funds. Under its Transfer
Agency Agreement, State Street has

-35-
<PAGE>

agreed, among other things, to (i) receive purchase orders and redemption
requests for shares of the Funds; (ii) issue and redeem shares of the Funds;
(iii) effect transfers of shares of the Funds; (iv) prepare and transmit
payments for dividends and distributions declared by the Funds; (v) maintain
records of account for the Funds and shareholders and advise each as to the
foregoing; (vi) record the issuance of shares of each Fund and maintain a record
of and provide the Fund on a regular basis with the total number of shares of
each Fund which are authorized, issued and outstanding; (vii) perform the
customary services of a transfer agent, a dividend disbursing agent and
custodian of certain retirement plans and, as relevant, agent in connection with
accumulation, open account or similar plans; and (viii) provide a system
enabling the Funds to monitor the total number of shares sold in each state.

Distributor and Fund Accountant
- -------------------------------

Shares of the Funds are distributed continuously and without a sales
load by BISYS (the "Distributor"). The Distributor has agreed to use
appropriate efforts to solicit orders for the purchase of shares. No
compensation is payable by the Funds to the Distributor for distribution
services provided.

Unless otherwise terminated, the Distribution Agreement will remain in
effect until July 20, 1998, and thereafter will continue automatically with
respect to each Fund from year to year if approved at least annually by the
Company's Board of Directors, or by the vote of a majority of the outstanding
voting securities of the Fund, and by the vote of a majority of the Directors of
the Company who are not parties to the Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.

BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an affiliate of the
Distributor, provides full fund accounting services for the Company, including
the computation of each Fund's net asset value, net income and realized capital
gains, if any.

Compensation of Administrator, Custodian, Transfer Agent and Fund Accountant
- ----------------------------------------------------------------------------

Mercantile, the custodian and BISYS Ohio are entitled to receive fees
based on the aggregate average daily net assets per portfolio of the Company.
As compensation for transfer agency services provided, State Street is entitled
to receive an annual fee based on the number of portfolios of the Company, plus
a transaction charge for certain transactions and out-of-pocket

-36-
<PAGE>

expenses, and additional fees as compensation for sub-accounting services
provided.

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

The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
------------------------------------
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
--------------------------------------------------------------
Company Institute that the Board did not exceed its authority under the Holding
- -----------------
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.

The Adviser believes, with respect to its activities as required by
the Advisory and Administration Agreements and as contemplated by the Prospectus
and this Statement of Additional Information, that, if the question were
properly presented, a court should hold that the Adviser may perform such
activities without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. It should be noted, however, that there have been
no cases deciding whether banks may perform services comparable to those
performed by the Adviser and that future changes in either federal or state
statutes and regulations relating to permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent the Adviser from continuing to perform such services
for the Funds. If the Adviser were prohibited from continuing to perform
advisory/administration services for the Funds, it is expected that the Board of
Directors would recommend that the Funds affected enter into new agreements or
would consider the possible termination of such Funds. Any new advisory
agreement would be subject to shareholder approval.

-37-
<PAGE>

If current restrictions under the Glass-Steagall Act preventing a bank
from sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Funds expect that the Adviser, or an
affiliate of the Adviser, would consider the possibility of offering to perform
additional services for the Funds. Legislation modifying such restrictions has
been introduced in past sessions of Congress. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which the Adviser or such an affiliate, might offer to provide such
services.

INDEPENDENT ACCOUNTANTS
- -----------------------

Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serve as independent accountants for the Company.

COUNSEL
- -------

Drinker Biddle & Reath LLP, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496, serve as counsel to the
Company and will pass upon certain legal matters on behalf of the Company.

ADDITIONAL INFORMATION CONCERNING SHARES
- ----------------------------------------

The Company was incorporated in Maryland on March 7, 1989. The
Company's Articles of Incorporation authorize the Board of Directors to issue up
to 10,000,000,000 full and fractional shares of capital stock, $.001 par value
per share. The Company's Articles of Incorporation further authorize the Board
of Directors to classify and reclassify any unissued shares into any number of
additional classes of shares. Of these authorized shares, 400,000,000 shares
are classified as Class K Common Stock representing shares of the National Tax-
Exempt Bond Fund, 400,000,000 shares are classified as Class L Common Stock
representing shares of the Total Return Bond Fund, 400,000,000 shares are
classified as Class M Common Stock representing shares of the Equity Growth
Fund, 400,000,000 shares are classified as Class N Common Stock representing
shares of the Equity Income Fund and 400,000,000 shares are classified as Class
O Common Stock representing shares of the Intermediate Tax-Exempt Bond Fund.

In the event of a liquidation or dissolution of the Company or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
Company's respective investment portfolios, of any general assets not belonging
to any particular portfolio which are available for distribution. Shareholders
of a Fund are entitled to participate

-38-
<PAGE>

equally in the net distributable assets of the particular Fund involved on
liquidation, based on the number of shares of the Fund that are held by each
shareholder.

Shareholders of the Company's existing investment portfolios, as well
as those of any other investment portfolio offered by the Company in the future,
will vote in the aggregate and not by portfolio or class on all matters, except
as otherwise required by law or when the Board of Directors determines that the
matter to be voted upon affects only the interests of the shareholders of a
particular portfolio or class. Rule 18f-2 under the 1940 Act provides that any
matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each Fund affected by the matter. A Fund is affected
by a matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under the Rule, the approval of an investment advisory agreement or any
change in a fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the Rule also provides that the ratification of the
appointment of independent public accountants, the approval of principal
underwriting contracts, and the election of directors may be effectively acted
upon by shareholders of the Company voting together in the aggregate without
regard to particular portfolios.

Notwithstanding any provision of Maryland law requiring a greater vote
of shares of the Company's Common Stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law (for
example by Rule 18f-2 discussed above) or by the Company's Articles of
Incorporation, the Company may take or authorize such action upon the favorable
vote of the holders of more than 50% of all of the outstanding shares of Common
Stock voting without regard to class (or portfolio). The Company's Bylaws
enable shareholders to call for a meeting to vote on the removal of one or more
directors; the affirmative vote of a majority of the Company's outstanding
shares is required to remove a director. Meetings of the Company's shareholders
shall be called by the Board of Directors upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.

The Company's Articles of Incorporation authorize the Board of
Directors, without shareholder approval (unless otherwise required by applicable
law), to: (a) sell and convey a Fund's assets to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding

-39-
<PAGE>

shares of such Fund to be redeemed at a price equal to their net asset value
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert a
Fund's assets into money and, in connection therewith, to cause all outstanding
shares of such Fund to be redeemed at their net asset value; or (c) combine a
Fund's assets with the assets belonging to one or more of the Company's other
investment portfolios if the Board of Directors reasonably determines that such
combination will not have a material adverse effect on the shareholders of any
portfolio participating in such combination and, in connection therewith, to
cause all outstanding shares of any such portfolio to be redeemed or converted
into shares of another portfolio at their net asset value. The exercise of such
authority may be subject to certain restrictions under the 1940 Act.

ADDITIONAL PERFORMANCE INFORMATION
- ----------------------------------

Yield Calculations. From time to time the Funds may quote their
------------------
yields in advertisements, sales literature or in reports to shareholders. The
yield for a Fund is calculated by dividing the net investment income per share
(as described below) earned during a 30-day period by its net asset value per
share on the last day of the period and annualizing the result on a semi-annual
basis by adding one to the quotient, raising the sum to the power of six,
subtracting one from the result and then doubling the difference. A Fund's net
investment income per share earned during the period is based on the average
daily number of shares outstanding in the Fund during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:

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

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

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

c = the average daily number of shares out standing during the
period that were entitled to receive dividends.

d = net asset value per share on the last day of the period.

-40-
<PAGE>

For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations. The Tax-Exempt Funds calculate interest earned on tax-
exempt obligations issued without original issue discount and having a current
market discount by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt obligations that are issued with original
issue discount, where the discount based on the current market value exceeds the
then-remaining portion of original issue discount, the yield to maturity is the
imputed rate based on the original issue discount calculation. Conversely,
where the discount based on the current market value is less than the remaining
portion of the original issue discount, the yield to maturity is based on the
market value.

With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), (a) gain or loss attributable
to actual monthly pay downs is accounted for as an increase or decrease to
interest income during the period; and (b) a Fund may elect either (i) to
amortize the discount and premium on the remaining security, based on the cost
of the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize discount or premium on
the remaining security.

Undeclared earned income may be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but

-41-
<PAGE>

is reasonably expected to be and is declared as a dividend shortly thereafter.

The Tax-Exempt Funds' "tax-equivalent" yields are computed by: (a)
dividing the portion of a Fund's yield that is exempt from federal income tax by
one minus a stated federal income tax rate, and (b) adding the figures resulting
from (a) above to that portion, if any, of such yield that is not exempt from
federal income tax.

Total Return Calculations. The Funds compute their average annual
-------------------------
total returns by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested in a particular
Fund to the ending redeemable value of such investment in the Fund. This is
done by dividing the ending redeemable value of a hypothetical $1,000 initial
payment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result. This calculation can be expressed as
follows:

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

Where: T = average annual total return.

ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.

P = hypothetical initial payment of $1,000.

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

The Funds compute their aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested in a particular Fund to the ending redeemable value of
such investment in the Fund. The formula for calculating aggregate total return
is as follows:

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

The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during

-42-
<PAGE>

the period. The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computations.

Since performance will fluctuate, performance data for the Funds
cannot necessarily be used to compare an investment in the Funds' shares with
bank deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.

Hypothetical Performance Information
- ------------------------------------

In addition to providing performance information that demonstrates the
actual yield or return of a particular Fund over a particular period of time,
the Tax-Exempt Funds may provide certain other information demonstrating
hypothetical yields or returns. For example, the table below illustrates the
approximate yield that a taxable investment must earn at various income brackets
to produce after-tax yields equivalent to those of tax-exempt investments
yielding from 4.00% to 6.50%. The yields below are for illustration purposes
only and are not intended to represent current or future yields for the Tax-
Exempt Funds, which may be higher or lower than those shown. A Fund's yield
will fluctuate as market conditions change. For investors in a low tax bracket,
investing in a tax-exempt investment may not be beneficial if a higher yield
after taxes could be received from a taxable investment. Investors should be
aware that tax brackets may change over time and they should consult their own
tax adviser with specific reference to their own tax situation.

-43-
<PAGE>

For the Tax-Exempt Funds:
- --------------------------------------------------------------------------------------------

Federal
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Single Return Joint Return Equivalent Taxable Yields

$ 0 - $ 24,650 $ 0 - $ 41,200 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 24,651 - $ 59,750 $ 41,201 - $ 99,600 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 59,751 - $124,650 $ 99,601 - $151,750 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$124,651 - $271,050 $151,751 - $271,050 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $271,050 Over $271,050 39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
- --------------------------------------------------------------------------------------------
</TABLE>

The tax-exempt yields used here are hypothetical and no assurance can be made
that the Tax-Exempt Funds will obtain any particular yields. A Fund's yield
fluctuates as market conditions change. The tax brackets and related yield
calculations are based on the 1997 Federal marginal tax rates indicated in the
table. The table does not reflect the phase out of personal exemptions and
itemized deductions which will apply to certain higher income taxpayers.
- --------------------------------------------------------------------------------

Distribution Rates
- ------------------

The Total Return Bond, National Tax-Exempt Bond and Intermediate Tax-
Exempt Bond Funds may also quote from time to time distribution rates in reports
to shareholders and in sales literature. The distribution rate for a specified
period is calculated by annualizing the daily distributions of net investment
income and dividing this amount by the daily ending net asset value, and then
adding all the daily numbers and dividing by the number of days in the specified
period. Distribution rates do not reflect realized and unrealized capital gains
and losses.

Performance Comparisons
- -----------------------

From time to time, in advertisements or in reports to shareholders, a
Fund's yield or total return may be quoted and compared to that of other mutual
funds with similar investment objectives and to stock or other relevant indices.
The total return and yield of the Funds may be compared to the Consumer Price
Index; the total returns and yields of the Equity Income Fund and Equity Growth
Fund may be compared to the Standard & Poor's 500 Index, an index of unmanaged
groups of common stocks or the Dow Jones Industrial Average, a recognized
unmanaged index

-44-
<PAGE>

of common stocks of 30 industrial companies listed on the New York Stock
Exchange; the total return and yield of the Total Return Bond Fund may be
compared to the Salomon Brothers Broad Investment Grade Bond Index; the total
return and yield of the National Tax-Exempt Bond Fund may be compared to the
Lehman Brothers Municipal Bond Index; and the total return and yield of the
Intermediate Tax-Exempt Bond Fund may be compared to the Lehman Brothers 1-10
Blend Municipal Bond Index. In addition, total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal, and The New York Times, or in publications of
a local or regional nature, may be used in comparing the performance of a Fund.
The total return and yield of a Fund may also be compared to data prepared by
Lipper Analytical Services, Inc. and Morningstar.

From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
investment portfolios within the Company; (5) descriptions of investment
strategies for one or more of such portfolios; (6) descriptions or comparisons
of various savings and investment products (including but not limited to insured
bank products, annuities, qualified retirement plans and individual stocks and
bonds) which may or may not include such portfolios; (7) comparisons of
investment products (including such portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of portfolio
rankings or ratings by recognized rating organizations. The Company may also
include calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any of the Funds.

Information concerning the current yield and performance of the Funds
may be obtained by calling 1-800-551-2145.

MISCELLANEOUS
- -------------

As used in this Statement of Additional Information and in the
Prospectus, a "majority of the outstanding shares" of a Fund means, with respect
to the approval of an investment advisory agreement or a change in a fundamental
investment policy, the lesser of (1) 67% of the shares of the particular

-45-
<PAGE>

Fund represented at a meeting at which the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund.

As of November 18, 1997, Mercantile-Safe Deposit and Trust Company
("Mercantile"), Two Hopkins Plaza, Baltimore, Maryland 21201, owned of record
substantially all of the shares of the Company's Prime Money Market Fund,
Government Money Market Fund, Tax-Exempt Money Market Fund, Tax-Exempt Money
Market Fund (Trust), International Equity Fund and Maryland Tax-Exempt Bond
Fund. Mercantile is a wholly-owned subsidiary of Mercantile Bancshares
Corporation and is a Maryland trust company. The Company believes that
substantially all of the shares held of record by Mercantile were beneficially
owned by its customers.

As of November 18, 1997, the name, address and percentage ownership of
each person, in addition to Mercantile, that beneficially owned 5% or more of
the outstanding shares of the Company was as follows: Prime Money Market Fund -
The Johns Hopkins Hospital, 600 North Wolfe Street, Baltimore, MD 21287
(6.99%); Government Money Market Fund - Mr. James G. Robinson, 10 East Lee
Street, Suite 2705, Baltimore, MD 21202 (8.85%); Tax-Exempt Money Market Fund -
Mr. Fred Hittman, 3211 Keyser Road, Baltimore, MD 21208 (5.44%); Tax-Exempt
Money Market Fund (Trust) - Robert H. Levi Marital Trust, c/o Mercantile-Safe
Deposit and Trust Company, Two Hopkins Plaza, Baltimore, MD 21201 (6.43%);
Betty Washington White Deed of Trust, c/o Mercantile-Safe Deposit and Trust
Company, Two Hopkins Plaza, Baltimore, MD 21201 (9.25%); Maryland Tax-Exempt
Bond Fund - Mr. Kenneth H. Roberts, 6287 Firethorn Drive, Clarksville, MD 21029
(17.18%); Mr. Charles C. Fenwick, Sr., Belmont Farms, 3302 Belmont Road,
Glyndon, MD 21071 (7.27%); Growth & Income Fund -Mr. Willard Hackerman, 1 Slade
Avenue, Baltimore, MD 21208-5240 (6.85%).

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APPENDIX A
----------

COMMERCIAL PAPER RATINGS
- ------------------------

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

"A-1" - The highest category 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.

"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."

"A-3" - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

"B" - Issues are regarded as having only a speculative capacity for
timely payment.

"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

"D" - Issues are in payment default. The "D" rating category is used
when interest payments of principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.

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

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

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internal cash generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.

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

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

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

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

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

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

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

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

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<PAGE>

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

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

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

Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:

"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.

"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."

"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" ratings.

"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.

"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.

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

"LOC" - The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.

Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of

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debt instruments with original maturities of one year or less. The following
summarizes the ratings used by Thomson BankWatch:

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

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

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

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

IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:

"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of "A1+" is assigned.

"A2" - Obligations are supported by a satisfactory capacity for timely
repayment although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.

"A3" - Obligations are supported by an adequate capacity for timely
repayment such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.

"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic, or financial conditions.

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<PAGE>

"C" - Obligations for which there is a high risk of default or which
are currently in default.

CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------

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

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

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

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

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

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

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

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

"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic

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conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.

"CC" - An obligation rated "CCC" is currently highly vulnerable to
non-payment.

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

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

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

"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest-
only and principal-only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.

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

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

"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may

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<PAGE>

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

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

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

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

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

(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.

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<PAGE>

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

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

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

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

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

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

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

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

"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."

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<PAGE>

"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

"BB" - Bonds considered to be speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.

"B" - Bonds are considered highly speculative. While securities in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.

"CCC" - Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.

"CC" - Bonds are minimally protected. Default in payments of interest
and/or principal seems probable over time.

"C" - Bonds are in imminent default in payment of interest or
principal.

"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.

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

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IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:

"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.

"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.

"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.

"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.

"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.

IBCA may append a rating of plus (+) or minus (-) to a rating below
"AAA" to denote relative status within major rating categories.

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

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"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.

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

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

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

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

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

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

MUNICIPAL NOTE RATINGS
- ----------------------

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

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

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

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

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

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

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

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

"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.

"SG" - This designation denotes speculative quality and lack of
margins of protection.

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

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APPENDIX B
----------

As stated in the Prospectus, the Funds may enter into futures
contracts and options in an effort to have fuller exposure to price movements in
securities markets pending investment of purchase orders or while maintaining
liquidity to meet potential shareholder redemptions and for other hedging and
investment purposes. Such transactions are described in this Appendix.

I. Interest Rate Futures Contracts.
-------------------------------

Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund might use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.

A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.

Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance

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with the rules of the exchange on which the futures contract sale or purchase
was made.

Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.

Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. The Funds would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.

A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Fund may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments.

Examples of Futures Contract Sale. A Fund might engage in an interest
---------------------------------
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury bonds"). The Adviser wishes to fix the current market
value of this portfolio security until some point in the future. Assume the
portfolio security has a market value of 100, and the Adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market

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value of the portfolio security does indeed decline from 100 to 95, the
equivalent futures market price for the Treasury bonds might also decline from
98 to 93.

In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.

The Adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.

If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.

Examples of Futures Contract Purchase. A Fund might engage in an
-------------------------------------
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. The Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.

For example, assume that the market price of a long-term bond that a
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market

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price of the long-term bond does indeed rise from 100 to 105, the equivalent
futures market price for Treasury bonds might also rise from 98 to 103. In that
case, the 5-point increase in the price that the Fund pays for the long-term
bond would be offset by the 5-point gain realized by closing out the futures
contract purchase.

The Adviser could be wrong in its forecast of interest rates; long-
term interest rates might rise to above 10%; and the equivalent futures market
price could fall below 98. If short-term rates at the same time fall to 10% or
below, it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.

If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.

II. Index Futures Contracts.
-----------------------

A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. A stock or bond index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value (which assigns relative values to the common
stocks or bonds included in the index) at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made. Some stock
index futures contracts are based on broad market indices, such as the Standard
& Poor's 500 or the New York Stock Exchange Composite Index. In contrast,
certain exchanges offer futures contracts on narrower market indices, such as
the Standard & Poor's 100 or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.

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A Fund will sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.

In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of its portfolio will decline prior to the time of
sale.

The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).

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<PAGE>

ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price

Portfolio Futures
--------- -------

-Day Hedge is Placed-

Anticipate Buying $62,500 Buying 1 Index Futures
Equity Portfolio at 125
Value of Futures =
$62,500/Contract

-Day Hedge is Lifted-

Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500

HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund

Factors:

Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0

Portfolio Futures
- -------------------------------- -----------------------------

-Day Hedge is Placed-

Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000

-Day Hedge is Lifted-

Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000

If, however, the market moved in the opposite direction, that is,
market value decreased and a Fund had entered into an anticipatory purchase
hedge, or market value increased and a Fund had hedged its stock portfolio, the
results of the Fund's transactions in stock index futures would be as set forth
below.

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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price

Portfolio Futures
--------- -------

-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract

-Day Hedge is Lifted-

Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500

HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund

Factors:

Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0

Portfolio Futures
- --------- -------

-Day Hedge is Placed-

Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000

-Day Hedge is Lifted-

Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000

III. Futures Contracts on Foreign Currencies.
---------------------------------------

A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.

IV. Margin Payments.
---------------

Unlike when a Fund purchases or sells a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the

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Fund's custodian an amount of cash or liquid portfolio securities, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract assuming
all contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-market. For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract
and the price of the futures contract has declined in response to a decrease in
the underlying instruments, the position would be less valuable and the Fund
would be required to make a variation margin payment to the broker. At any time
prior to expiration of the futures contract, the Adviser may elect to close the
position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.

V. Risks of Transactions in Futures Contracts.
------------------------------------------

There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the future and movements in the price of the securities which are
the subject of a hedge. The price of the future may move more than or less than
the price of the securities being hedged. If the price of the future moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by the
loss on the future. If the price of the future moves more than the price of the
hedged securities, the Fund will experience either a loss or gain on the future
which will not be completely offset by movements in the price of the securities
which are the subject of the hedge. To compensate

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for the imperfect correlation of movements in the price of securities being
hedged and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, or if otherwise deemed to be appropriate by the investment
adviser. Conversely, a Fund may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures contract
being used, or if otherwise deemed to be appropriate by the adviser. It is also
possible that, where a Fund has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of securities held
in the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.

Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.

In instances involving the purchase of futures con tracts by a Fund,
an amount of cash or liquid portfolio securities, equal to the market value of
the futures contracts, will be deposited in a segregated account with the Fund's
custodian and/or in a margin account with a broker to collateralize the position
and thereby reduce the leverage effect resulting from the use of such futures.

In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and any
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures

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market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may also
cause temporary price distortions. Due to the possibility of price distortion
in the futures market, and because of the imperfect correlation between the
movements in the cash market and movements in the price of futures, a correct
forecast of general market trends or interest rate movements by the Adviser may
still not result in a successful hedging transaction over a short time frame.

Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will normally not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.

Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.

Successful use of futures by the Funds is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its portfolio and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising

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market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.

VI. Options on Futures Contracts.
----------------------------

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

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

VII. Other Transactions
------------------

The Funds are authorized to enter into transactions in any other
futures or options contracts which are currently traded or which may
subsequently become available for trading. Such instruments may be employed in
connection with the Funds' hedging and other investment strategies if, in the
judgment of the Adviser, transactions therein are necessary or advisable.

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