NORTH AMERICAN FUNDS, 485APOS, 1998-12-18

NORTH AMERICAN FUNDS
485APOS, 1998-12-18

Previous: LOEWEN GROUP INC, SC 13D/A, 1998-12-18

Next: MAPICS INC, 10-K405, 1998-12-18

<PAGE>

REGISTRATION NOS. 33-27958, 811-5797
As filed with the Securities and Exchange Commission
on December 18, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
-

PRE-EFFECTIVE AMENDMENT NO. __ /_/

POST-EFFECTIVE AMENDMENT NO. 28 /X/
-

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
-

AMENDMENT NO. 30 /X/
-

NORTH AMERICAN FUNDS
(Exact Name of Registrant as Specified in Charter)

286 Congress Street
Boston, Massachusetts 02210
(800) 872-8037
(Address of Principal Executive Offices)
John I. Fitzgerald, Esq.
General Counsel
North American Funds
286 Congress Street
Boston, MA 02210
(Agent for Service)
____________________

Copy to:
Gregory D. Sheehan, Esq.
Ropes & Gray
One International Place
Boston, MA 02110

It is proposed that this filing will become effective (check appropriate box)

[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

[_] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

<PAGE>

[Front Cover]

North American Funds

International Small Cap Fund Equity-Income Fund
International Growth and Income Fund Balanced Fund
Global Equity Fund Strategic Income Fund
Emerging Growth Fund Investment Quality Bond Fund
Small/Mid Cap Fund National Municipal Bond Fund
Growth Equity Fund U.S. Government Securities Fund
Tax-Sensitive Equity Fund Money Market Fund
Growth and Income Fund

The Securities and Exchange Commission has not approved or disapproved of
these securities or passed on the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.

February XX, 1999

<PAGE>

Table of Contents

Organization of Information

Because this Prospectus includes information about fifteen different Funds, the
material is organized specifically to help you find the information you are
looking for.

. Section I of the Prospectus includes summaries of each Fund.
. Section II includes additional information about the Funds' investment
strategies, additional risk information and information about the
investment managers.
. Section III of the Prospectus includes information about how to invest and
manage your North American Funds account.

Section I: Summaries of the Funds

Summary of Each Fund
1. Investment Goal
2. Principal Investment Strategies
3. Descriptions of Main Investment Risks
4. Investment Performance

Section II: Other Information about Each Fund

. Expenses
. Fund Management
. Other Risks of Investing

Section III: Investing in the Funds

This section includes the information you need about how to invest and how to
redeem shares. It also includes other important information about sales charges,
taxes and account privileges.

More Information

If you'd like more information than is included in this Prospectus, the back
cover lists a number of places to call or to visit for additional materials.

<PAGE>

Section I:
Fund Summaries

North American Funds (the "Trust") is group of mutual funds that includes
fifteen separate investment portfolios, or Funds. Each Fund has a specific,
unique investment objective. Each Fund has a subadvisor, a firm responsible for
making investment decisions for the Fund.

The summaries on the next XX pages describe each Fund's investment objective and
principal investment strategies, list the main risks of investing in the Fund,
and show the Fund's past investment performance. For explanations of the main
risks of investing in each Fund, turn to page XX. Although a Fund may have the
flexibility to use some or all of the investments or strategies described in
this Prospectus and the Statement of Additional Information, its subadvisor may
choose not to use these investments or strategies for a variety of reasons.
These choices may cause a Fund to miss opportunities, lose money or not achieve
its goal.

Below most of the Funds' descriptions are two charts (the newer Tax-Sensitive
Equity and Emerging Growth Funds do not have charts because they are less than
one year old). The bar chart shows how the investment returns of one class of
each Fund's shares have varied in the past ten years, or in the years since the
Fund began if it is less than ten years old. The bar chart does not reflect
sales charges; if it did, performance would be less than shown.

The chart (the Average Annual Total Return Chart) following each bar chart shows
how that Fund's average annual returns for each Class of shares for the last
one, five and ten years (or since the Fund began, for newer Funds) compared to
returns of a broad-based securities market index. The table reflects sales
charges, including the maximum initial sales charge for Class A shares, and the
maximum applicable deferred sales charge for Class B and Class C shares.

It is important to remember that past performance does not predict future
performance, and that as with any investment, it is possible for investors to
lose money on investments in the Funds. An investment in any of the Funds is not
a deposit of a bank and is not insured by the Federal Deposit Insurance
Corporation or any other government agency.

International Small Cap Fund

Investment Goal and Strategies

The investment objective of the International Small Cap Fund is to seek
capital appreciation. To achieve this objective, Founders Asset Management, LLC
("Founders"), the Fund's subadvisor, invests primarily in equity securities
issued by foreign companies with market capitalizations, or annual revenues, of
$1 billion or less. These companies are located in both established and emerging
economies throughout the world.

1
<PAGE>

Main Investing Risks

. Currency Risk
. Derivatives Risk
. Equity Risk, including the risks associated with investing in smaller
companies
. Foreign Investment Risk
. Liquidity Risk Management
. Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- ------------------------------------------------------------------------------------------------
Past One Year Life Of Fund (since 3/4/96)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A
- ------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------
MSCI World ex-U.S. Index
- ------------------------------------------------------------------------------------------------

</TABLE>

International Growth and Income Fund

Investment Goal and Strategies

The investment objective of the International Growth and Income Fund is to
seek long-term growth of capital and income. J.P. Morgan Investment Management
Inc. ("J.P. Morgan"), the Fund's subadvisor, pursues this goal by emphasizing
investments in equity securities of established foreign companies located in
developed countries other than the United States.

At least 65% of the Fund's total assets will generally be invested in the
equity securities of foreign companies. Although the Fund will focus primarily
on the common stock of established companies based in developed countries
outside the United States, it may invest up to 15% of its assets in emerging
market equity securities. The Fund will make investments in at least three
foreign countries. Up to 100% of the Fund's assets may be invested in foreign
securities.

2
<PAGE>

Main Investing Risks

. Currency Risk
. Derivatives Risk
. Equity Risk
. Foreign Investment Risk
. Liquidity Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- ---------------------------------------------------------------------------------------------
Past One Year Life of Fund (Since 1/9/95)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Class A
- ---------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------
Composite Index*
- ---------------------------------------------------------------------------------------------

</TABLE>

*Comprised of 85% of the return of the MSCI EAFE Index, 15% of the return of the
Salomon Brothers Non-$ WGBI 10 Index.

Global Equity Fund

Investment Goal and Strategies

The investment objective of the Global Equity Fund is long-term capital
appreciation. To achieve this objective, Morgan Stanley Dean Witter Investment
Management Inc. ("MSDW Investment Management"), the Fund's subadvisor, invests
in a globally diversified portfolio of equity securities.

Under normal circumstances, at least 65% of the Fund's assets will be
invested in equity

3
<PAGE>

securities and at least 20% of the Fund's total assets will be invested in the
common stocks of U.S. issuers. The Fund may invest up to 80% of its assets in
foreign securities. Although the Fund expects to invest primarily in securities
listed on stock exchanges, it will also invest in equity securities that are
traded over-the-counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market.

Main Investing Risks

. Currency Risk
Equity Risk, particularly the risk associated with investments in Value
stocks
. Foreign Investment Risk
. Management Risk
. Derivatives Risk

Investment Performance

Calendar Year Total Returns for Class C Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- --------------------------------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------------------------------
MSCI World Index
- --------------------------------------------------------------------------------------------------------

</TABLE>

*Inception dates: Class A and Class B - 4/1/94; Class C - 11/1/90

Emerging Growth Fund

Investment Goal and Strategies

The investment objective of the Emerging Growth Fund is maximum capital
appreciation. Warburg Pincus Asset Management, Inc. ("Warburg"), the Fund's
subadvisor, pursues this objective by investing primarily in equity securities
of U.S. companies. The focus of the Fund is emerging growth companies, which
often are small or medium-size companies that reflect growth characteristics
such as positive earnings comparisons and potential for accelerated growth. The
Fund may also invest in high-quality bonds, and to a certain extent, foreign
securities.

4
<PAGE>

Main Investing Risks

. Concentration Risk, including the particular risks of a non-diversified
fund
. Credit Risk
. Currency Risk
. Derivatives Risk
Equity Risk, particularly the risks associated with investing in smaller
companies
. Interest Rate Risk
. Liquidity Risk
. Foreign Investment Risk
. Management Risk

Small/Mid Cap Fund

Investment Goal and Strategies

The investment objective of the Small/Mid Cap Fund is to seek long term
capital appreciation. To achieve this objective, Fred Alger Management, Inc.
("Alger"), the Fund's subadvisor, ordinarily invests at least 65% of Fund assets
in the stock of small- to mid-size companies with market capitalizations (total
value of outstanding securities) between $500 million and $5 billion. The Fund
can invest up to 35% of its assets in the stocks of companies that have total
market capitalization of $5 billion or more. The Fund may also invest up to 15%
of its assets in money market and other fixed income securities, and up to 20%
of its assets in foreign securities.

Main Investing Risks

. Credit Risk
. Currency Risk
. Derivatives Risk
. Equity Risk, including the risks associated with investing in smaller
companies
. Foreign Investment Risk
. Interest Rate Risk
. Liquidity Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

5
<PAGE>

Average Annual Total Returns as of 12/31/98

- ----------------------------------------------------------------------------------------------
Past One Year Life Of Fund (Since 3/4/96)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Class A
- ----------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------
Class C
- ----------------------------------------------------------------------------------------------
S&P MidCap 400 Index
- ----------------------------------------------------------------------------------------------
Russell 2000 Growth Index
- ----------------------------------------------------------------------------------------------

</TABLE>

Growth Equity Fund

Investment Goal and Strategies

The investment objective of the Growth Equity Fund is to seek long-term
capital growth. To achieve this goal, Founders Asset Management LLC
("Founders"), the Fund's subadvisor, invests at least 65% of its total assets in
the common stocks of well-established, high-quality growth companies whose
earnings are expected by Founders to increase faster than the market average.
The Fund may invest in other types of equity securities that offer opportunities
for capital appreciation. The Fund may also invest in high-quality bonds. The
Fund may invest up to 100% of its assets in American Depositary Receipts (ADRs)
and up to 30% of its total assets in foreign securities (other than ADRs). The
Fund may not invest more than 25% of its assets in any one foreign country.

Main Investing Risks

. Credit Risk
. Currency Risk
. Derivatives Risk
. Equity Risk, including the particular risks associated with Growth stocks
. Foreign Investment Risk
. Interest Rate Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

6
<PAGE>

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------
Past One Year Life of Fund (Since 3/4/96)
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------

Tax-Sensitive Equity Fund

Investment Goal and Strategies

The Fund's investment objective is to maximize after-tax total return, with
emphasis on long-term growth of capital, primarily through investment in equity
securities of companies that appear to be undervalued. Standish, Ayer & Wood,
Inc., ("Standish"), the Fund's subadvisor, uses tax-sensitive strategies
designed to reduce the impact of federal income tax on the after-tax returns
actually achieved by the Fund's shareholders.

The Fund focuses on medium to large capitalization companies with
above-average capital growth potential. Standish emphasizes individual stock
selection rather than attempting to time which industries or sectors may perform
best. Standish selects stocks for the Fund's portfolio by:

. Using a mathematical model to identify companies that have strong and
consistent historic earnings, are valued attractively by the market, and
have improving growth prospects.
. Using fundamental research and qualitative analysis to evaluate the stocks
identified by the mathematical model. Standish looks for companies with
sustainable profit growth, proven management teams, attractive businesses,
and strong financial characteristics.

To reduce the impact of federal and state income taxes on the Fund's after-tax
returns, the Fund:

. Minimizes sales of securities that result in capital gains. If this cannot
be avoided, the Fund will sell the securities with the smallest capital
gains, and will sell securities with long-term gains first.
. Sells securities to create capital losses, which can offset realized
capital gains.
. Favors low yield stocks and limits income-producing investments.

Main Investing Risks

. Derivatives Risk
. Equity Risk, including particular risks associated Value stocks
. Foreign Investment Risk
. Management Risk

7
<PAGE>

Growth and Income Fund

Investment Goal and Strategies

The investment objective of the Growth and Income Fund is to provide
long-term growth of capital and income consistent with prudent investment risk.
Wellington Management Company, LLP ("Wellington Management"), the Fund's
subadvisor, pursues this objective by investing mostly in a diversified
portfolio of common stocks of U.S. issuers which Wellington Management believes
are of high quality. The Fund will typically invest in dividend-paying stocks of
larger companies. The Fund may invest up to 20% of its assets in foreign
securities.

To select stocks for the Fund, Wellington Management assesses a company and
its business environment, management, balance sheet, income statement,
anticipated earnings and dividends, and other related measures of value. For
non-U.S. securities, Wellington Management will also monitors and evaluates the
economic and political climate and the principal securities markets of the
country in which each company is located.

Main Investing Risks

. Currency Risk
. Derivatives Risk
. Equity Risk, including particular risks associated with Value stocks
. Foreign Investment Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class C Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- ------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- ------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------
Class C
- ------------------------------------------------------------------------------------------------
S&P 500 Index
- ------------------------------------------------------------------------------------------------

</TABLE>

*Inception dates: Class A and Class B - 4/1/94; Class C - 5/1/91

Equity-Income Fund

8
<PAGE>

Investment Goal and Strategies

The investment objective of the Equity-Income Fund is to provide
substantial dividend income and also long term capital appreciation. To achieve
this objective, T. Rowe Price Associates, Inc. ("T. Rowe Price"), the Fund's
subadvisor, invests primarily in dividend-paying common stocks of established
companies with favorable prospects for both increasing dividends and capital
appreciation.

Under normal circumstances, the Fund will invest at least 65% of total
assets in the common stocks of established companies paying above-average
dividends. T. Rowe Price believes that income can be a significant contributor
to total return over time and expects the Fund's dividend yield to be above that
of the S&P 500 Stock Index.

Main Investing Risks

. Credit Risk
. Equity Risk, particularly the risks associated with Value stocks
. Foreign Investment and Currency Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class C Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- ----------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- ----------------------------------------------------------------------------------------------
Class B
- ----------------------------------------------------------------------------------------------
Class C
- ----------------------------------------------------------------------------------------------
S&P 500 Index
- ----------------------------------------------------------------------------------------------

</TABLE>

*Inception date: Class A and Class B - 4/1/94; Class C - 8/28/89

Balanced Fund

Investment Goal and Strategies

The investment objective of the Balanced Fund is current income and capital
appreciation. To achieve this goal, Founders Asset Management, LLC ("Founders"),
the Fund's subadvisor, invests in a balanced portfolio of common stocks, U.S.
and foreign government debt obligations and a variety of corporate fixed-income
securities.

9
<PAGE>

Normally, the Fund will invest up to 75% of its total assets in common
stocks, convertible corporate obligations, and preferred stocks. The Fund
emphasizes investments in dividend-paying common stocks with the potential for
increased dividends, as well as capital appreciation. The Fund also may invest
in non-dividend-paying companies if, in Founders' opinion, they offer better
prospects for capital appreciation.

The Fund will maintain a minimum of 25% of its total assets in
fixed-income, investment-grade securities rated Baa or higher by Moody"
Investors Service, Inc. ("Moody's" or BBB or higher by Standard & Poor's Ratings
Service ("S&P"). There is no maximum limit on the amount of straight debt
securities in which the Fund may invest.

Main Investing Risks

. Credit Risk
. Currency Risk
. Derivatives Risk
. Equity Risk, including particular risks associated with Value stocks
. Foreign Investment Risk
. Interest Rate Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- --------------------------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------------------------
S&P 500 Index
- --------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index
- --------------------------------------------------------------------------------------------------

</TABLE>

*Inception date: Class A and Class B - 4/1/94; Class C - 8/28/89

Strategic Income Fund

Investment Goal and Strategies

10
<PAGE>

The investment objective of the Strategic Income Fund is to seek a high
level of total return consistent with preservation of capital. To achieve this
goal, Salomon Brothers Asset Management Inc. ("SBAM"), the Fund's subadvisor,
invests in certain segments of the fixed-income market based on current economic
and market conditions and on the relative risks and opportunities in different
market segments. The segments that SBAM will consider for investment include:
U.S. Government obligations, investment grade domestic corporate debt, high
yield corporate debt securities, mortgage-backed securities and investment grade
and high yield international debt securities. To select securities for the Fund,
SBAM uses fundamental analysis as well as mathematical, quantitative analytical
techniques that measure relative risks and opportunities of each type of
security.

To maintain liquidity the Fund may invest up to 20% of its assets in high-
quality short-term money market instruments (not including securities relating
to forward settlement of trades). The Fund may invest up to 100% of its assets
in lower-rated securities, which are commonly called "junk bonds."

Main Investing Risks

. Credit Risk, including the particular risks associated with junk bonds
. Currency Risk
. Derivatives Risk
. Foreign Investment Risk
. Interest Rate Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- -----------------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- -----------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index
- -----------------------------------------------------------------------------------------------------------

</TABLE>

*Inception dates: Class A - 11/1/93; Class B and Class C - 4/1/94

11
<PAGE>

Investment Quality Bond Fund

Investment Goal and Strategies

The investment objective of the Investment Quality Bond Fund is to provide
a high level of current income consistent with the maintenance of principal and
liquidity. Wellington Management Company, LLP ("Wellington Management"), the
Fund's subadvisor, invests primarily in a diversified portfolio of investment
grade corporate bonds and U.S. Government bonds with intermediate to longer term
maturities. The Fund strives to generate and maintain a high, steady and
possibly growing income stream.

Wellington Management's investment management process includes credit
research on issuers and particular securities, as well as sector analysis. In
performing sector analysis, Wellington Management analyzes differences among
classes of securities, issuers and industry sectors to seek to obtain value and
yield advantages.

At least 65% of the Fund's assets will be invested in high quality,
marketable debt securities issued by U.S. and foreign companies that are
denominated in U.S. dollars, and securities that are either issued or that have
a guarantee as to principal or interest by the U.S. Government or its agencies
or instrumentalities, including mortgage-backed securities. The balance of the
Fund's investments may include lower-rated debt securities including junk bonds,
preferred stocks and convertible securities.

Main Investing Risks

. Credit Risk, including the particular risks associated with junk bonds
. Currency Risk
. Derivatives Risk
. Foreign Investment Risk
. Interest Rate Risk
. Liquidity Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------

12
<PAGE>

Class B
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index
- --------------------------------------------------------------------------------
*Inception dates: Class A - 5/1/91; Class B and Class C - 4/1/94

National Municipal Bond Fund

Investment Goal and Strategies

The investment objective of the National Municipal Bond Fund is to achieve
a high level of current income that is exempt from regular federal income taxes.
The Fund is also particularly concerned with preserving capital. To achieve
these goals, the Fund invests primarily in municipal debt. Salomon Brothers
Asset Management Inc. ("SBAM"), the Fund's subadvisor, manages the National
Municipal Bond Fund. Under normal circumstances, at least 80% of the Fund's net
assets will be invested in municipal debt securities whose interest payments are
exempt from regular federal income tax. Some of the Fund's dividends may be
subject to the federal alternative minimum tax.

The Fund will not purchase below investment-grade securities. Because the
Fund focuses on securities with long-term maturities, the average Fund maturity
will probably be 20 to 30 years, with an average duration of 8 to 11 years. The
Fund's portfolio may also include securities issued by municipalities that are
exempt from federal income tax. In order to maintain liquidity, the Fund may
invest up to 20% of its assets in taxable obligations, including taxable
high-quality short-term money market instruments.

Main Investing Risks

. Concentration Risk
. Credit Risk
. Interest Rate Risk
. Liquidity Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

13
<PAGE>

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- --------------------------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------------------------
Lehman Brothers Municipal
Bond Index
- --------------------------------------------------------------------------------------------------

</TABLE>

*Inception dates: Class A - 7/6/93: Class B and Class C - 4/1/94

U.S. Government Securities Fund

Investment Goal and Strategies

The investment objective of the U.S. Government Securities Fund is
to obtain a high level of current income consistent with preservation of capital
and maintenance of liquidity. Salomon Brothers Asset Management Inc ("SBAM"),
the Fund's subadvisor, pursues this objective by emphasizing investments in debt
obligations and mortgage-backed securities issued or guaranteed by the U.S.
Government or its agencies, and in derivative securities relating to such
securities.

Main Investing Risks

. Credit Risk
. Derivatives Risk
. Interest Rate Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

14
<PAGE>

Average Annual Total Returns as of 12/31/98

- ---------------------------------------------------------------------------------------------------------
Past One Year Past Five Years Life of Fund*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A
- ---------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------
Class C
- ---------------------------------------------------------------------------------------------------------
Merrill Lynch 1-10 Year
Government Index
- ---------------------------------------------------------------------------------------------------------

</TABLE>

*Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94

Money Market Fund

Investment Goal and Strategies

The investment objective of the Money Market Fund is to obtain maximum
current income consistent with preservation of principal and liquidity. To
achieve this objective, Manufacturers Adviser Corporation ("MAC"), the Fund's
subadvisor, invests in high quality, U.S. dollar denominated money market
instruments. An investment in the Money Market Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or by any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.

Main Investing Risks

. Interest Rate Risk
. Management Risk

Investment Performance

Calendar Year Total Returns for Class A Shares
[INSERT BAR CHART]

Best quarter: XX (quarter ending xx/xx/xx)
Worst quarter: XX (quarter ending xx/xx/xx)

Average Annual Total Returns as of 12/31/98

- --------------------------------------------------------------------------------
Past One Year Life of Fund*
- --------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
Class C
- --------------------------------------------------------------------------------
[Index]
- --------------------------------------------------------------------------------
*Inception dates: Class A - 8/28/89; Class B and Class C - 4/1/94

15
<PAGE>

Descriptions of Main Investing Risks

The value of your investment in a Fund can change for many reasons,
and may decrease. The primary reasons for possible decreases in a Fund's value
are called "Main Investing Risks," and are explained in this section. Because
the types of investments a Fund makes changes over time, the types of risks
affecting the Fund will change as well. Section II of the Prospectus includes
more information about other risks that might affect the Funds' values.

Concentration Risk

Investment professionals believe that investment risk can be reduced
through diversification, which is simply the practice of choosing more than one
type of investment. On the other hand, concentrating investments in a smaller
number of securities increases risk. The Emerging Growth Fund is not
"diversified," which means that it may invest in a relatively small number of
issuers of securities, and its value may be affected very significantly by the
change in value of a single security.

Credit Risk

Credit risk is the risk that the issuer or the guarantor (the entity
that agrees to pay the debt if the issuer cannot) of a debt or fixed income
security, or the counterparty to a derivatives contract or a securities loan,
will not repay the principal and interest owed to the investors or otherwise
honor its obligations. There are different levels of credit risk. Funds that
invest in lower-rated securities have higher levels of credit risk. Lower-rated
or unrated securities of equivalent quality (generally known as junk bonds) have
very high levels of credit risk. Securities that are highly rated have lower
levels of credit risk.

Funds may be subject to greater credit risk because they may invest
in debt securities issued in connection with corporate restructurings by highly
leveraged (indebted) issuers and in debt securities not current in the payment
of interest or principal, or in default.

Funds that invest in foreign securities are also subject to
increased credit risk because of the difficulties of requiring foreign entities,
including issuers of sovereign (national) debt, to honor their contractual
commitments, and because a number of foreign governments and other issuers are
already in default.

Currency Risk

Funds that invest in securities denominated in and/or are receiving
revenues in foreign currencies are subject to currency risk. Currency risk is
the risk that foreign currencies will decline in value relative to the U.S.
dollar. In the case of hedging positions, this is the risk that the U.S.
Dollar will decline in value relative to the currency hedged.

Derivatives Risk

16
<PAGE>

Derivatives are financial contracts between two parties whose value
depends on, or is derived from, the change in value of an underlying asset,
reference rate or index. When the value of the underlying security or index
changes, the value of the derivative changes as well. As a result, derivatives
can lose all of their value very quickly. Derivatives also offer the opportunity
for great increases in value. Because derivatives are contracts between parties,
there is also some credit risk associated with using derivatives. Additional
risks associated with derivatives include mispricing and improper valuation.
Derivatives risk for some Funds will be increased by their investments in
structured securities.

Equity Risk

Equity securities, such as a company's common stock, may fall in
value in response to factors relating to the issuer, such as management
decisions or falling demand for a company's goods or services. Factors affecting
a company's particular industry, such as increased production costs, may affect
the value of its equity securities. Equity securities also rise and fall in
value as a result of factors affecting entire financial markets, such as
political or economic developments, or changes in investor psychology.

Growth stocks are the stocks of companies that have earnings that
are expected to grow relatively rapidly. As a result, the values of growth
stocks may be more sensitive to changes in current or expected earnings than the
values of other stocks.

Value stocks are the stocks of companies that are not expected to
experience significant earnings growth, but that are undervalued, or are cheap
relative to the value of the company and its business as a whole. These
companies may have experienced some recent troubles that have caused their
stocks to be out of favor. If the market does not recognize the value of the
company over time, the price of its stock may fall, or simply may not increase
as expected.

Market capitalization refers to the total value of a company's
outstanding stock. Smaller companies with market capitalizations of less than $1
billion or so are more likely than larger companies to have limited product
lines, smaller markets for their products and services, and they may depend on a
small or inexperienced management group. Small company stocks may not trade very
actively, and their prices may fluctuate more than stocks of other companies.
Stocks of smaller companies may be more vulnerable to negative changes than
stocks of larger companies.

Foreign Investment Risk

Funds investing in foreign securities may experience rapid changes
in value. One reason for this volatility is that the securities markets of many
foreign countries are relatively small, with a limited number of companies
representing a small number of industries. Also, foreign securities issuers are
usually not subject to the same degree of regulation as U.S. issuers. Reporting,
accounting and auditing standards of foreign countries differ, in some cases
significantly, from U.S. standards.

17
<PAGE>

The possibility of political instability or diplomatic developments
in foreign countries could trigger nationalization of companies and industries,
expropriation (confiscation of property), extremely high levels of taxation, and
other negative developments. In the event of nationalization, expropriation or
other confiscation, a Fund could lose its entire investment. Funds that invest
in sovereign debt obligations are exposed to the risks of political, social and
economic change in the countries that issued the bonds.

Interest Rate Risk or Market Risk

Interest rate risk or market risk is the risk that a change in
interest rates will negatively affect the value of a security. This risk applies
primarily to debt securities such as bonds, notes and asset backed securities.
Debt securities are obligations of the issuer to make payments of principal
and/or interest on future dates. As interest rates rise, an investment in a Fund
can lose value, because the value of the securities the Fund holds may fall.

Market risk is generally greater for Funds that invest in debt
securities with longer maturities. This risk may be increased for Funds that
invest in mortgage-backed or other types of asset-backed securities that are
often prepaid. Even Funds that invest in the highest quality debt securities are
subject to interest rate risk.

Leverage Risk

Funds that borrow money to buy securities are using leverage.
Leverage risk is the risk that leverage, or debt, will enable a Fund to buy more
of a security that falls in value. In this case, the Fund's investment could
fall, and the Fund would still need to repay the money it borrowed. Funds can
create leverage, or borrow money, by using different types of techniques
including reverse repurchase agreements, dollar rolls, and derivatives including
inverse floating rate instruments.

Liquidity Risk

Liquidity risk is the risk that a Fund will not be able to sell a
security because there are too few people who actively buy and sell, or trade,
that security on a regular basis. A Fund holding an illiquid security may not be
able to sell the security at a fair price. Liquidity risk increases for Funds
investing with derivatives, foreign investments and restricted securities, which
all involve increased liquidity risk.

Management Risk

Management risk is the risk that the management of a Fund, despite
using various investment and risk analysis techniques, may not produce the
desired investment results.

18
<PAGE>

Fees and Expenses

This table describes the fees and expenses that you may pay if you
invest in the Funds.

SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)

<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price)
All Funds except Money Market
Fund .................................... 4.75% None None
Money Market Fund ....................... None None None
Maximum Deferred Sales Charge (as a percentage
of original purchase price or redemption price,
whichever is lower)
All Portfolios except Money Market
Fund..................................... 1%* 5%** 1%***
Money Market Fund........................ None None None
</TABLE>

* For purchases of $1 million or more.
** 5% first and second year; 4% third year; 3% fourth year; 2% fifth year;
1% sixth year and 0% thereafter.
*** 0% after first year.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)

Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
International Small Cap Fund
Management Fees ......................... 1.050% 1.050% 1.050%
Distribution (12b-1) Fees ............... 0.350% 1.000% 1.000%
Other Expenses*.......................... 0.500% 0.500% 0.500%
------ ------ ------
Total Annual Fund Operating Expenses .... 1.900% 2.550% 2.550%

International Growth and Income Fund
Management Fees ......................... 0.900% 0.900% 0.900%
Distribution (12b-1) Fees ............... 0.350% 1.000% 1.000%
Other Expenses* ......................... 0.500% 0.500% 0.500%
------ ------ ------
Total Annual Fund Operating Expenses .... 1.750% 2.400% 2.400%

Global Equity Fund
Management Fees ......................... 0.900% 0.900% 0.900%
Distribution (12b-1) Fees ............... 0.350% 1.000% 1.000%
Other Expenses*.......................... 0.500% 0.500% 0.500%
------ ------ ------
Total Annual Fund Operating Expenses .... 1.750% 2.400% 2.400%

Emerging Growth Fund
Management Fees .......................... 0.950% 0.950% 0.950%

</TABLE>

19
<PAGE>

<TABLE>
<S> <C> <C> <C>
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.400% 0.400% 0.400%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.700% 2.350% 2.350%

Small/Mid Cap Fund
Management Fees ................................... 0.925% 0.925% 0.925%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.400% 0.400% 0.400%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.675% 2.325% 2.325%

Growth Equity Fund
Management Fees ................................... 0.900% 0.900% 0.900%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.400% 0.400% 0.400%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.650% 2.300% 2.300%

Tax-Sensitive Equity Fund
Management Fees ................................... 0.850% 0.850% 0.850%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.400% 0.400% 0.400%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.600% 2.250% 2.250%

Growth and Income Fund
Management Fees ................................... 0.725% 0.725% 0.725%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.265% 0.265% 0.265%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.340% 1.990% 1.990%

Equity-Income Fund
Management Fees ................................... 0.800% 0.800% 0.800%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.265% 0.265% 0.265%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.415% 2.065% 2.065%

Balanced Fund
Management Fees ................................... 0.775% 0.775% 0.775%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.265% 0.265% 0.265%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.390% 2.040% 2.040%

Strategic Income Fund
Management Fees ................................... 0.750% 0.750% 0.750%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.400% 0.400% 0.400%
------ ------ ------
Total Annual Fund Operating Expenses .............. 1.500% 2.150% 2.150%

Investment Quality Bond Fund
Management Fees ................................... 0.600% 0.600% 0.600%
Distribution (12b-1) Fees ......................... 0.350% 1.000% 1.000%
Other Expenses* ................................... 0.300% 0.300% 0.300%
------ ------ ------
</TABLE>

20
<PAGE>

<TABLE>
<S> <C> <C> <C>
Total Annual Fund Operating Expenses ............. 1.250% 1.900% 1.900%

National Municipal Bond Fund
Management Fees .................................. 0.600% 0.600% 0.600%
Distribution (12b-1) Fees ........................ 0.150% 1.000% 1.000%
Other Expenses* .................................. 0.250% 0.250% 0.250%
------ ------ ------
Total Annual Fund Operating Expenses ............. 1.000% 1.850% 1.850%

U.S. Government Securities Fund
Management Fees .................................. 0.600% 0.600% 0.600%
Distribution (12b-1) Fees ........................ 0.350% 1.000% 1.000%
Other Expenses* .................................. 0.300% 0.300% 0.300%
------ ------ ------
Total Annual Fund Operating Expenses ............. 1.250% 1.900% 1.900%

Money Market Fund
Management Fees .................................. 0.200% 0.200% 0.200%
Distribution (12b-1) Fees ........................ 0.000% 0.000% 0.000%
Other Expenses* ................................... 0.300% 0.300% 0.300%
------ ------ ------
Total Annual Fund Operating Expenses ............. 0.500% 0.500% 0.500%
</TABLE>

* Reflects terms of the Advisory Agreement which may not be changed without a
shareholder vote.

The higher Distribution Fees borne by Class B and Class C shares may cause
long-term shareholders to pay more in sales charges than the maximum permitted
front-end sales charge on Class A shares. These examples help you compare the
costs of investing in a particular Fund, or a particular class of shares, with
the costs of investing in other mutual funds.

The examples assume that you:

. Invest $10,000 in a Fund for the time period indicated and then redeem
all of your shares at the end of those periods.

. Your investment earns a 5% return each year and that each Fund's
operating expenses remain the same.

Although your actual costs may be higher or lower, based on these assumptions
your costs would be:

<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
International Small Cap Fund
Class A Shares ................................... 659 1,044 1,453 2,592
Class B Shares ................................... 758 1,193 1,555 2,724
Class B No redemption ............................ 258 793 1,355 2,724
Class C Shares ................................... 358 793 1,355 2,885
Class C No redemption ............................ 258 793 1,355 2,885

International Growth and Income Fund
Class A Shares ................................... 644 1,000 1,379 2,439
Class B Shares ................................... 743 1,148 1,480 2,572
Class B No redemption ............................ 243 748 1,280 2,572
Class C Shares ................................... 343 748 1,280 2,736
Class C No redemption ............................ 243 748 1,280 2,572
</TABLE>

21
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Global Equity Fund
Class A Shares ....................... 644 1,000 1,379 2,439
Class B Shares ....................... 743 1,148 1,480 2,572
Class B No redemption ................ 243 748 1,280 2,572
Class C Shares ....................... 343 748 1,280 2,736
Class C No redemption ................ 243 748 1,280 2,572

Emerging Growth Fund
Class A Shares ....................... 640 985 1,354 2,388
Class B Shares ....................... 738 1,133 1,455 2,522
Class B No redemption ................ 238 733 1,255 2,522
Class C Shares ....................... 338 733 1,255 2,686
Class C No redemption ................ 238 733 1,255 2,686

Small/Mid Cap Fund
Class A Shares ....................... 637 978 1,342 2,362
Class B Shares ....................... 736 1,126 1,443 2,496
Class B No redemption ................ 236 726 1,243 2,496
Class C Shares ....................... 336 726 1,243 2,661
Class C No redemption ................ 336 726 1,243 2,496

Growth Equity Fund
Class A Shares ....................... 635 971 1,329 2,337
Class B Shares ....................... 733 1,118 1,430 2,470
Class B No redemption ................ 233 718 1,230 2,470
Class C Shares ....................... 333 718 1,230 2,636
Class C No redemption ................ 233 718 1,230 2,470

Tax-Sensitive Equity Fund
Class A Shares ....................... 630 956 1,304 2,285
Class B Shares ....................... 728 1,103 1,405 2,419
Class B No redemption ................ 228 703 1,205 2,419
Class C Shares ....................... 328 703 1,205 2,585
Class C No redemption ................ 228 703 1,205 2,585

Growth and Income Fund
Class A Shares ....................... 605 879 1,174 2,011
Class B Shares ....................... 702 1,024 1,273 2,147
Class B No redemption ................ 202 624 1,073 2,147
Class C Shares ....................... 302 624 1,073 2,317
Class C No redemption ................ 202 642 1,073 2,147
Equity-Income Fund
Class A Shares ....................... 612 902 1,212 2,091
Class B Shares ....................... 710 1,047 1,311 2,226
Class B No redemption ................ 210 647 1,111 2,226
Class C Shares ....................... 310 647 1,111 2,395
Class C No redemption ................ 210 647 1,111 2,226
</TABLE>

22
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Balanced Fund
Class A Shares ........................ 610 894 1,191 2,064
Class B Shares ........................ 707 1,040 1,298 2,200
Class B No redemption ................. 207 640 1,098 2,200
Class C Shares ........................ 307 640 1,098 2,369
Class C No redemption ................. 207 640 1,098 2,200

Strategic Income Fund
Class A Shares ........................ 620 927 1,255 2,180
Class B Shares ........................ 718 1,073 1,354 2,315
Class B No redemption ................. 218 673 1,154 2,315
Class C Shares ........................ 318 673 1,154 2,483
Class C No redemption ................. 218 673 1,154 2,315

Investment Quality Bond Fund
Class A Shares ........................ 596 853 1,129 1,915
Class B Shares ........................ 693 997 1,226 2,051
Class B No redemption ................. 193 597 1,026 2,051
Class C Shares ........................ 293 597 1,026 2,222
Class C No redemption ................. 193 597 1,026 2,051

National Municipal Bond Fund
Class A Shares ........................ 572 778 1,001 1,641
Class B Shares ........................ 688 982 1,201 1,944
Class B No redemption ................. 188 582 1,001 1,944
Class C Shares ........................ 288 582 1,001 2,169
Class C No redemption ................. 188 582 1,001 1,944

U.S. Government Securities Fund
Class A Shares ........................ 596 853 1,129 1,915
Class B Shares ........................ 693 997 1,226 2,051
Class B No redemption ................. 193 597 1,026 2,051
Class C Shares ........................ 293 597 1,026 2,222
Class C No redemption ................. 193 597 1,026 2,051

Money Market Fund
Class A Shares ........................ 51 161 282 642
Class B Shares ........................ 51 161 282 642
Class C Shares ........................ 51 161 282 642
</TABLE>

23
<PAGE>

More Information About
Investment Objectives, Strategies and Risks

This Prospectus does not attempt to disclose all of the different
investment techniques that the Funds might use, or all of the types of
securities in which the Funds might invest. As with any mutual fund, investors
must rely on the professional judgment and skill of the Funds' management. A
subadvisor may choose not to use some or all of the investment techniques
available to a Fund, and these choices may cause the Fund to lose money or not
achieve its goal.

Each Fund has a unique investment goal (see the Fund Summaries) that it
tries to achieve through its investment strategies. The investment goals, or
objectives, of the Funds cannot be changed without the approval of the holders
of a majority of the outstanding shares of each Fund. However, except for
certain investment restrictions, the strategies a Fund uses to achieve its
investment objective may be changed by the Trustees without approval of the
shareholders. Because each Fund is different, they have different investment
policies and risks, and will also have different returns over time. This section
provides additional information about the Funds, and should be read in
conjunction with the Fund Summaries.

International Small Cap Fund

The Fund may invest without limit in American Depositary Receipts and
American Depositary Shares (collectively, "ADR's"). ADR's are receipts
representing shares of a foreign corporation held by a U.S. bank that entitle
the holder to all dividends and capital gains on the underlying foreign shares.
ADR's are denominated in U.S. dollars and trade in the U.S. securities markets.

The Fund may invest a significant portion of its assets in the securities
of small companies. Small companies are still in the developing stages of their
life cycles and have limited product lines, markets or financial resources
and/or lack management depth. The securities of small companies may have limited
marketability and may experience more abrupt or erratic movements in price than
securities of larger companies or the market averages in general. Because of
this, the net asset value of the International Small Cap Fund may fluctuate more
widely than popular market averages.

The Fund may also invest in convertible securities, preferred stocks,
bonds, debentures and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation.

The Fund may invest in investment-grade bonds, debt securities and
corporate obligations rated (Baa or higher by Moody's, or BBB or higher by S&P.
The Fund may choose to invest in lower-rated (Ba or lower by Moody's and BB or
lower by S&P) convertible securities and preferred stocks. The Fund may also
invest in unrated convertible securities and preferred stocks if Founders
believes they are equivalent in quality to the rated securities that the Fund
may buy.

24
<PAGE>

The Fund will not invest more than 5% of its total assets in unrated
or below investment-grade fixed-income securities, with the exception of
preferred stocks. If the Fund holds securities that are downgraded after they
are purchased, the Fund does not have to sell them unless the total Fund assets
in unrated and below investment-grade securities reach 5% of assets.

Since the Fund's assets will be invested primarily in foreign
securities and since substantially all of the Fund's revenues will be received
in foreign currencies, the Fund's net asset values will be affected by changes
in currency exchange rates. The Fund will pay dividends in dollars and will
incur currency conversion costs.

International Growth and Income Fund

The Fund is designed for investors with a long-term investment
horizon who want to take advantage of investment opportunities outside the
United States.

The Fund invests primarily in the common stock of companies based in
developed markets other than the United States. However, the Fund may invest up
to 15% of its assets in companies from emerging markets. The Fund may also
invest in other foreign securities with equity characteristics such as preferred
stock, warrants, rights and convertible securities.

The Fund invests in securities listed on foreign or domestic
securities exchanges and over-the-counter markets, and can invest in certain
restricted or unlisted securities. For the purposes of the Fund's investments,
developed countries include Australia, Canada, Japan, New Zealand, the United
Kingdom and most of the countries in estern Europe. Emerging markets include
most other countries in the world.

In pursuing the Fund's objective, J.P. Morgan will actively manage
the assets of the Fund primarily through stock valuation and selection. Using
fundamental analysis as well as macro-economic models, J.P. Morgan develops
proprietary research on companies, countries and currencies. Using its
fundamental stock research, J.P. Morgan produces a ranking of companies in each
industry group according to their relative value. J.P. Morgan then buys and
sells stocks, using the research and valuation rankings as well as its
assessment of other factors it believes could affect a stock's price. The Fund
emphasizes those stocks ranked as undervalued, while underweighting or avoiding
those that appear overvalued. The Fund's country weightings primarily result
from its stock selection decisions and may differ significantly from it's
benchmark, the MSCI All Country World Index Free (ex-U.S.)

J.P. Morgan manages currency exposure, in conjunction with country
and stock allocation, in an attempt to protect and possibly enhance the Fund's
market value. Through the use of forward foreign currency exchange contracts,
the Fund may reduce its exposure to foreign currencies that J.P. Morgan deems
unattractive by selling the foreign currency in exchange for the U.S. dollar.
However, the Fund does not typically hedge its emerging markets equity exposure.

25
<PAGE>

The Fund may make money market investments while seeking suitable investments,
waiting for settlement, or for liquidity purposes.

Global Equity Fund

The Fund invests primarily in common and preferred stocks,
convertible securities, rights and warrants to purchase common stocks, American
and Global Depository Receipts and other equity securities of issuers throughout
the world, including issuers in the U.S. and emerging market countries.

Under normal circumstances, at least 65% of the value of the total
assets of the Fund will be invested in equity securities and at least 20% of the
value of the Fund's total assets will be invested in the common stocks of U.S.
issuers. The Fund may also invest in money market instruments. Although the Fund
intends to invest primarily in securities listed on stock exchanges, it will
also invest in equity securities that are traded over-the-counter or that are
not admitted to listing on a stock exchange or dealt in on a regulated market.
Privately traded securities may have additional liquidity risks. The Fund may
also engage in forward foreign currency transactions and purchase when-issued or
delayed delivery securities.

MSDW Investment Management's investment focus is the selection of
individual stocks, with an eye toward value. To choose stocks for the Fund, MSDW
Investment Management identifies stocks that it believes to be undervalued in
relation to the issuer's assets, cash flow, earnings and revenues. To decide
whether or not these stocks are suitable for investment, MSDW Investment
Management estimates the future value of these stocks using a mathematical
model, called a dividend discount model. MSDW Investment Management uses
research from a number of sources, including Morgan Stanley Capital
International, an affiliate located in Geneva, Switzerland. Fund holdings are
reviewed regularly, and analyzed to be sure they continue to conform to MSDW
Investment Management's value criteria. Equity securities that stop conforming
to the Fund's investment criteria will be sold. Although the Fund will not
invest for short-term trading purposes, securities may be sold that were held
only for a short time.

Emerging Growth Fund

The Fund will usually invest at least 65% of its total assets in
common stocks or warrants of emerging growth companies that represent attractive
opportunities for maximum capital appreciation. Emerging growth companies are
small- or medium-sized companies beyond their start-up phase showing positive
earnings or the potential for accelerated earnings growth.

Although the Fund will typically invest in small and mid-sized
companies, the Fund may invest in emerging growth companies of any size.
Emerging growth companies generally benefit from new products or services,
technological developments, changes in management or other factors. The Fund may
also invest in companies experiencing unusual developments affecting their
market value, called "special situation" companies. These companies may be
involved in acquisitions or consolidations, reorganization, recapitalization,
mergers, liquidation, or distribution of cash, securities or other assets,
tender or exchange offers, a breakup or workout of

26
<PAGE>

a holding company, lawsuits which, if resolved favorably, would improve the
value of the company's stock, or a change in corporate control.

The Fund may invest up to 20% of its total assets in investment
grade debt securities (other than money market obligations) and preferred stocks
that are not convertible into common stock. The Fund may also invest up to 20%
of its assets in the securities of foreign issuers, which have certain risks
associated with them. The Fund's status is non-diversified , although its
portfolio managers have typically diversified the Fund's investments.

The interest income to be derived may be considered as one factor in
selecting debt securities for investment. Because the market value of debt
obligations can be expected to vary inversely with changes in prevailing
interest rates, investing in debt obligations may provide an opportunity for
capital appreciation when interest rates are expected to decline. The success of
such a strategy is dependent upon Warburg's ability to accurately forecast
changes in interest rates.

A security will be considered investment grade if it is rated within
the four highest grades by Moody's or S&P or, if unrated, is determined by
Warburg to be of comparable quality. Bonds rated in the fourth highest grade may
have speculative characteristics. If a security held by the Fund is no longer
rated, or is rated below Fund's minimum allowed rating, Warburg factors this
information into the decision about whether the Fund should continue to hold the
securities. The Fund can normally invest up to 20% of its total assets in
domestic and foreign short-term money market obligations.

Investing in securities of emerging growth and small-sized companies
can involve greater risks because these securities may have limited
marketability. Because small and medium-sized companies normally have fewer
shares outstanding than larger companies, it may be more difficult for the Fund
to buy or sell large numbers of shares without affecting current prices. Small-
and medium-sized companies are typically subject to a greater degree of changes
in earnings and business prospects than are larger, more established companies.
There is typically less publicly available information concerning small- and
medium-sized companies than for larger, more established ones. And companies
with small market capitalizations may also be dependent upon a single
proprietary product or market niche, may have limited product lines, markets or
financial resources, or may depend on a limited management group.

Small/Mid Cap Fund

The Fund invests in equity securities, including common and
preferred stocks, and securities that can be converted into or exchanged for
equity securities, including warrants and rights. The Fund will typically invest
in companies whose securities are traded on domestic stock exchanges or in the
over-the-counter market.

Small companies are still in the developing stages of their life
cycles and are attempting to achieve rapid growth in both sales and earnings.
The securities of small companies may have limited marketability and may
experience more abrupt or erratic movements in price than

27
<PAGE>

securities of larger companies or the market averages in general. Because of
this, the net asset value of the Small/Mid Cap Fund may fluctuate more widely
than those of the popular market averages.

To give the Fund the flexibility to take advantage of new
opportunities that can help to meet the Fund's investment objectives, the Fund
can invest up to 15% of its net assets in money market instruments, bank and
thrift obligations, obligations issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities, foreign bank obligations and obligations
of foreign branches of domestic banks, variable rate master demand notes and
repurchase agreements.

The Fund may invest up to 20% of its total assets in foreign
securities and will be subject to certain risks as a result of these
investments. The Fund may also purchase American Depository Receipts ("ADRs") or
U.S. dollar-denominated securities of foreign issuers that are not included in
the 20% foreign securities limitation.

Growth Equity Fund

The Fund may invest in convertible securities, preferred stocks,
bonds, debentures and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation. Although these
securities do produce current income, income will not be a substantial factor
when selecting these securities. The Fund will only invest in investment-grade
bonds, (Baa or higher by Moody's and BBB or higher by S&P) debt securities and
corporate obligations. If these securities are unrated, they will be considered
by Founders to be of comparable quality. The Fund may purchase convertible
securities and preferred stocks rated above B in medium and lower categories by
Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P).

At least 65% of the Fund's total assets will be invested in common
stocks of well-established, high-quality growth companies. The Fund may also
invest in convertible securities, preferred stocks, debentures and other
corporate obligations when Founders believes that these investments offer
opportunities for capital appreciation. Although these securities may produce
current income, income will not be a substantial factor in selecting these
securities.

The Fund may invest in investment grade bonds, debentures and
corporate obligations rated Baa or higher by Moody's or BBB or higher by S&P.
The Fund may choose to invest in lower-rated (Ba or lower by Moody's and BB or
lower by S&P) convertible and preferred stocks but not rated below B. The Fund
may also invest in unrated convertible securities and preferred stocks if
Founders believes that they are equivalent in quality to the rated securities
the Fund may buy. The Fund will never have more than 5% of its total assets
invested in unrated or below-investment-grade fixed income securities, with the
exception of preferred stocks. If the Fund holds securities that are downgraded
after they are purchased, the Fund does not have to sell them unless the total
Fund assets in unrated and blow investment-grade securities reaches 5% of
assets.

28
<PAGE>

The Fund is also permitted to use forward foreign currency contracts
and futures contracts. The Fund may also purchase and/or write options on
securities and on indices, and my invest in Rule 144A securities.

Tax-Sensitive Equity Fund

This Fund is designed for investors in all but the lowest federal
income tax bracket seeking the highest long-term after-tax total return. The
Fund tries to minimize taxable dividend income by emphasizing securities with
low dividend yields and minimizing investments in income producing securities.

Usually, at least 80% of the Fund's total assets will be invested in
equity and equity-related securities, such as common stocks and preferred
stocks. The Fund may invest in equity securities of foreign issuers that are
listed on a U.S. securities exchange or traded in the U.S. over-the-counter
market, but will not invest more than 10% of its total assets in securities that
are not listed or traded. The Fund currently intends to limit its investments in
foreign securities to those that are denominated or quoted in U.S. dollars.

When selling portfolio securities, the Fund will generally select
the highest cost shares of the specific security (and/or, if gains will be
realized, shares that will produce long-term capital gains) in order to reduce
the realization of capital gains, short-term gains in particular. To help
achieve its investment objective, the Fund may sell securities in order to
realize capital losses. Realized capital losses can be used to offset realized
capital gains, reducing the amount of capital gains the Fund would distribute.

The Fund generally expects to have relatively low annual portfolio
turnover under normal circumstances, which is one way to help minimize taxable
gains to investors. For taxpayers in all but the lowest tax brackets, ordinary
income is taxed at a higher tax rate than capital gains on securities held for
more than one year ("long-term capital gains"). Ordinary income includes
dividends from the Fund's net investment income and net short-term capital
gains. Net long-term capital gains realized and distributed by the Fund are
subject to federal taxes as long-term capital gains. The Fund expects generally
to hold appreciated portfolio securities for more than one year. This holding
period will reduce the realization and distribution to shareholders of
short-term capital gains, which are taxed at higher ordinary income rates.

Although the Fund will always consider the impact of federal and
state income taxes on a shareholder's investment returns, portfolio management
decisions may be made based on other criteria, including actual or anticipated
economic, market or issuer-specific developments. In this case, the Fund may
produce taxable ordinary income. The Fund may occasionally need to sell
securities it would otherwise have held to generate cash, pay expenses or meet
shareholder redemption requests. Certain investments by the Fund may produce
ordinary taxable income on a regular basis.

As part of the strategy of reducing the impact of federal and state
income taxes paid by shareholders on Fund distributions, the Fund will follow a
disciplined investment strategy,

29
<PAGE>

emphasizing stocks that Standish believes to offer above-average potential for
capital growth while offering low dividend yields. Although the precise
application of the strategy will vary according to market conditions, to
identify attractive equity securities Standish intends to use statistical
modeling techniques that look at stock-specific factors. These factors include:
Current price/earnings ratios; stability of earnings growth; forecasted changes
in earnings growth; trends in consensus analysts' estimates; and measures of
earnings results relative to expectations. Once securities are identified,
fundamental analysis will be completed before they are included in the Fund's
holdings. Securities selected for inclusion in the Fund's portfolio will
represent various industries and sectors.

Growth and Income Fund

Wellington Management seeks to achieve the Fund's objective by investing
primarily in a diversified portfolio of common stocks of U.S. issuers which
Wellington Management believes are of high quality. Wellington Management
believes that high quality companies is evidenced by a leadership position
within an industry, a strong or improving balance sheet, relatively high return
on equity, steady or increasing dividend payout, and strong management skills.
The Fund's investments will emphasize primarily dividend paying stocks of larger
companies

The Fund may invest in securities that can be converted into, or that
include the right to buy common stocks, including convertible securities issued
in the Euromarket and preferred stocks. The Fund may also invest in marketable
debt securities of domestic issuers and of foreign issuers (payable in U.S.
dollars) rated at the time of purchase "A" or better by Moody's or S&P, or
unrated securities considered to be of equivalent quality in Wellington
Management's judgment. Under normal market conditions, the subadvisor expects
that the Fund's portfolio will consist primarily of equity securities.

Equity-Income Fund

The Fund will generally consider companies with the following characteristics:

. established operating histories;
. above-average current dividend yield relative to the average yield of the
S&P 500 Stock Index;
. low price/earnings ratios relative to the S&P 500 Stock Index;
. sound balance sheets and other financial characteristics; and
. low stock price relative to a company's underlying value as measured by
assets, earnings, cash flow, or business franchises.

The Fund will tend to take a "value" approach and invest in stocks and
other securities that appear to be temporarily undervalued by various measures,
such as price/earnings ratios. Value investors seek to buy a stock (or other
security) when its price is low in relation to what they believe to be its real
worth or future prospects. By identifying companies whose stocks are currently
out of favor, value investors hope to realize significant appreciation as other
investors recognize the stock's real value and the price rises accordingly.

30
<PAGE>

The Fund may also buy bonds of any quality, including "junk bonds,"
foreign securities, preferred stocks, convertible securities, and warrants, and
it will hold some highly-rated U.S. and foreign dollar-denominated money market
securities, including repurchase agreements, in the two highest rating
categories, maturing in one year or less.

Balanced Fund

The Fund may invest in convertible securities, preferred stocks,
bonds, debentures, and other corporate obligations when Founders believes that
these investments offer opportunities for capital appreciation. Current income
is also a factor in the selection of these securities. The Fund may purchase
convertible securities and preferred stocks rated above B in medium and lower
categories by Moody's or S&P (Ba or lower by Moody's and BB or lower by S&P).

The Fund may invest without limit in ADRs and up to 30% of its total
assets in foreign securities (other than ADRs). The Fund will not invest more
than 25% of its total assets in the securities of any one foreign country. The
Fund will be subject to special risks as a result of its ability to invest up to
30% of its total assets in foreign securities, excluding ADRs.

Strategic Income Fund

SBAM has entered into a subadvisory consulting agreement with its
London-based affiliate, Salomon Brothers Asset Management Limited ("SBAM
Limited") under which SBAM Limited provides certain advisory services to SBAM
relating to currency transactions and investments in non-dollar denominated debt
securities.

The Fund may invest up to 100% of Fund assets in lower-rated
securities usually called "junk bonds." Junk bonds are rated "B" or below by
Moody's (Moody's lowest rating is C), or "BB" or below by S&P (S&P's lowest
rating is D). If they are unrated, SBAM will determine that they are of similar
quality to rated securities.

In addition to fundamental analysis, SBAM relies in part on
mathematical, quantitative analytical techniques that measure relative risks and
opportunities of each type of security. The techniques consider current and
historical economic, market, political and technical data for each type of
security. SBAM also assesses economic and market conditions on a global and
local (country) basis, including include current and projected levels of growth
and inflation, balance of payment status and monetary policy. SBAM also uses
sophisticated fixed income analysis tools, including prepayment analysis and
option adjusted spread technology to evaluate mortgage securities, mean variance
optimization models to evaluate international debt securities, and total rate of
return analysis to measure relative risks and opportunities in other fixed-
income markets.

Currency relationships and politics also impact the selection of
international debt securities. If the Fund is concerned about preserving
capital, it may choose to invest in securities that do not offer the highest
possible yields. SBAM continuously reviews how the Fund's assets

31
<PAGE>

are invested, and make s appropriate adjustments. The Fund will invest in
securities that range in maturity.

The Fund may also invest in debt obligations issued or guaranteed by
a foreign sovereign government or one of its agencies or political subdivisions,
and debt obligations issued or guaranteed by international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the "World Bank"), the European Coal and Steel Community, the
Asian Development Bank and the Inter-American Development Bank. These securities
may be denominated in multi-national currency units.

As discussed above, the Fund may invest in U.S. dollar-denominated
securities issued by domestic issuers that are rated below investment grade or,
if unrated, determined by SBAM to be of comparable quality. Although SBAM does
not plan to invest more than 75% of the Fund's assets in below investment-grade
domestic and developing country debt securities, the Fund may choose to invest
more than that if SBAM feels that the yield available from such securities
outweighs their additional risks.

The purpose of investing a portion of the Fund's assets in below
investment grade, mortgage, and international debt securities, is to provide
investors with a higher yield than a high-quality domestic corporate bond fund,
and with less risk than a fund that invests principally in below investment
grade securities. Some of the debt securities the Fund may select may considered
comparable to securities having, the lowest ratings for non-subordinated debt
instruments assigned by Moody's or S&P (i.e., rated C by Moody's or CCC or lower
by S&P).

Investment Quality Bond Fund

The investment objective of the Fund is to provide a high level of
current income consistent with the maintenance of principal and liquidity. The
Fund invests primarily in a diversified portfolio of fixed income securities.

Credit research on corporate bonds includes examining both
quantitative (mathematical) and qualitative criteria established by Wellington
Management. These criteria include an issuer's industry, operating and financial
profiles, business strategy, management quality, and projected financial and
business conditions.

At least 65% of the Fund's assets will be invested in high quality debt
securities. "High quality" debt securities are those rated (at the time of
purchase) "A" or better by Moody's or S&P (in the three highest rating tiers),
or unrated debt securities considered to be of comparable quality by Wellington
Management. The Fund may only invest up to 20% of its assets in debt securities
rated below "Baa" by Moody's or "BBB" by S&P, or unrated debt securities
considered to be of comparable quality by Wellington Management. The Fund will
not be required to sell any downgraded bonds that cause the Fund to exceed this
20% minimum.

32
<PAGE>

The Fund may invest up to 20% of its assets in domestic and foreign high
yield corporate and government debt securities, commonly referred to as "high
yield/high risk" or "junk" bonds. These bonds may be rated "B" or below by
Moody's (Moody's lowest rating is "C"), or "BB" or below by S&P (S&P's lowest
rating is "D"), or they may be unrated but considered to be of comparable
quality by Wellington Management. There is no minimum rating required by the
Fund. Domestic and foreign high yield debt securities involve greater risks than
higher quality securities, including price volatility and risk of default in the
payment of interest and principal

National Municipal Bond Fund

The Fund's portfolio may include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities cannot make its interest and principal payments from
current revenues, it may rely on a reserve fund. The availability of the reserve
fund is a moral commitment, but not a legal obligation, of the state or
municipality that created the issuer.

In addition, the Fund may invest in municipal lease obligations ("MLOs").
MLOs are not fully backed by the municipality's credit and their interest may
become taxable if the lease is assigned, or sold to another lender. If timely
lease payments are not made, the lease will end, and it is possible that the MLO
will default and that the Fund will suffer a loss. Because SBAM plans to invest
more than 5% of the Fund's net assets in MLOs the Trustees of the Fund have
established procedures for SBAM to use in considering an investment in MLOs. The
factors SBAM must examine include:

. the frequency of trades and quotes for the MLO
. the number of dealers willing to purchase or sell such MLO and the number
of other potential purchasers the willingness of dealers to undertake to
make a market in the MLO
. the nature of the MLO and the nature of the marketplace trades (e.g., the
time needed to dispose of the security and the method of soliciting offers)
. the nature of the offering of such MLO (e.g., the size of the issue and the
number of anticipated holders)
. the ability of the MLO to maintain its marketability throughout the time
the instrument is held in the Fund
. other factors, if any, which SBAM deems relevant to determining the
existence of a trading market for such MLO.

The Fund also may invest in resource recovery bonds, which may be general
obligations of the issuing municipality or supported by corporate or bank
guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.

In order to maintain liquidity, the Fund may invest up to 20% of its assets
in taxable obligations, including taxable high-quality short-term money market
instruments, including

33
<PAGE>

. Obligations of the U.S. Government or its agencies or instrumentalities
. Commercial paper of issuers rated at the time of purchase "A-2" or better
by S&P, "P-2" or better by Moody's, or "F-2" or better by Fitch Investors
Services, Inc., ("Fitch"), or unrated securities of similar quality
. Certificates of deposit, bankers' acceptances or time deposits of U.S.
banks with total assets of at least $1 billion (including obligations of
foreign branches of such banks) and of the 75 largest foreign commercial
banks in terms of total assets (including domestic branches of such banks),
and repurchase agreements with respect to such obligations.

If at some point, SBAM determines that the market to securities exempt from
federal income taxes is troubled, the Fund may invest up to 100% of its net
assets taxable high-quality short-term money market instruments. Of course,
dividends paid by the Fund that are generated by taxable money market
instruments will be taxable to investors.

From time to time, the Fund may invest more than 25% of its assets in
obligations whose interest payments are from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same geographic location.
As a result, the Fund may be more susceptible to a single economic, political or
regulatory development than would a Fund of securities with a greater variety of
issuers.

U.S. Government Securities Fund

The Fund may invest in:

. Mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA"), popularly known as "Ginnie Maes," that are backed by
the full faith and credit of the U.S. Government. These are known as a
"modified pass-through" type of mortgage-backed security ("GNMA
Certificates"). These securities entitle the holder to receive all interest
and principal payments due whether or not payments are actually made on the
underlying mortgages
. U.S. Treasury obligations . Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government. These securities are backed by
their own credit, and may not be backed by the full faith and credit of the
U.S. Government
. Mortgage-backed securities guaranteed by agencies or instrumentalities of
the U.S. Government which are supported by their own credit but not the
full faith and credit of the U.S. Government, such as the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association; and
. Collateralized mortgage obligations issued by private issuers for which the
underlying mortgage-backed securities serving as collateral are backed (i)
by the credit alone of the U.S. Government agency or instrumentality which
issues or guarantees the mortgage-backed securities, or (ii) by the full
faith and credit of the U.S. Government.
. Repurchase agreements collateralized by any of the foregoing.

34
<PAGE>

Money Market Fund

The Fund invests in high quality, U.S. dollar-denominated money market
instruments including:

. Obligations that are issued by or whose principal or interest is guaranteed
by the U.S. Government. Obligations of any agency or authority controlled
or supervised by and acting as an instrumentality of the U.S. Government
under authority granted by Congress. These are called '"U.S. Government
securities."'
. Certificates of deposit, bank notes, time deposits, Eurodollars, Yankee
obligations and bankers' acceptances of U.S. banks, foreign branches of
U.S. banks, foreign banks and U.S. savings and loan associations which at
the date of investment have capital, surplus and undivided profits as of
the date of their most recent published financial statements in excess of
$100,000,000 (or less than $100,000,000 if the principal amount of such
bank obligations is insured by the Federal Deposit Insurance Corporation
("FDIC") or the Savings Association Insurance Fund ("SAIF"))
. Commercial paper which at the date of investment is rated (or guaranteed by
a company whose commercial paper is rated) within the two highest rating
categories by any nationally recognized statistical rating organization
("NRSRO") (such as "P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P) or,
if not rated, is issued by a company which MAC, acting pursuant to
guidelines established by the Trustees, has determined to be of minimal
credit risk and comparable quality
. Corporate obligations maturing in 397 days or less which at the date of
investment are rated within the two highest rating categories by any NRSRO
(such as "Aa" or higher by Moody's or "AA" or higher by S&P)
. Short-term obligations issued by state and local governmental issuers
. Obligations of foreign governments, including Canadian and Provincial
Government and Crown Agency Obligations
. Securities that have been structured to be eligible money market
instruments such as participation interests in special purpose trusts that
meet the quality and maturity requirements in whole or in part due to
arrangements for credit enhancement or for shortening effective maturity .
Repurchase agreements with respect to any of the foregoing obligations

35
<PAGE>

Other Risks of Investing in the North American Funds

High Yield/High Risk Securities

High yield securities (often known as "junk bonds") include debt
instruments that have an equity security attached to them. Securities rated
below investment grade and comparable unrated securities offer yields that
fluctuate over time, but generally offer higher yields than do higher rated
securities. However, securities rated below investment grade also involve
greater risks than higher rated securities. Under rating agency guidelines,
medium- and lower-rated securities and comparable unrated securities will likely
have some quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions.

Some of the debt securities in which the Funds may choose to invest
may be, or may be similar to the lowest rated, (C by Moody's or CCC or lower by
S&P) non-subordinated debt. This type of security is very risky, as issuers may
not have the ability to repay principal and interest, and may even default. If
this should occur, the value of shares of the Fund holding them could fall.

Foreign Securities

There are risks associated with investing in foreign securities.
These risks include unforeseen changes in tax laws, political changes, and
changes in foreign currency values and exchange rates. There may be less
publicly available information about foreign issuers. Foreign issuers, including
foreign branches of U.S. banks, are subject to different accounting and
reporting requirements, which are generally less extensive than the requirements
for domestic issuers. Foreign stock markets generally have substantially less
volume than the U.S. exchanges and securities of foreign issuers are generally
less liquid and more volatile, relative to U.S. issuers. For emerging markets,
these risks can be more extreme.

There is frequently less governmental regulation of foreign
exchanges, broker-dealers and issuers than in the United States, and brokerage
costs may be higher. In addition, investments in foreign companies may be
subject to the possibility of nationalization or other changes in policy. Policy
changes may allow foreign government to withhold dividends, expropriate
(confiscate, or keep) investment returns, or raise taxes to extremely high
levels, among other things. Also, should a foreign issuer default, it may be
difficult to recover anything in a bankruptcy proceeding.

36
<PAGE>

Lending Fund Securities

Each Fund may lend up to 33% of its total portfolio assets, or
securities, to brokers, dealers and other financial institutions. These loans
must be callable (the Fund may ask that the loan be repaid in full) at any time
by the Fund. The loans must be at all times fully secured by cash, cash
equivalents or securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities, and marked to market (priced at market value) to
the value of loaned securities on a daily basis. As with any extensions of
credit, there may be risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of Fund securities will only be made to firms deemed by the
subadvisors to be creditworthy.

Hedging and Other Strategic Transactions

Individual Funds may be authorized to use a variety of investment
strategies described below for hedging purposes only, including hedging various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements), and managing the effective maturity or duration of
debt instruments held by the Fund. Hedging is simply believing that certain
securities will fall, or rise, in value, and structuring transactions that take
advantage of those changes. These transactions are generally used to protect
against possible changes in the market value of securities a Fund already owns
or plans to buy, to protect unrealized gains or to improve the Fund's return in
some way.

Where allowed, individual Funds may purchase and sell (or write)
exchange-listed and over-the-counter put and call options on securities, index
futures contracts, financial futures contracts and fixed-income indices and
other financial instruments, enter into financial futures contracts, enter into
interest rate transactions, and enter into currency transactions. This category
includes derivative transactions. A "derivative" is generally defined as an
instrument whose value is based upon, or derived from, some underlying index or
rate. Interest rate transactions may include swaps, caps, floors and collars,
and currency transactions may include currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.

Year 2000

Year 2000 computer problems involve the inability of some computer
systems to properly process data-related information in respect to the end of
this century. While this problem could have a negative effect on the Funds, CAM
is working to avoid this problem and obtain assurances from the subadvisors and
other service providers that they are adequately addressing any possible year
2000 problems.

37
<PAGE>

Frequent Trading

A Fund may buy or sell investments extremely frequently, increasing
brokerage commissions and other expenses of the Fund. Frequent trading may also
increase the amount of capital gains realized by a Fund, including short-term
capital gains, which are generally taxable to shareholders at ordinary income
tax rates.

Defensive Strategies

A Fund's subadvisor may at certain times decide that pursuing the
Fund's investment strategies is inconsistent with market conditions. A
subadvisor may then employ defensive strategies designed mostly to limit losses.
However, the subadvisor may choose not to use defensive strategies, even in
volatile or unsettled market conditions. Such defensive strategies may cause the
Fund to miss opportunities or to not achieve its goal.

38
<PAGE>

Management of the Funds

Under the federal securities laws, Massachusetts law and the Trust's
Agreement and Declaration of Trust and By-Laws, the business and affairs of the
Trust are managed under the direction of the Trustees.

CypressTree Asset Management Corporation, Inc. ("CAM") is the
investment adviser for the Trust. CAM was formed in 1996 to advise, acquire and
distribute mutual funds through broker-dealers, banks and other intermediaries.
CAM's address is 286 Congress Street, Boston, Massachusetts 02210.

According to its Advisory Agreement with the Trust (the "Advisory Agreement"),
CAM:

. Oversees the administration of all aspects of the business and affairs of
the Funds
. Selects, contracts with and compensates subadvisors to manage the assets of
the Funds
. Makes recommendations to the Trustees regarding the hiring, termination and
replacement of subadvisors
. Reimburses the Fund if the total of certain expenses allocated to any Fund
exceeds certain limitations
. Monitors the subadvisors for compliance with the investment objectives and
related policies of each Fund
. Reviews the performance of the subadvisors
. Periodically reports to the Trustees.

The following table shows the management fees each Fund paid to CAM
for the last fiscal year under the Advisory Agreement as a percentage of the
Fund's average daily net asset value.

- ----------------------------------------------------------------------------
Funds Management Fees
- ----------------------------------------------------------------------------
International Small Cap Fund
- ----------------------------------------------------------------------------
International Growth and Income Fund
- ----------------------------------------------------------------------------
Global Equity Fund
- ----------------------------------------------------------------------------
Emerging Growth Fund
- ----------------------------------------------------------------------------
Small/Mid Cap Fund
- ----------------------------------------------------------------------------
Growth Equity Fund
- ----------------------------------------------------------------------------
Tax-Sensitive Equity Fund
- ----------------------------------------------------------------------------
Growth and Income Fund
- ----------------------------------------------------------------------------
Equity Income Fund
- ----------------------------------------------------------------------------
Balanced Fund
- ----------------------------------------------------------------------------
Strategic Income Fund
- ----------------------------------------------------------------------------
Investment Quality Bond Fund
- ----------------------------------------------------------------------------
National Municipal Bond Fund
- ----------------------------------------------------------------------------
U.S. Government Securities Fund
- ----------------------------------------------------------------------------
Money Market Fund
- ----------------------------------------------------------------------------

39
<PAGE>

Under an order granted to the Funds by the Securities and Exchange
Commission, CAM is permitted to appoint a subadvisor, to create a subadvisory
agreement and to terminate or amend a subadvisory agreement, in each case
without shareholder approval. This "Manager of Managers" structure permits the
Funds to change subadvisors or the fees paid to subadvisors without the expense
and delays associated with obtaining shareholder approval. CAM has ultimate
responsibility under the Manager of Managers structure to oversee the
subadvisors, including making recommendations to the Trust regarding the hiring,
termination and replacement of subadvisors.

Subadvisory Arrangements

CAM contracts with and compensates ten investment subadvisors which provide
portfolio management services to all of the Funds:

Wellington Management Company, LLP

Wellington Management Company, LLP, the subadvisor to the Growth and Income
and Investment Quality Bond Funds, ("Wellington Management"), whose principal
business address is 75 State Street, Boston, Massachusetts 02109.

Wellington Management and its predecessor organizations have provided
investment management services to investment companies, employee benefit plans,
endowments, foundations and other institutions and individuals since 1928. As of
September 30, 1998, Wellington Management had investment management authority
with respect to approximately $186.5 billion of assets.

Matthew E. Megargel, Senior Vice President of Wellington Management, has
served as fund manager to the Growth and Income Fund since February 1992. Mr.
Megargel joined Wellington Management in 1983 as a research analyst and took on
additional responsibilities as a fund manager in 1988. In 1991, he became solely
a fund manager with Wellington Management.

Thomas L. Pappas, Senior Vice President of Wellington Management, has
served as fund manager to the Investment Quality Bond Fund since March 1994. Mr.
Pappas has been a fund manager with Wellington Management since 1987.

Standish, Ayer & Wood, Inc.

Standish, Ayer & Wood, Inc., the subadvisor to the Tax-Sensitive Equity
Fund, is a Massachusetts corporation incorporated in 1933 with offices at One
Financial Center, Boston, Massachusetts 02111. Standish provides fully
discretionary management services and counseling and advisory services to a
broad range of clients throughout the United States and abroad. Standish or its
affiliate, Standish International Management Company, L.P., serves as the
investment adviser to each of the funds in the Standish, Ayer & Wood family of
funds. Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual

40
<PAGE>

investors. As of September 30, 1998, Standish managed approximately $46 billion
in assets.

The Tax-Sensitive Equity Fund's fund manager is Laurence A. Manchester, who
has served in such capacity since the Tax-Sensitive Equity Fund's inception.
During the past five years, Mr. Manchester has served as a Vice President and
Director of Standish.

Warburg Pincus Asset Management, Inc.

Warburg Pincus Asset Management, Inc., the subadvisor to the Emerging
Growth Fund, is indirectly controlled by Warburg, Pincus & Co. Warburg's address
is 466 Lexington Ave., New York, N.Y., 10017-3147.

Warburg is a professional investment counseling firm which provides
investment services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions and individuals. As of October 31,
1998, Warburg managed approximately $20 billion of assets, including
approximately $10.3 billion of investment company assets.

The co-fund managers of the Emerging Growth Fund are Elizabeth B. Dater and
Stephen J. Lurito. Ms. Dater, a managing director of Warburg, has been fund
manager of the Emerging Growth Fund since its inception and has been a fund
manager of Warburg since 1978. Mr. Lurito, a managing director of Warburg, has
been a fund manager of the Emerging Growth Fund since its inception and has been
with Warburg since 1987.

J.P. Morgan Investment Management Inc.

J.P. Morgan Investment Management Inc. is the subadvisor to the
International Growth and Income Fund. J.P. Morgan, with principal offices at 522
Fifth Avenue, New York, New York 10036, is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bank holding company
organized under the laws of Delaware which is located at 60 Wall Street, New
York, New York 10260.

With offices in New York City and abroad, J.P. Morgan & Co., through J.P.
Morgan and other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as investment adviser
to individual and institutional clients with combined assets under management of
approximately $275 billion as of September 30, 1997. J.P. Morgan has managed
international securities for institutional investors since 1974. As of September
30, 1998, non-U.S. equity securities under J.P. Morgan's management were
approximately $112 billion.

J.P. Morgan uses a collaborative process for managing the Fund. Nigel
Emmet, Vice President (employed by Morgan since August 1997, previously an
assistant manager at Brown Brothers Harriman and Co., and a portfolio manager at
Gartmore Investment Management) , Andrew Cormie, Vice President (employed by
Morgan since 1984) and Paul Qunisee, Managing Director, Managing Director
(employed by Morgan since 1992) are primarily responsible for the day-to-day
management and implementation of J.P. Morgan's process for the Fund. Mr. Cormie

41
<PAGE>

and Mr. Emmett joined the Fund's portfolio management team in 1998. Mr. Quinsee
has been managing the Fund since its inception in January 1995.

Salomon Brothers Asset Management Inc

Salomon Brothers Asset Management Inc ("SBAM") is the Subadvisor to
the U.S. Government Securities Fund, the Strategic Income Fund and the National
Municipal Bond Fund. SBAM is an indirect, wholly-owned subsidiary of CitiGroup
Inc. ("CitiGroup"). CitiGroup is a diversified financial services company
engaged in investment services, asset management, banking, consumer finance and
life and property and casualty insurance services. SBAM was incorporated in 1987
and, together with affiliates in London, Frankfurt and Hong Kong, provides a
full range of fixed income and equity investment advisory services for
individual and institutional clients located throughout the world, and serves as
investment adviser to various investment companies. In providing such investment
advisory services, SBAM and its affiliates have access to SBAM's and its
affiliates' more than 40 economists and mortgage, bond, sovereign and equity
analysts. As of September 30, 1998, SBAM and its worldwide investment advisory
affiliates managed approximately $29 billion in assets. SBAM's business offices
are located at 7 World Trade Center, New York, New York 10048.

In connection with SBAM's service as subadvisor to the Strategic
Income Fund, SBAM's London-based affiliate, SBAM Ltd., whose business address is
Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB, England, provides
certain advisory services to SBAM with regard to currency transactions and
investments in non-dollar denominated debt securities for the benefit of the
Strategic Income Fund. SBAM Ltd. is compensated by SBAM at no additional expense
to the Strategic Income Fund. SBAM Ltd. is a wholly-owned indirect subsidiary of
CitiGroup. SBAM Ltd. is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940, as
amended.

Roger Lavan has had responsibility for the day-to-day management of
the mortgage-backed securities and U.S. government securities components of the
U.S. Government Securities Fund portfolio since December 1991 and the Strategic
Income Fund portfolio since its inception in November 1993, and assumed sole
primary responsibility for such management in August 1998.

Peter Wilby is primarily responsible for the day-to-day management
of the high yield and sovereign bond portions of the Strategic Income Fund. Mr.
Wilby, who joined SBAM in 1989, is a Managing Director of Salomon Smith Barney
Inc. and SBAM, responsible for investment company and institutional funds which
invest in high yield U.S. and non-U.S. corporate debt securities and high yield
foreign sovereign debt securities. In addition to other registered investment
companies for which Mr. Wilby serves as fund manager, he also serves as fund
manager for a number of offshore and institutional clients.

David Scott is primarily responsible for a portion of the Strategic
Income Fund relating to currency transactions and investments in non-dollar
denominated securities. David Scott is a

<PAGE>

Senior Fund Manager with SBAM Ltd. in London with primary responsibility for
managing long-term global bond funds. He also plays an integral role in
developing strategy. Prior to joining SBAM Limited in April 1994, Mr. Scott
worked at J.P. Morgan from 1990 to 1994 where he had responsibility for global
and non-dollar funds.

Robert Amodeo is responsible for developing and executing municipal
bond portfolio investment strategies for the National Municipal Bond Fund. Mr.
Amodeo pioneered adaptation and the use of the Yield Book for municipal bond
portfolio management, analysis, performance attribution and optimization. Prior
to joining SBAM, he was a member of Salomon Brothers Partnership Investment
Group where he was responsible for analyzing and managing various partnership
investments. Mr. Amodeo received a B.S. (Magna Cum Laude) in Business Management
form Long Island University. He also holds a Chartered Financial Analyst
designation and is a member of the New York Society of Security Analysts.

Fred Alger Management, Inc.

Investment decisions for the Small/Mid Cap Fund are made by its
Subadvisor, Fred Alger Management, Inc. Alger, located at One World Trade
Center, New York, New York 10048, has been in the business of providing
investment advisory services since 1964. As of October 31, 1998 Alger had
approximately $8.5 billion under management, including $5.3 billion in mutual
fund accounts and $3.2 billion in other advisory accounts. Alger is wholly owned
by Fred Alger & Company, Inc., which in turn is wholly owned by Alger
Associates, Inc., a financial services holding company.

David D. Alger, President of Alger, has been primarily responsible
for the day-to-day management of the Small/Mid Cap Fund since the Fund's
inception (March 1996). He has been employed by Alger as Executive Vice
President and Director of Research since 1971 and as President since 1995 and he
serves as fund manager for other mutual funds and investment accounts managed by
Alger Management. Also participating in the management of the Small/Mid Cap Fund
since the Fund's inception are Ronald Tartaro and Seilai Khoo. Mr. Tartaro has
been employed by Alger since 1990, and he serves as a Senior Vice President. Ms.
Khoo has been employed by Alger Management since 1989, and she serves as a
Senior Vice President.

Founders Asset Management, LLC.

Investment decisions for the Growth Equity, International Small Cap
and Balanced Funds are made by its Subadvisor, Founders Asset Management, LLC,
located at 2930 East Third Avenue, Denver, Colorado 80206. Founders is a
registered investment adviser first established as an asset manager in 1938, and
is a subsidiary of Mellon Bank, N.A. As of September 30, 1997, Founders had over
$6.3 billion of assets under management, including approximately $4.5 billion in
mutual fund accounts and $1.8 billion in other advisory accounts.

To facilitate the day-to-day investment management of the Growth
Equity, International Small Cap and Balanced Funds, Founders employs a unique
team-and-lead-manager system. The management team is composed of several members
of the Investment Department, including lead portfolio managers, portfolio
traders and research analysts. Team members share responsibility for providing
ideas, information, knowledge and expertise in the management of the Funds. Each
team member has one or more areas of expertise that is applied to the management
of the Fund. Daily decisions on Fund selection for the Fund rests with a lead
fund manager assigned to the Fund.

Michael W. Gerding, Vice President of Investments, has been the lead
fund manager for the International Small Cap Fund since the Fund's inception
(March 1996). Mr. Gerding is a chartered financial analyst who has been part of
Founders' investment department since 1990.

43
<PAGE>

Brian F. Kelly, Fund Manager, has been the lead fund manager for the
Balanced Fund since October 1996. Mr. Kelly joined Founders in 1996. Prior to
joining Founders, Mr. Kelly served as fund manager for Invesco Trust Company
(1993-1996) and as a senior investment analyst for Sears Investment Management
Company (1986-1993).

Thomas M. Arrington, Vice President of Investments, is a Chartered
Financial Analyst who has been the co-portfolio manager, along with Scott
Chapman, of the Growth Fund since December 1998. Prior to joining Founders, he
was vice president and director of income equity strategy at HighMark Capital
Management, a subsidiary of Union BanCal Corp., where he managed the HighMark
Income Equity Fund, a large-cap fund. He received a bachelor's degree in
economics from the University of California, Los Angeles and an MBA from San
Francisco State University.

Scott Chapman, Vice President of Investments, is a Chartered Financial
Analyst who has been the co-portfolio manager, along with Thomas Arrington, of
the Growth Fund since December 1998. Before joining Founders, Chapman was vice
president and director of growth strategy for HighMark Capital. He has more than
10 years experience in equity investment management, including security analysis
positions with McCullough, Andrews and Cappiello and Cooper Development Co.
Chapman received a bachelor of science degree in accounting from Santa Clara
University and an MBA in finance from Golden Gate University.

T. Rowe Price Associates, Inc.

T. Rowe Price Associates, Inc., whose address is at 100 East Pratt Street,
Baltimore, Maryland 21202, is the subadvisor for the Equity-Income Fund. Founded
in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price and its affiliates
managed over $130 billion for over 5 million individual and institutional
investor accounts as of September 30, 1998.

The investment advisory committee for the Equity-Income Fund is comprised
of the following members: Brian C. Rogers, Chairman, Stephen W. Boesel, Richard
P. Howard, and William J. Stromberg. Mr. Rogers joined T. Rowe Price in 1982 and
has been managing investments since 1983. He has been chairman of the Equity
Income Fund investment advisory committee since October 1, 1996.

44
<PAGE>

Morgan Stanley Dean Witter Investment Management Inc.

Morgan Stanley Dean Witter Investment Management Inc., with principal
offices at 1221 Avenue of the Americas, New York, New York 10020, has been the
subadvisor to the Global Equity Fund since October 1, 1996. MSDW Investment
Management, a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.,
conducts a worldwide fund management business, providing a broad range of fund
management services to customers in the United States and abroad. At October 30,
1998, MSDW Investment Management, together with its affiliated institutional
asset management companies (including MAS), managed investments totaling
approximately $156.2 billion, including approximately $137.6 billion under
active management and $18.6 billion as named fiduciary or fiduciary adviser.

Frances Campion has been primarily responsible for the fund management of
the Global Equity Fund since October 1996. Ms. Campion joined MSDW Investment
Management in January 1990 as a global equity fund manager and is now a Managing
Director of Morgan Stanley & Co. Incorporated. Her responsibilities include day
to day management of the Morgan Stanley's global equity products.

Manufacturers Adviser Corporation

Manufacturers Adviser Corporation, a Colorado corporation, is the
subadvisor of the Money Market Fund. Its principal business at the present time
is to provide investment management services to these funds and comparable funds
of NASL Series Trust. MAC is an indirect wholly-owned subsidiary of Manulife.
The address of MAC is 200 Bloor Street East, Toronto, Ontario, Canada M4W 1E5.
As of September 30, 1998, MAC together with Manulife had approximately $13
billion of assets under management.

This Fund is managed by a team of investment professionals each of
whom plays an important role in the management process of each Fund. Team
members work together to develop investment strategies and select securities for
a Fund. They are supported by research analysts, traders and other investment
specialists who work alongside the investment professionals in an effort to
utilize all available resources to benefit the shareholders.

45
<PAGE>

Investing in the North American Funds

Classes of Shares

There are three classes of shares of North American Funds: A, B, and
C.

The initial investment minimum for all classes of shares is $1,000.
For retirement plans and other automatic investment programs, the initial
purchase minimum is $50. You must maintain a minimum account balance of $500, or
$50 for retirement plans and other automatic investing programs. If you do not,
North American Funds will send you a check for your account balance. Purchases
and redemptions will be made at the share price calculated by North American
Funds after the request is processed. Confirmations of all transactions will be
mailed to you promptly, and a copy will be sent to your broker of record. North
American Funds may refuse any request to purchase shares.

- --------------------------------------------------------------------------------------------------
Buying Fund Shares Redeeming Fund Shares
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
By Mail* Mail a check and account Send a written request to:
application to: North American Funds
North American Funds P.O. Box 8505
P.O. Box 8505 Boston, MA 02266-8508
Boston, MA 02266-8508

To add to an existing account,
mail a check with
your account number:
North American Funds
P.O. Box 8505
Boston, MA 02266-8508
- --------------------------------------------------------------------------------------------------
By Wire Transfer For wire instructions, contact
Customer Service at Yes, with a minimum of
1-800-872-8037. $1,000. For wire instructions,
contact Customer Service at
1-800-872-8037.
- --------------------------------------------------------------------------------------------------
By Phone No Yes, simply call 1-800-872-8037
by 4:00 p.m. to receive that
day's closing price
- --------------------------------------------------------------------------------------------------
Through Broker Dealers Yes, if a dealer agreement is Yes, if a dealer agreement is
in place in place

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

</TABLE>

* Some types of accounts may require additional forms.

46
<PAGE>

- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares Class B Shares Class C Shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Charges . Purchases of less than $1 . Shares are sold without a . Shares are sold without a
million are sold with a front front end sales charge. For front end sales charge. For
end sales charge (see the shares redeemed within six shares redeemed within one year
table below). years there is a sales charge there is a 1% sales charge at
. Purchases over $1 million are at redemption (see the table redemption.
sold without a front end sales below). This does not apply to . Available for purchases under
charge. For shares redeemed the Money Market Fund. $1 million.
within one year there is a 1% . Available for purchases of
back end sales charge at $250,000 or less.
redemption.

- ------------------------------------------------------------------------------------------------------------------------------------
Programs That Reduce . Rights of Accumulation - you For B and C Shares, the back end sales charge is equal to the
Sales Charges will pay the sales charge lesser of the net asset value at redemption, or the original
applicable to your total purchase price.
account balance in all classes
of shares
. Statement of intention agree to
invest a certain amount over 13
months and you will pay the sales
charge based on your goal
----------------------------------------------------------------------------------------------------------
. For all classes of shares, no back end sales charge applies if a systematic withdrawal plan is
in place. For account opened after 5/1/95, up to 12% of the account value may be withdrawn each
year, without a sales charge.
. For qualified retirement plans, no back end sales charge applies.
- ------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

47
<PAGE>

Sale Charge Tables

These tables show the sales charges for each of the three classes of shares of
the North American Funds.

Class A Shares Sales Charge Table

There is no front end sales charge for Class A shares of the Money
Market Fund. If A Shares of this Fund are exchanged for Class A shares of
another Fund, the regular sales charge for Class A shares will be charged.

- --------------------------------------------------------------------------------------------------------------------------
Concession to
Percentage of Broker Dealer as
Amount of Percentage of the Net Amount a Percentage of
Purchase Payment the Offering Price Invested Offering Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.75% 4.99% 4.00%
- --------------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 4.00% 4.17% 3.25%
- --------------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 3.00% 3.09% 2.50%
- --------------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1 million 2.25% 2.30% 1.75%
- --------------------------------------------------------------------------------------------------------------------------
$1 million or more None* None* See below**
- --------------------------------------------------------------------------------------------------------------------------

</TABLE>

* A CDSC (back end sales charge) may apply.

** For purchases of Class A shares of $1 million or more the Distributor
will pay a commission to dealers as follows: 1.00% on sales up to $5 million
(0.50% for sales of the National Municipal Bond Fund), plus 0.50% of the amount
in excess of $5 million; provided, however, that the Distributor may pay a
commission on sales in excess of $5 million of up to 1.00% to certain dealers
which, at the Distributor's invitation, enter into an agreement with the
Distributor in which the dealer agrees to return any commission paid to it on
the sale (or a pro rata portion thereof) if the shareholder redeems his shares
within a period of time after purchase as specified by the Distributor.
Purchases of $1 million or more for each shareholder account will be aggregated
over a 12 month period (commencing from the date of the first such purchase) for
purposes of determining the level of commission to be paid during that period
with respect to such account.

Class B Shares Sales Charge Table

- ---------------------------------------------------------------------------------------------------------
Year(s) Since Purchase Back End Charge as a Percentage of Amount Redeemed
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Up to 2 years 5%
- ---------------------------------------------------------------------------------------------------------
2 years or more but less than 3 years 4%
- ---------------------------------------------------------------------------------------------------------
3 years or more but less than 4 years 3%
- ---------------------------------------------------------------------------------------------------------
4 years or more but less than 5 years 2%
- ---------------------------------------------------------------------------------------------------------
5 years or more but less than 6 years 1%
- ---------------------------------------------------------------------------------------------------------
6 or more years 0%
- ---------------------------------------------------------------------------------------------------------

</TABLE>

48
<PAGE>

Class C Shares

Class C shares are offered for sale at net asset value and are
offered for purchases of less than $1 million. Class C shares are sold without a
front end sales charge. Class C shares are subject to a CDSC of 1% of the dollar
amount subject thereto during the first year after purchase.

Redemption in Kind

The Funds reserve the right to redeem proceeds in whole or in part
by a distribution in kind of marketable securities held by the Fund.

Pricing of Fund Shares

The public offering price of the Class A shares of each Fund is the
net asset value per share (next determined following receipt of an order) plus,
in the case of all Funds except the Money Market Fund, a front end sales charge,
if applicable. The share price for Class B shares and Class C shares is the net
asset value per share (next determined following receipt of an order).

The net asset value of the shares of each class of each Fund is
calculated separately and, except as described below, is determined once daily
as of the close of regularly scheduled trading on the New York Stock Exchange.
Net asset value per share of each class of each Fund (other than the Money
Market Fund, as described below) is calculated by dividing the value of the
portion of the Fund's securities and other assets attributable to that class,
less the liabilities attributable to that class, by the number of shares of that
class outstanding. No determination is required on (i) days on which changes in
the value of such Fund's securities holdings will not materially affect the
current net asset value of the shares of the Fund, (ii) days when the New York
Stock Exchange is closed.

Generally, trading in non-U.S. securities, as well as U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of regularly scheduled trading on
the New York Stock Exchange. The values of such securities used in computing the
net asset value of the shares of a class of a Fund are generally determined as
of such times. Occasionally, events which affect the values of such securities
may occur between the times at which they are generally determined and the close
of regularly scheduled trading on the Exchange and would therefore not be
reflected in the computation of a class's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith by the
subadvisors under procedures established and regularly reviewed by the Trustees.

All instruments held by the Money Market Fund and short-term debt
instruments with a remaining maturity of 60 days or less held by the other Funds
are valued on an amortized cost basis.

49
<PAGE>

Dividends and Distributions from North American Funds

Unless you request cash payment, all dividends and distributions will be
reinvested. All Funds except the Money Market Fund declare and pay capital gains
and dividends annually.

These Funds declare and pay income dividends annually:
. International Small Cap Fund
. Global Equity Fund
. Emerging Growth
. Small/Mid Cap Fund
. Growth Equity Fund
. Tax-Sensitive Fund
. Equity-Income Fund
. Balanced Fund

These Funds declare and pay income dividends semiannually:
. International Growth and Income Fund
. Growth and Income Fund

These Funds declare income dividends daily and pay them monthly:
. Strategic Income Fund
. Investment Quality Bond Fund
. National Municipal Bond Fund
. U.S. Government Securities Fund
. Money Market Fund

Taxes

It is expected that each Fund of the Trust will qualify as a "regulated
investment company" under the Code. If it so qualifies, a Fund will not be
subject to United States federal income taxes on its net investment income and
net capital gain, if any, that it distributes to its shareholders in each
taxable year, provided that it distributes to its shareholders (i) at least 90%
of its net investment income for such taxable year, and (ii) with respect to the
National Municipal Bond Fund at least 90% of its net tax-exempt interest income
for such taxable year. If in any year a Fund fails to qualify as a regulated
investment company, such Fund would incur regular corporate federal income tax
on its taxable income for that year and be subject to certain additional
distribution requirements upon re-qualification. Each Fund will be subject to a
4% nondeductible excise tax on its taxable income to the extent it does not meet
certain distribution requirements by the end of each calendar year. Each Fund
intends to make sufficient distributions to avoid application of the corporate
income and excise taxes.

Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of the Funds investing in foreign securities or currencies will
be reduced by these foreign taxes. Shareholders

50
<PAGE>

will bear the cost of any foreign taxes, but may not be able to claim a foreign
tax credit or deduction for these foreign taxes. If a Fund is eligible for and
makes an election to allow the shareholders of that Fund to claim a foreign tax
credit or deduction for these taxes for any taxable year, the shareholders will
be notified. The ability of the shareholders to utilize such a foreign tax
credit is subject to a holding period requirement. In addition, Funds investing
in securities of passive foreign investment companies may be subject to U.S.
federal income taxes (and interest on such taxes) as a result of such
investments. The investment yield of the Funds making such investments will be
reduced by these taxes and interest. Shareholders will bear the cost of these
taxes and interest, but will not be able to claim a deduction for these amounts.

The redemption, sale or exchange of Fund shares (including the
exchange of shares of one Fund for shares of another) is a taxable event and may
result in a gain or loss. Gain or loss, if any, recognized on the sale or other
disposition of shares of the Fund will be taxed as capital gain or loss if the
shares are capital assets in the shareholder's hands. Generally, a shareholder's
gain or loss will be a long-term gain or loss if the shares have been held for
more than one year. Pursuant to the Taxpayer Relief Act of 1997, long-term
capital gains generally are subject to a maximum tax rate of 28% or 20%
depending on the shareholder's holding period in shares of a Fund. If a
shareholder sells or otherwise disposes of a share of the Fund before holding it
for more than six months, any loss on the sale or other disposition of such
share shall be (i) treated as a long-term capital loss to the extent of any
capital gain dividends received by the shareholder with respect to such share or
(ii) in the case of the National Municipal Bond Fund, disallowed to the extent
of any exempt-interest dividend received by the shareholder with respect to such
shares. A loss realized on a sale or exchange of shares may be disallowed if
other shares are acquired within a 61-day period beginning 30 days before and
ending 30 days after the date on which the shares are disposed.

Generally, unless a shareholder of any Fund includes his or her
taxpayer identification number (social security number for individuals) in the
Shareholder Application and certifies that he or she is not subject to backup
withholding, the Fund is required to withhold and remit to the U.S. Treasury 31%
from dividends other than exempt-interest dividends and other reportable
payments to the shareholder.

Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities. Thus,
for residents of these states, distributions derived from a Fund's investment in
certain types of U.S. government securities should be free from state and local
income taxes to the extent that the interest income from such investments would
have been exempt from state and local income taxes if such securities had been
held directly by the respective shareholders themselves.

National Municipal Bond Fund--Taxation

The National Municipal Bond Fund also intends to satisfy conditions
under the Code that will enable interest from municipal obligations, which is
exempt from regular federal income taxes in the hands of each Fund, to qualify
as "exempt-interest dividends" when distributed to

51
<PAGE>

such Fund's shareholders. Except as discussed below, such dividends are exempt
from regular federal income taxes.

Although exempt-interest dividends paid by the National Municipal
Bond Fund will be excluded by shareholders of the Funds from their gross income
for regular federal income tax purposes, under the Code all or a portion of such
dividends may be (i) a preference item for purposes of the alternative minimum
tax, (ii) a component of the "ACE" adjustment for purposes of determining the
amount of corporate alternative minimum tax or (iii) a factor in determining the
extent to which a shareholder's Social Security or railroad retirement benefits
are taxable. Moreover, the receipt of exempt-interest dividends from each of the
Funds affect the federal tax liability of certain foreign corporations, S
Corporations and insurance companies. Furthermore, under the Code, interest on
indebtedness incurred or continued to purchase or carry Fund shares, which
interest is deemed to relate to exempt-interest dividends, will not be
deductible by shareholders of the Fund for federal income tax purposes.

The exemption of exempt-interest dividend income from regular
federal income taxation does not necessarily result in similar exemptions for
such income under tax laws of state or local taxing authorities. In general,
states exempt from state income tax only that portion of any exempt-interest
dividend that is derived from interest received by a regulated investment
company on its holdings of obligations issued by that state or its political
subdivisions and instrumentalities.

A notice detailing the tax status of dividends and distributions
paid by the National Municipal Bond Fund will be mailed annually to its
shareholders. As part of this notice, the Fund will report to its shareholders
the percentage of interest income earned by the Fund during the preceding year
on tax-exempt obligations indicating, on a state-by-state basis, the source of
such income.

Descriptions of tax consequences set forth in this Prospectus and in
the Statement of Additional Information are intended to be a general guide.
Investors should consult their tax advisers with respect to the specific tax
consequences to it of an investment in a Fund, including the effect and
applicability of state, local, foreign, and other tax laws and the possible
effects of changes in federal or other tax laws. This discussion is not intended
as a substitute for careful tax planning.

Rule 12b-1 Fees

The Trust has adopted distribution plan under Rule 12b-1 of the
Investment Company Act of 1940, as amended, that allows the funds to pay
distribution fees for the sale and distribution of Fund shares. Portions of the
fees are used to provide payments for services provided to shareholders
("service fees"), as indicated below.

Class A shares of each Fund, except the Money Market Fund and the
National Municipal Bond Fund, are subject to a fee of up to .35% of average
daily net assets, five-sevenths of which (.25%) is a "service fee." There are no
Rule 12b-1 fees on the Money Market Fund, and the Rule

52
<PAGE>

12b-1 fee paid by Class A shares, or for the National Municipal Bond Fund is up
to .15% of average annual net assets, all of which is a "service fee."

Class B shares of each Fund except the Money Market Fund are subject
to a Rule 12b-1 fee of up to 1.00% of average annual net assets, one-fourth
(.25%) of this is a "service fee."

Class C shares of each Fund except the Money Market Fund are subject
to a fee of up to 1.00% of average annual net assets, one-fourth (.25%) of this
is a "service fee."

Because these fees are paid out of the Fund's assets on an ongoing
basis, over time they will increase the cost of your investment and may cost you
more than paying other types of sales charges. The higher fees for Class B and
Class C shares may therefore cost you more than paying the maximum permitted
front-end sales charge on Class A Shares.

Account Services

To use any of these programs, simply fill out the appropriate section of your
account application, or request the appropriate form.

Automatic Dividend Diversification

With this program, you can use all dividends and other distributions
from one Fund automatically invested in another Fund of the same class of
shares.

Automatic Investment Plan

Shareholders can set up an Automatic Investment Plan. Once each
month the transfer agent will debit the shareholder's bank account the amount
(at least $50) specified by the shareholder. To stop the plan, give 30 days
written notice to the Transfer Agent. The program will stop if a shareholder's
bank does not honor a debit.

Checkwriting

Checkwriting is available to Class A and Class C shareholders of the
U.S. Government Securities, National Municipal Bond and Money Market Funds.
Simply request this on your account application, and complete a signature card,
and you will receive a book of blank checks. The minimum amount of a check is
$250. When a check is presented for payment, enough shares will be redeemed to
cover the amount of the check and any applicable back end load. If the amount of
the check plus the load is more than the account value, the check will be
returned unpaid.

Exchange Privilege

Shareholders may make free unlimited exchanges by mail or telephone
within classes of shares without any sales charge. Shares of one class may not
be exchanged for shares of any

53
<PAGE>

other class of any Fund. Be aware that exchanges are regarded as sales for
federal and state income tax purposes and could result in a gain or loss,
depending on the original cost of shares exchanged. Exchanges usually occur on
the same day they are requested. The terms of the exchange privilege may change
and the privilege may be revoked at any time.

You may make exchanges over the phone by calling 1-800-872-8037.

Reinstatement Privilege

If you redeem Class A shares (under $1 million) and reinvest within
90 days, you will not have to pay a sales charge. If you redeem A shares over $1
million, or Class B or C shares and pay a back end load and then reinvest within
90 days, your account will be credited the amount of the back end load.

Systematic Investing

Your shares of any class of the Money Market, U.S. Government
Securities or National Municipal Bond Fund can be exchanged monthly for shares
of the same class of up to three other Funds. An exchange of at least $50 per
exchange will be made around the 15th of each month in accordance with your
instructions. This program takes advantage of dollar cost averaging.

Systematic Withdrawal Plan

If you have an account balance of at least $10,000, you can set up a
plan to have redemptions paid to you, or someone you designate, on a monthly,
quarterly, semiannual or annual basis. You can withdraw up to 12% of the account
value annually, up to 1% per month, without a back end load. If you request this
service after completing your application and payments are to be made to someone
other than yourself, you will have to provide a signature guarantee. Redemptions
are generally made on the 25th of the month, and checks are generally mailed
within two days after redemption. The availability of this service may end, and
a fee of up to $5 per withdrawal may be charged with 30 days' written notice to
you.

Transfer of Shares

You may transfer Fund shares to family members and others at any
time without a sales charge. Consult your tax adviser concerning such transfers.

54
<PAGE>

Financial Highlights

The financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the return that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by [ ], whose
report, along with each Fund's financial statements, is included in the Funds'
annual report, which is available upon request.

[Financial Highlights to be added by amendment]

55
<PAGE>

[Back Cover]

North American Funds
286 Congress Street, Boston, Massachusetts 02210
(800) 872-8037

For Additional Information

More information about the Funds, including the SAI, is available to you free of
charge. To request additional information:

- ---------------------------------------------------------------------------------------------------
By Telephone Call 1-800-872-8037
- ---------------------------------------------------------------------------------------------------
<S> <C>
By Mail from the Funds (There is no fee.) Write to:
North American Funds
286 Congress Street
Boston, MA 02210
- ---------------------------------------------------------------------------------------------------
By Mail or In Person from the Public Reference Room of the Visit or Write to:
Securities and Exchange Commission (SEC). (You will pay a SEC's Public Reference Section
duplication fee.) 450 Fifth Street, NW
Washington, DC, 20549-6009
1-800-SEC-0330
- ---------------------------------------------------------------------------------------------------
Online at the SEC's Internet Site Text-only versions of fund documents
can be viewed online or downloaded
from http://www.sec.gov.
- ---------------------------------------------------------------------------------------------------

</TABLE>

Statement of Additional Information (SAI)

The SAI provides additional information about the Trust and the Funds. The SAI
and the auditor's report and financial statements included in the Trust's most
recent Annual Report to its shareholders are incorporated by reference as part
of this Prospectus.

<PAGE>

Annual and Semi-annual Reports

The Annual and Semi-annual Reports describe the Funds' performance, list
portfolio holdings and include additional information about the Fund's
investments. The Annual Report discusses the market conditions and investment
strategies that significantly affected the Fund's performance during their last
fiscal year.

File No. 811-5797

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

NORTH AMERICAN FUNDS

North American Funds (the "Trust") is a professionally managed open-end
investment company that currently has fifteen investment portfolios, or series:
the Tax-Sensitive Equity Fund, the Emerging Growth Fund, the International Small
Cap Fund, the Small/Mid Cap Fund, the Global Equity Fund, the Growth Equity
Fund, the International Growth and Income Fund, the Growth and Income Fund, the
Equity-Income Fund, the Balanced Fund, the Strategic Income Fund, the Investment
Quality Bond Fund, the National Municipal Bond Fund, the U.S. Government
Securities Fund and the Money Market Fund (collectively, the "Funds," and each a
"Fund"). The investment objective of each Fund is described in the Trust's
Prospectus dated February __, 1999.

This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus dated February __, 1998, as revised
from time to time. Certain disclosure has been incorporated by reference from
the Trust's Annual Report. A free copy of both the Prospectus and the Annual
Report may be obtained by writing to North American Funds, 286 Congress Street,
Boston, Massachusetts, 02210, or by telephone request at 800-872-8037.

The date of this Statement of Additional Information is February __,
1999.
<PAGE>

TABLE OF CONTENTS

DEBT SECURITY RATINGS ......................................................3

HISTORY AND CLASSIFICATION .................................................8

INVESTMENT POLICIES AND RISKS ..............................................8

INVESTMENTS AND RISK FACTORS APPLICABLE TO MULTIPLE FUNDS .................13

HEDGING AND OTHER STRATEGIC TRANSACTIONS ..................................23

INVESTMENT RESTRICTIONS ...................................................29

PORTFOLIO TURNOVER ........................................................30

TEMPORARY DEFENSIVE POSITIONS .............................................31

MANAGEMENT OF THE FUND ....................................................32

INVESTMENT MANAGEMENT ARRANGEMENTS ........................................37

DISTRIBUTION PLANS ........................................................42

PORTFOLIO BROKERAGE .......................................................47

MULTIPLE PRICING SYSTEM ...................................................52

CAPITAL STOCK .............................................................54

PURCHASE, REDEMPTION AND PRICING ..........................................55

PERFORMANCE INFORMATION ...................................................57

-2-
<PAGE>

DEBT SECURITY RATINGS

Standard & Poor's Ratings Service ("S&P")

Commercial Paper:

A-1

The rating A-1 is the highest rating assigned by S&P to
commercial paper. This designation indicates that the degree of
safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign designation.

A-2

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

Bonds:

AAA

Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.

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

Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.

BBB

Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.

BB-B- CCC-CC

Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms
of the obligations. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.

Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired. The D
rating is also used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.

The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.

-3-
<PAGE>

Moody's Investors Service, Inc. ("Moody's")

Commercial Paper:

P-1

The rating P-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated P-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. P-1 repayment capacity will normally be evidenced by
the following characteristics: (1) leading market positions in
established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high
internal cash generation; and (5) well established access to a
range of financial markets and assured sources of alternate
liquidity.

P-2

Issuers rated P-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
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, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.

Bonds:

Aaa

Bonds which are rated Aaa by Moody's are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge". Interest payments are
protected by a large or 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.

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

Bonds which are rated A by Moody's 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 which are rated Baa by Moody's are considered as medium
grade obligations, that is, 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.

Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during other good and
bad times over the future. Uncertainty of position characterizes
bond in this class.

-4-
<PAGE>

Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance and other terms of the contract over
any long period of time may be small.

Caa

Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.

Bonds which are rated Ca represent obligations which are
speculative in high degree. Such issues are often in default or
have other marked shortcomings.

Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.

Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.

Fitch Investors Service, Inc. ("Fitch")

Commercial Paper:

F-1+

Exceptionally strong credit quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.

F-1

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

Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as
great as for issues assigned "F-1+" or "F-1".
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.

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+".

-5-
<PAGE>

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 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.

Bonds are considered 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.

Bonds are considered highly speculative. While bonds 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 which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.

Bonds are in imminent default in payment of interest or
principal.

DDD-DD-

Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on

and D

the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.

Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.

ADDITIONAL MOODY'S AND S&P MUNICIPAL BOND RATINGS

Moody's Ratings of State and Municipal Notes

MIG-1/VMIG-1

Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior
liquidity support or broad-based access to the market for
refinancing.

-6-
<PAGE>

MIG-2/VMIG-2

Notes which are rated MIG-2/VMIG-2 are of high quality. Margins
of protection are ample though not so large as in the preceding
group.

S&P Ratings of State and Municipal Notes

SP-1

Notes which are rated SP-1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a plus (+)
designation.

SP-2

Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.

-7-
<PAGE>

HISTORY AND CLASSIFICATION

The Fund is an open-end, management investment company organized as a
business trust under the laws of the Commonwealth of Massachusetts on September
28, 1988.

All of the Funds, except the Emerging Growth Fund, are "diversified"
for purposes of the Investment Company Act of 1940.

None of the Funds is a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the Commodity Futures Trading Commission
(the "CFTC")). Futures contracts and options on futures contracts will be
purchased, sold or entered into only for bona fide hedging to the extent
permitted by CFTC regulations. The use of certain Hedging and Other Strategic
Transactions will require that a Fund segregate cash or other liquid assets to
the extent a Fund's obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency.

INVESTMENT POLICIES AND RISKS

The following discussion supplements the descriptions of certain of the
Funds and their possible investments and associated risks, as set forth in the
Prospectus. Although the Funds may have the flexibility to use some or all of
the investments and strategies described in the Prospectus and in this SAI, the
subadvisers may choose not to use such investments or strategies for a variety
of reasons. These choices may cause a Fund to miss opportunities, lose money or
not achieve its objective.

Tax-Sensitive Equity Fund

Although the Fund will prefer long-term capital gains to taxable
dividend income and interest income, the Fund may to a limited extent invest in
debt securities and preferred stocks that are convertible into, or exchangeable
for, common stocks. Generally, such securities will be rated, at the time of
investment, Aaa, Aa or A by Moody's of AAA, AA or A by S&P or, if not rated, are
determined by Standish to be of comparable credit quality. Up to 5% of the
Fund's total assets invested in convertible debt securities and preferred stocks
may be rated, at the time of investment, Baa by Moody's or BBB by S&P or, if not
rated, determined by Standish to be of comparable credit quality. As a temporary
matter and for defensive purposes, the Fund may purchase investment grade short-
term debt securities, the amount of which will depend on market conditions and
the needs of the Fund. The Fund will attempt to reduce risk by diversifying its
investments within the investment policy set forth above.

The Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific equity market movements and currency exchange rate risks) or to seek
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Fund may: (i)
purchase and write (sell) put and call options on securities, equity indices and
other financial instruments; (ii) purchase and sell financial futures contracts
on U.S. equity indices and options thereon; (iii) enter into repurchase
agreements; (iv) enter into various currency transactions, such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures (the Fund has no current intention to engage in
such transactions); and (v) make short sales. These techniques may produce
taxable ordinary income and/or short-term or long-term capital gains. Although
the Fund does not normally invest in equity securities that are restricted as to
disposition by federal securities laws or are otherwise illiquid, the Fund may
so invest up to 15% of its net assets when, in the opinion of Standish,
investment opportunities presented by such securities are particularly
attractive.

International Small Cap Fund

The Fund may invest in securities issued by companies located in
countries not considered to be major industrialized nations. Such countries are
subject to more economic, political and business risk than major industrialized
nations, and the securities issued by those companies may be more volatile, less
liquid and more uncertain as to payment of dividends, interest and principal.
Additionally, investments of the Fund may include securities created through the
Brady Plan, a program under which heavily indebted countries have restructured
their bank debt into bonds.

Growth Equity Fund

The Fund may invest in investment grade bonds, debentures and corporate
obligations rated Baa or higher by Moody's or BBB or higher by S&P. The Fund may
choose to invest in lower-rated (Ba or lower by Moody's and BB or lower by S&P)
convertible and preferred stocks but not rated below B. The Fund may also invest
in unrated convertible securities and preferred stocks if Founders believes that
they are equivalent in quality to the rated securities that the Fund may buy.
The Fund will never have more than 5% of its total assets invested in unrated or
below investment-grade fixed-income securities, with the exception of preferred
stocks. If the Fund holds securities that are downgraded after they are
purchased, the Fund does not have to sell them unless the total Fund assets in
unrated and below investment-grade securities reaches 5% of assets.

-8-
<PAGE>

The Fund is also permitted to use forward foreign currency contracts
and futures contracts. The Fund may also purchase and/or write option on
securities and on indices, and may invest in Rule 144A securities.

Investment Quality Bond

Subject to the investment quality limitations discussed in the
Prospectus, the Fund is authorized to invest in domestic and foreign debt
securities rated (at the time of purchase) below "A" by Moody's or S&P (or
unrated debt securities considered to be of comparable quality by Wellington
Management). The Fund is also authorized to invest in preferred stocks,
convertible securities (including those issued in the Euro market) and
securities carrying warrants to purchase equity securities, privately placed
debt securities, asset-backed securities and privately issued mortgage
securities.

International Growth and Income Fund

The Fund intends to manage its portfolio actively in pursuit of its
investment objective. The Fund does not expect to trade in securities for short-
term profits; however, when circumstances warrant, securities may be sold
without regard to the length of time held.

The Fund may invest in securities on a when-issued or delayed delivery
basis, enter into repurchase and reverse repurchase agreements, loan its Fund
securities and purchase certain privately placed securities.

Equity-Income Fund

The Fund may invest in debt securities of any type including municipal
securities without regard to quality or rating. The total return and yield of
lower-quality (high-yield/high-risk) bonds, commonly referred to as "junk"
bonds, can be expected to fluctuate more than the total return and yield of
higher-quality, shorter-term bonds, but not as much as common stocks. Junk bonds
(those rated below BBB or in default) are regarded as predominantly speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. The Fund will not purchase a noninvestment-grade debt security (or
junk bond) if immediately after such purchase the Fund would have more than 10%
of its total assets invested in such securities.

The Fund may also engage in a variety of investment management
practices, such as buying and selling futures and options. The Fund may invest
up to 10% of its total assets in hybrid instruments, which are a type of high-
risk derivative which can combine the characteristics of securities, futures and
options. For example, the principal amount, redemption or conversion terms of a
security could be related to the market price of some commodity, currency or
securities index. Such securities may bear interest or pay dividends at below
market (or even relatively nominal) rates.

Balanced Fund

The Fund may invest in unrated convertible securities and preferred
stocks in instances in which the subadviser believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Fund rated in categories no lower than B. At no time will the
Fund have more than 5% of its total assets invested in any fixed-income
securities which are unrated or are rated below investment grade either at the
time of purchase or as a result of a reduction in rating after purchase.
Preferred stocks are not subject to this 5% limitation. The Fund is not required
to dispose of debt securities whose ratings are downgraded below these ratings
subsequent to the Fund's purchase of the securities, unless such a disposition
is necessary to reduce the Fund's holdings of such securities to less than 5% of
its total assets.

Strategic Income Fund

In light of the risks associated with high yield corporate and
sovereign debt securities, the subadviser will take various factors into
consideration in evaluating the creditworthiness of an issuer. For corporate
debt securities, these will typically include the issuer's financial resources,
its sensitivity to economic conditions and trends, the operating history of the
issuer, and the experience and track record of the issuer's management. For
sovereign debt instruments, these will typically include the economic and
political conditions within the issuer's country, the issuer's overall and
external debt levels and debt service ratios, the issuer's access to capital
markets and other sources of funding, and the issuer's debt service payment
history. The subadviser will also review the ratings, if any, assigned to the
security by any recognized rating agencies, although the subadviser's judgment
as to the quality of a debt security may differ from that suggested by the
rating published by a rating service. The Fund's ability to achieve its
investment objective may be more dependent on the subadviser's credit analysis
than would be the case if it invested in higher quality debt securities.

The high yield sovereign debt securities in which the Fund may invest
are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging countries. The subadviser
expects that these countries will consist primarily of those which have issued
or have announced plans to issue Brady Bonds, but the Fund is not limited to
investing in the debt of such countries. The subadviser anticipates that the
Fund's initial investments in sovereign debt will be concentrated in Latin
American countries, including Mexico and Central and South American and
Caribbean countries. The subadviser expects to take advantage of additional
opportunities for investment in the debt of

-9-
<PAGE>

North African countries, such as Nigeria and Morocco, Eastern European
countries, such as Poland and Hungary, and Southeast Asian countries, such as
the Philippines. Sovereign governments may include national, provincial, state,
municipal or other foreign governments with taxing authority. Governmental
entities may include the agencies and instrumentalities of such governments, as
well as state-owned enterprises.

National Municipal Bond Fund

The types of obligations in which the Fund may invest include the
following:

Municipal Bonds. The Fund may invest in municipal bonds that are rated
at the time of purchase within the four highest ratings assigned by Moody's, S&P
or Fitch, or determined by SBAM to be of comparable quality. The four highest
ratings currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A"
and "Baa"; the four highest ratings assigned by S&P and Fitch to municipal bonds
are "AAA", "AA", "A" and "BBB". A more complete description of the debt security
ratings used by the Fund assigned by Moody's, S&P and Fitch is included in
Appendix I to this Prospectus.

Although municipal obligations rated in the fourth highest rating
category by Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered
investment grade, they may be subject to greater risks than other higher rated
investment grade securities. Municipal obligations rated "Baa" by Moody's, for
example, are considered medium grade obligations that lack outstanding
investment characteristics and have speculative characteristics as well.
Municipal obligations rated "BBB" by S&P and Fitch are regarded as having an
adequate capacity to pay principal and interest.

Municipal bonds are debt obligations that are typically issued to
obtain funds for various public purposes, such as construction of public
facilities (e.g., airports, highways, bridges and schools). Municipal bonds at
the time of issuance are generally long-term securities with maturities of as
much as twenty years or more, but may have remaining maturities of shorter
duration at the time of purchase by the Fund.

Municipal Notes. The Fund may invest in municipal notes rated at the
time of purchase "MIG1", "MIG2" (or "VMIG-1" or "VMIG-2", in the case of
variable rate demand notes), "P-2" or better by Moody's, "SP-2", "A-2" or better
by S&P, or "F-2" or better by Fitch, or if not rated, determined by SBAM to be
of comparable quality.

Municipal notes are issued to meet the short-term funding requirements
of local, regional and state governments. Municipal notes generally have
maturities at the time of issuance of three years or less. Municipal notes that
may be purchased by the Fund include, but are not limited to:

Tax Anticipation Notes. Tax anticipation notes ("TANs") are sold as
interim financing in anticipation of collection of taxes. An uncertainty in a
municipal issuer's capacity to raise taxes as a result of such factors as a
decline in its tax base or a rise in delinquencies could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.

Bond Anticipation Notes. Bond anticipation notes ("BANs") are sold as
interim financing in anticipation of a bond sale. The ability of a municipal
issuer to meet its obligations on its BANs is primarily dependent on the
issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.

Revenue Anticipation Notes. Revenue anticipation notes ("RANs") are
sold as interim financing in anticipation of receipt of other revenues. A
decline in the receipt of certain revenues, such as anticipated revenues from
another level of government, could adversely affect an issuer's ability to meet
its obligations on outstanding RANs.

TANs, BANs and RANs are usually general obligations of the issuer.

Municipal Commercial Paper. The Fund may also purchase municipal
commercial paper that is rated at the time of purchase "P-2" or better by
Moody's, "A-2" or better by S&P, or "F-2" or better by Fitch, or if not rated,
determined by SBAM to be of comparable quality.

Municipal commercial paper that may be purchased by the Fund consists
of short term obligations of a municipality. Such paper is likely to be issued
to meet seasonal working capital needs of a municipality or as interim
construction financing. Municipal commercial paper, in many cases, is backed by
a letter of credit lending agreement, note repurchase agreement or other credit
facility agreement offered by banks or other institutions.

Municipal Lease Obligations

The Fund may invest in municipal lease obligations. Municipal lease
obligations are secured by revenues derived from the lease of property to state
and local government units. The underlying leases typically are renewable
annually by the governmental user, although the lease may have a term longer
than one year. If the governmental user does not appropriate sufficient funds
for the following

-10-
<PAGE>

year's lease payments, the lease will terminate, with the possibility of default
on the lease obligations and significant loss to the Fund. In the event of a
termination, assignment or sublease by the governmental user, the interest paid
on the municipal lease obligation could become taxable, depending upon the
identity of the succeeding user.

Municipal Bond Index Futures Contracts

The Fund may enter into municipal bond index futures contracts. A
municipal bond index futures contract is an agreement to take or make delivery
of an amount of cash equal to the difference between the value of the index at
the beginning and at the end of the contract period. The Fund may enter into
short municipal bond index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of securities
in its respective portfolio that might otherwise result. When the Fund is not
fully invested in securities and anticipates a significant market advance, it
may enter into long municipal bond index futures contracts in order to gain
rapid market exposure that may wholly or partially offset increases in the costs
of securities that it intends to purchase. In a substantial majority of these
transactions, the Fund will purchase such securities upon termination of the
futures position but, under unusual market conditions, a futures position may be
terminated without the corresponding purchase of securities.

Characteristics of Municipal Obligations. Municipal obligations are
debt obligations issued by or on behalf of states, cities, municipalities and
other public authorities. The two principal classifications of municipal
obligations that may be held by the Fund are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of a facility being financed. Revenue securities may include private
activity bonds. Such bonds may be issued by or on behalf of public authorities
to finance various privately operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of private
activity bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Fund will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Fund may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax.

Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither the Fund
nor SBAM will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.

Additional Investment Activities. Floating and Variable Rate
Obligations. Certain of the obligations that the Fund may purchase may have a
floating or variable rate of interest. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by
the Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the underlying instrument or to a third party at par value
prior to maturity. Such obligations include variable rate demand notes, which
are instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate.

Participation Certificates. The instruments that may be purchased by
the Fund include participation certificates issued by a bank, insurance company
or other financial institution in obligations owned by such institutions or
affiliated organizations that may otherwise be purchased by the Fund. A
participation certificate gives the Fund an undivided interest in the underlying
obligations in the proportion that the Fund's interest bears to the total
principal amount of such obligations. Certain of such participation certificates
may carry a demand feature that would permit the holder to tender them back to
the issuer or to a third party prior to maturity.

Variable Rate Auction Securities and Inverse Floaters. The Fund may
invest in variable rate auction securities and inverse floaters which are
instruments created when an issuer or dealer separates the principal portion of
a long-term, fixed-rate municipal bond into two long-term, variable-rate
instruments. The interest rate on the variable rate auction portion reflects
short-term interest rates, while the interest rate on the inverse floater
portion is typically higher than the rate available on the original fixed-rate
bond. Changes in the interest rate paid on the portion of the issue relative to
short-term interest rates inversely affect the interest rate paid on the latter
portion of the issue. The latter portion therefore is subject to greater price
volatility than the original fixed-rate bond. Since the market for these
instruments is new, the holder of one portion may have difficulty finding a
ready purchaser. Depending on market availability, the two portions may be
recombined to form a fixed-rate municipal bond.

Use of Hedging and Other Strategic Transactions. The Fund is currently
authorized to use only certain hedging and other strategic transactions.
Specifically, the Fund may purchase or sell futures contracts on (a) debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds and Treasury Notes and (b) municipal bond
indices. Currently, at least one exchange trades futures contracts on an index
of long-term municipal bonds, and the Fund reserves the right to conduct futures
transactions based on an index which may be developed in the future to correlate
with price movements in municipal obligations. It is not presently anticipated
that any of these strategies will be used to a significant degree by the Fund.

-11-
<PAGE>

U.S. Government Securities Fund

The mortgage-backed securities in which the Fund invests represent
participating interests in pools of residential mortgage loans which are
guaranteed by the U.S. Government, its agencies or instrumentalities of the U.S.
Government. However, the guarantee of these types of securities runs only to the
principal and interest payments and not to the market value of such securities.
In addition, the guarantee only runs to the Fund securities held by the U.S.
Government Securities Fund and not to the purchase of shares of the Fund.

Mortgage-backed securities are issued by lenders such as mortgage
bankers, commercial banks, and savings and loan associations. Such securities
differ from conventional debt securities which provide for periodic payment of
interest in fixed amounts (usually semiannually) with principal payments at
maturity or specified call dates. Mortgage-backed securities provide monthly
payments which are, in effect, a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans. Principal prepayments result from the sale of the
underlying property or the refinancing or foreclosure of underlying mortgages.

The yield of mortgage-backed securities is based on the average life of
the underlying pool of mortgage loans, which is computed on the basis of the
maturities of the underlying instruments. The actual life of any particular pool
may be shortened by unscheduled or early payments of principal and interest. The
occurrence of prepayments is affected by a wide range of economic, demographic
and social factors and, accordingly, it is not possible to accurately predict
the average life of a particular pool. For pools of fixed rate 30-year
mortgages, it has been common practice to assume that prepayments will result in
a 12-year average life. The actual prepayment experience of a pool of mortgage
loans may cause the yield realized by the Fund to differ from the yield
calculated on the basis of the average life of the pool. In addition, if any of
these mortgage-backed securities are purchased at a premium, the premium may be
lost in the event of early prepayment which may result in a loss to the Fund.

Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. Reinvestment by the Fund of scheduled principal payments and
unscheduled prepayments may occur at higher or lower rates than the original
investment, thus affecting the yield of the Fund. Monthly interest payments
received by the Fund have a compounding effect which will increase the yield to
shareholders as compared to debt obligations that pay interest semiannually.
Because of the reinvestment of prepayments of principal at current rates,
mortgage-backed securities may be less effective than Treasury bonds of similar
maturity at maintaining yields during periods of declining interest rates. Also,
although the value of debt securities may increase as interest rates decline,
the value of these pass-through type of securities may not increase as much due
to the prepayment feature.

While the Fund seeks a high level of current income, it cannot invest
in instruments such as lower grade corporate obligations which offer higher
yields but are subject to greater risks. The Fund will not knowingly invest in a
high risk mortgage security. The term "high risk mortgage security" is defined
generally as any mortgage security that exhibits greater price volatility than a
benchmark security, the Federal National Mortgage Association current coupon 30-
year mortgage-backed pass through security. Shares of the Fund are neither
insured nor guaranteed by the U.S. Government, its agencies or
instrumentalities.

In order to make the Fund an eligible investment for federal credit
unions ("FCUs"), federal savings and loan institutions and national banks, the
Fund will invest in U.S. Government securities that are eligible for investment
by such institutions without limitation, and will also generally be managed so
as to qualify as an eligible investment for such institutions. The Fund will
comply with all investment limitations applicable to FCUs including (i) the
requirement that a FCU may only purchase collateralized mortgage obligations
which would meet the high risk securities test of Part 703 of the National
Credit Union Administration Rules and Regulations or would be held solely to
reduce interest rate risk and (ii) the requirement that a FCU may not purchase
zero coupon securities having maturities greater than ten years.

Money Market Fund

Commercial paper may include variable amount master demand notes, which
are obligations that permit investment of fluctuating amounts at varying rates
of interest. Such notes are direct lending arrangements between the Fund and the
note issuer, and MAC will monitor the creditworthiness of the issuer and its
earning power and cash flow, and will also consider situations in which all
holders of such notes would redeem at the same time. Variable amount master
demand notes are redeemable on demand.

The Fund will invest only in U.S. dollar-denominated instruments. All
of the Fund's investments will mature in 397 days or less and the Fund will
maintain a dollar-weighted average fund maturity of 90 days or less. By limiting
the maturity of its investments, the Fund seeks to lessen the changes in the
value of its assets caused by fluctuations in short-term interest rates. Due to
the short maturities of its investments, the Fund will tend to have a lower
yield than, and the value of its underlying investments will be less volatile
than the investments of, funds that invest in longer-term securities. In
addition, the Fund will invest only in securities the Trustees determine to
present minimal credit risks and which at the time of purchase are "eligible
securities" as defined by Rule 2a-7 under the 1940 Act. Generally, eligible
securities must be rated by a NRSRO in one of the two highest rating categories
for short-term debt obligations or be of comparable quality.

-12-
<PAGE>

INVESTMENTS AND RISK FACTORS APPLICABLE TO MULTIPLE FUNDS

Money Market Instruments

The Money Market Fund will be invested in the types of money market
instruments described below. Certain of the instruments listed below may also be
purchased by the other Funds in accordance with their investment policies and
certain Funds may purchase such instruments to invest otherwise idle cash or for
defensive purposes.

1. U.S. Government and Government Agency Obligations. U.S. Government
obligations are debt securities issued or guaranteed as to principal or interest
by the U.S. Treasury. These securities include treasury bills, notes and bonds.
U.S. Government agency obligations are debt securities issued or guaranteed as
to principal or interest by an agency or instrumentality of the U.S. Government
pursuant to authority granted by Congress. U.S. Government agency obligations
include, but are not limited to, the Student Loan Marketing Association, Federal
Home Loan Banks, Federal Intermediate Credit Banks and the Federal National
Mortgage Association. U.S. instrumentality obligations include, but are not
limited to, the Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities are supported by the right of the issuer to borrow from the
U.S. Treasury or the Federal Reserve Banks, such as those issued by Federal
Intermediate Credit Banks; others, such as those issued by the Federal National
Mortgage Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality; and
others, such as those issued by the Student Loan Marketing Association, are
supported only by the credit of the agency or instrumentality. There are also
separately traded interest components of securities issued or guaranteed by the
U.S. Treasury. No assurance can be given that the U.S. Government will provide
financial support to such U.S. Government sponsored agencies or
instrumentalities in the future, since it is not obligated to do so by law. The
foregoing types of instruments are hereafter collectively referred to as "U.S.
Government securities."

2. Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are certificates issued against funds deposited in a bank or a savings
and loan association. They are for a definite period of time and earn a
specified rate of return. Bankers' acceptances are short-term credit instruments
evidencing the obligation of a bank to pay a draft which has been drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. They are
primarily used to finance the import, export, transfer or storage of goods. They
are termed "accepted" when a bank guarantees their payment at maturity.

Fund Portfolios may acquire obligations of foreign banks and foreign
branches of U.S. banks. These obligations are not insured by the Federal Deposit
Insurance Corporation.

3. Commercial Paper. Commercial paper consists of unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is issued in bearer form with maturities generally not
exceeding nine months. Commercial paper obligations may include variable amount
master demand notes. Variable amount master demand notes are obligations that
permit the investment of fluctuating amounts at varying rates of interest
pursuant to direct arrangements between a Fund, as lender, and the borrower.
These notes permit daily changes in the amounts borrowed. A Fund has the right
to increase the amount under the note at any time up to the full amount provided
by the note agreement, or to decrease the amount, and the borrower may prepay up
to the full amount of the note without penalty. Because variable amount master
demand notes are direct lending arrangements between the lender and borrower, it
is not generally contemplated that such instruments will be traded, and there is
no secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. A Fund will only invest in variable amount master demand notes issued
by companies which at the date of investment have an outstanding debt issue
rated "Aaa" or "Aa" by Moody's or "AAA" or "AA" by S&P and which the applicable
Subadviser has determined present minimal risk of loss to the Fund. A Subadviser
will look generally at the financial strength of the issuing company as
"backing" for the note and not to any security interest or supplemental source
such as a bank letter of credit. A variable amount master demand note will be
valued each day as a Fund's net asset value is determined, which value will
generally be equal to the face value of the note plus accrued interest unless
the financial position of the issuer is such that its ability to repay the note
when due is in question.

4. Corporate Obligations. Corporate obligations include bonds and
notes issued by corporations to finance longer-term credit needs than those
supported by commercial paper. While such obligations generally have maturities
of ten years or more, the Money Market Fund will only purchase obligations which
have remaining maturities of thirteen months or less from the date of purchase
and which are rated "AA" or higher by S&P or "Aa" or higher by Moody's.

5. Repurchase Agreements. Repurchase agreements are arrangements
involving the purchase of obligations by a Fund and the simultaneous agreement
to resell the same obligations on demand or at a specified future date and at an
agreed upon price. The majority of repurchase transactions run from day to day
and delivery pursuant to the resale provision typically will occur within one to
five business days of the purchase. A repurchase agreement can be viewed as a
loan made by a Fund to the seller of the obligation with such obligation serving
as collateral for the seller's agreement to repay the amount borrowed with
interest. Such transactions afford an opportunity for a Fund to earn a return on
cash which is only temporarily available. Repurchase agreements entered into by
the Fund will be with banks, brokers or dealers. However, a Fund will enter into
a repurchase agreement with a broker or dealer only if the broker or dealer
agrees to deposit additional collateral should the value of the obligation
purchased by the Fund decrease below the resale price.

-13-
<PAGE>

The Trustees have adopted procedures that establish certain
creditworthiness, asset and collateralization requirements for the
counterparties to a Fund's repurchase agreements. These procedures limit the
counterparties to repurchase transactions to those financial institutions which
are members of the Federal Reserve System and/or a primary government securities
dealer reporting to the Federal Reserve Bank of New York's Market Reports
Division or a broker/dealer which meet certain creditworthiness criteria or
which report U.S. Government securities positions to the Federal Reserve Board.
However, the Trustees reserve the right to change the criteria used to select
such financial institutions and broker/dealers. The Trustees will regularly
monitor the use of repurchase agreements and the Subadvisers will, pursuant to
procedures adopted by the Trustees, continuously monitor the amount of
collateral held with respect to a repurchase transaction so that it equals or
exceeds the amount of the obligations.

Should an issuer of a repurchase agreement fail to repurchase the
underlying obligation, the losses to the Fund, if any, would be the difference
between the repurchase price and the underlying obligation's market value. A
Fund might also incur certain costs in liquidating the underlying obligation.
Moreover, if bankruptcy or other insolvency proceedings should be commenced with
respect to the seller, realization upon the underlying obligation by the Fund
might be delayed or limited. Generally, repurchase agreements are of a short
duration, often less than one week but on occasion for longer periods.

6. Canadian and Provincial Government and Crown Agency Obligations.
Canadian Government obligations are debt securities issued or guaranteed as to
principal or interest by the Government of Canada pursuant to authority granted
by the Parliament of Canada and approved by the Governor in Council, where
necessary. These securities include treasury bills, notes, bonds, debentures and
marketable Government of Canada loans. Canadian Crown agency obligations are
debt securities issued or guaranteed by a Crown corporation, company or agency
("Crown agencies") pursuant to authority granted by the Parliament of Canada and
approved by the Governor in Council, where necessary. Certain Crown agencies are
by statute agents of Her Majesty in right of Canada, and their obligations, when
properly authorized, constitute direct obligations of the Government of Canada.
Such obligations include, but are not limited to, those issued or guaranteed by
the Export Development Corporation, Farm Credit Corporation, Federal Business
Development Bank and Canada Post Corporation. In addition, certain Crown
agencies which are not by law agents of Her Majesty may issue obligations which
by statute the Governor in Council may authorize the Minister of Finance to
guarantee on behalf of the Government of Canada. Other Crown agencies which are
not by law agents of Her Majesty may issue or guarantee obligations not entitled
to be guaranteed by the Government of Canada. No assurance can be given that the
Government of Canada will support the obligations of Crown agencies which are
not agents of Her Majesty, which it has not guaranteed, since it is not
obligated to do so by law.

Provincial Government obligations are debt securities issued or
guaranteed as to principal or interest by the government of any province of
Canada pursuant to authority granted by the Legislature of any such province and
approved by the Lieutenant Governor in Council of any such province, where
necessary. These securities include treasury bills, notes, bonds and debentures.
Provincial Crown agency obligations are debt securities issued or guaranteed by
a provincial Crown corporation, company or agency ("provincial Crown agencies")
pursuant to authority granted by a provincial Legislature and approved by the
Lieutenant Governor in Council of such province, where necessary. Certain
provincial Crown agencies are by statute agents of Her Majesty in right of a
particular province of Canada, and their obligations, when properly authorized,
constitute direct obligations of such province. Other provincial Crown agencies
which are not by law agents of Her Majesty in right of a particular province of
Canada may issue obligations which by statute the Lieutenant Governor in Council
of such province may guarantee, or may authorize the Treasurer thereof to
guarantee, on behalf of the government of such province. Finally, other
provincial Crown agencies which are not by law agencies of Her Majesty may issue
or guarantee obligations not entitled to be guaranteed by a provincial
government. No assurance can be given that the government of any province of
Canada will support the obligations of provincial Crown agencies which are not
agents of Her Majesty, which it has not guaranteed, as it is not obligated to do
so by law. Provincial Crown agency obligations described above include, but are
not limited to, those issued or guaranteed by a provincial railway corporation,
a provincial hydroelectric or power commission or authority, a provincial
municipal financing corporation or agency and a provincial telephone commission
or authority.

Any Canadian obligation acquired by the Money Market Fund will be
denominated in U.S. dollars.

Preferred Stock and Convertible Securities

Preferred stock is a class of capital stock that pays dividends at a
specified rate and that has preference over common stock in the payment of
dividends and the liquidation of assets. Preferred stock does not ordinarily
carry voting rights. Convertible securities are securities (usually preferred
shares or bonds) that are exchangeable for a set number of another form of
securities (usually common stock) at a prestated price. The convertible feature
is usually designed as a sweetener to enhance the marketability of the security.

Mortgage Securities

Mortgage securities differ from conventional bonds in that principal is
paid over the life of the securities rather than at maturity. As a result, a
Fund receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a Fund reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest which is
higher or lower than the rate on the existing mortgage securities. For this
reason, mortgage securities may be less effective than other types of debt
securities as a means of locking in long-term interest rates.

-14-
<PAGE>

In addition, because the underlying mortgage loans and assets may be
prepaid at any time, if a Fund purchases mortgage securities at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected payments will reduce, yield to maturity.

Adjustable rate mortgage securities are similar to the mortgage
securities discussed above, except that unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent interests
in mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. Most
adjustable rate mortgage securities provide for an initial mortgage rate that is
in effect for a fixed period, typically ranging from three to twelve months.
Thereafter, the mortgage interest rate will reset periodically in accordance
with movements in a specified published interest rate index. The amount of
interest due to an adjustable rate mortgage holder is determined in accordance
with movements in a specified published interest rate index by adding a pre-
determined increment or "margin" to the specified interest rate index. Many
adjustable rate mortgage securities reset their interest rates based on changes
in the one-year, three-year and five-year constant maturity Treasury rates, the
three-month or six-month Treasury Bill rate, the 11th District Federal Home Loan
Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-
month, six-month or one-year London Interbank Offered Rate ("LIBOR") and other
market rates.

A Fund will not benefit from increases in interest rates to the extent
that interest rates rise to the point where they cause the current coupon of
adjustable rate mortgages held as investments to exceed any maximum allowable
annual or lifetime reset limits (or "cap rates") for a particular mortgage. In
this event, the value of the mortgage securities in a Fund would likely
decrease. Also, the Fund's net asset value could vary to the extent that current
yields on adjustable rate mortgage securities are different than market yields
during interim periods between coupon reset dates. During periods of declining
interest rates, income to a Fund derived from adjustable rate mortgages which
remain in a mortgage pool will decrease in contrast to the income on fixed rate
mortgages, which will remain constant. Adjustable rate mortgages also have less
potential for appreciation in value as interest rates decline than do fixed rate
investments.

Privately-Issued Mortgage Securities. Privately-issued pass through
securities provide for the monthly principal and interest payments made by
individual borrowers to pass through to investors on a corporate basis, and in
privately-issued collateralized mortgage obligations, as further described
below. Privately-issued mortgage securities are issued by private originators
of, or investors in, mortgage loans, including mortgage bankers, commercial
banks, investment banks, savings and loan associations and special purpose
subsidiaries of the foregoing. Since privately-issued mortgage certificates are
not guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. For a description of the types of credit enhancements that may
accompany privately-issued mortgage securities, see "Asset-Backed Securities--
Types of Credit Support" below. A Fund will not limit its investments to asset-
backed securities with credit enhancements.

Collateralized Mortgage Obligations ("CMOs"). CMOs generally are bonds
or certificates issued in multiple classes that are collateralized by or
represent an interest in mortgages. CMOs may be issued by single-purpose, stand-
alone finance subsidiaries or trusts of financial institutions, government
agencies, investment banks or other similar institutions. Each class of CMOs,
often referred to as a "tranche", may be issued with a specific fixed coupon
rate (which may be zero) or a floating coupon rate, and has a stated maturity or
final distribution date. Principal prepayments on the underlying mortgages may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates. Interest is paid or accrued on CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the underlying
mortgages may be allocated among the several classes of a series of a CMO in
many ways. The general goal sought to be achieved in allocating cash flows on
the underlying mortgages to the various classes of a series of CMOs is to create
tranches on which the expected cash flows have a higher degree of predictability
than the underlying mortgages. As a general matter, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance. As part of the process of creating more
predictable cash flows on most of the tranches in a series of CMOs, one or more
tranches generally must be created that absorb most of the volatility in the
cash flows on the underlying mortgages. The yields on these tranches are
relatively higher than on tranches with more predictable cash flows. Because of
the uncertainty of the cash flows on these tranches, and the sensitivity thereof
to changes in prepayment rates on the underlying mortgages, the market prices of
and yield on these tranches tend to be highly volatile.

CMOs purchased may be:

(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government;

(2) collateralized by pools of mortgages in which payment of principal
and interest is guaranteed by the issuer and the guarantee is collateralized by
U.S. Government securities; or

(3) securities for which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is supported by
the credit of an agency or instrumentality of the U.S. Government.

STRIPS. In addition to the U.S. Government securities discussed above,
certain Funds may invest in separately traded interest components of securities
issued or guaranteed by the U.S. Treasury. The interest components of selected
securities are traded

-15-
<PAGE>

independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, the interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.

Stripped Mortgage Securities. Stripped mortgage securities are
derivative multiclass mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. Government, or by private
issuers, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities in which a Fund invests. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will not exceed 10% (or 15% with respect to the Emerging
Growth Fund and the Tax-Sensitive Equity Fund) of a Fund's net assets.

Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on a Fund's yield to maturity. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, a Fund may fail to fully recoup its initial investment in these
securities even if the securities have received the highest rating by a
nationally recognized statistical rating organization.

As interest rates rise and fall, the value of IOs tends to move in the
same direction as interest rates. The value of the other mortgage securities
described in this Statement of Additional Information, like other debt
instruments, will tend to move in the opposite direction of interest rates.
Accordingly, the Fund believes that investing in IOs, in conjunction with the
other mortgage securities described herein, will contribute to a Fund's
relatively stable net asset value.

In addition to the stripped mortgage securities described above, the
Strategic Income may invest in similar securities such as Super POs and Levered
IOs which are more volatile than POs or IOs. Risks associated with instruments
such as Super POs are similar in nature to those risks related to investments in
POs. Risks connected with Levered IOs and IOettes are similar in nature to those
associated with IOs. The Strategic Income Fund may also invest in other similar
instruments developed in the future that are deemed consistent with the
investment objective, policies and restrictions of the Fund.

Under the Internal Revenue Code of 1986, as amended (the "Code"), POs
may generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to a Fund. See "Taxes --Pay-in-kind
Bonds, Zero Coupon Bonds and Discount Obligations."

Inverse Floaters. The Strategic Income and National Municipal Bond
Funds may invest in inverse floaters, which are also derivative mortgage
securities. Inverse floaters may be issued by agencies or instrumentalities of
the U.S. Government, or by private issuers, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Inverse floaters have greater volatility
than other types of mortgage securities in which a Fund invests (with the
exception of stripped mortgage securities). Although inverse floaters are
purchased and sold by institutional investors through several investment banking
firms acting as brokers or dealers, the market for such securities has not yet
been fully developed. Accordingly, inverse floaters are generally illiquid and
to such extent, together with any other illiquid investments, will not exceed
10% of the Fund's net assets.

Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate obligations.

Asset-Backed Securities

The securitization techniques used to develop mortgage securities are
also being applied to a broad range of other assets. Through the use of trusts
and special purpose corporations, automobile and credit card receivables are
being securitized in pass-through structures similar to mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. Generally
the issuers of asset-backed bonds, notes or pass-through certificates are
special purpose entities and do not have any significant assets other than the
receivables securing such obligations. In general, the collateral supporting
asset-backed securities is of a shorter maturity than mortgage loans. As a
result, investment in these securities should result in greater price stability
for a Fund's shares. Instruments backed by pools of receivables are similar to
mortgage-backed securities in that they are subject to unscheduled prepayments
of principal prior to maturity.

-16-
<PAGE>

When the obligations are prepaid, a Fund must reinvest the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time.
Therefore, a Fund's ability to maintain a portfolio which includes high-yielding
asset-backed securities will be adversely affected to the extent that
prepayments of principal must be reinvested in securities which have lower
yields than the prepaid obligations. Moreover, prepayments of securities
purchased at a premium could result in a realized loss. A Fund will only invest
in asset-backed securities rated, at the time of purchase, "AA" or better by S&P
or "Aa" or better by Moody's or which, in the opinion of the applicable
Subadviser, are of comparable quality.

As with mortgage securities, asset-backed securities are often backed
by a pool of assets representing the obligations of a number of different
parties and use similar credit enhancement techniques. For a description of the
types of credit enhancement that may accompany privately-issued mortgage
securities, see "Types of Credit Support" below. A Fund will not limit its
investments to asset-backed securities with credit enhancements. Although asset-
backed securities are not generally traded on a national securities exchange,
such securities are widely traded by brokers and dealers, and to such extent
will not be considered illiquid securities.

Types of Credit Support. Mortgage securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failure by obligors on
underlying assets to make payments, such securities may contain elements of
credit support. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Funds will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.

The ratings of mortgage securities and asset-backed securities for
which third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.

Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.

Zero Coupon Securities and Pay-in-Kind Bonds

Zero coupon securities and pay-in-kind bonds involve special risk
considerations. Zero coupon securities are debt securities that do not provide
for the payment of cash income but are sold at substantial discounts from their
value at maturity. When a zero coupon security is held to maturity, its entire
return, which consists of the amortization of discount, comes from the
difference between its purchase price and its maturity value. This difference is
known at the time of purchase, so that investors holding zero coupon securities
until maturity know at the time of their investment what the return on their
investment will be. Certain zero coupon securities also are sold at substantial
discounts from their maturity value and provide for the commencement of regular
interest payments at a deferred date. The Funds also may purchase pay-in-kind
bonds. Pay-in-kind bonds are bonds that pay all or a portion of their interest
in the form of additional debt or equity securities. The U.S. Government
Securities Fund will not invest in zero coupon securities having maturities of
greater than ten years.

Zero coupon securities and pay-in-kind bonds tend to be subject to
greater price fluctuations in response to changes in interest rates than are
ordinary interest-paying debt securities with similar maturities. The value of
zero coupon securities appreciates more during periods of declining interest
rates and depreciates more during periods of rising interest rates.

Zero coupon securities and pay-in-kind bonds may be issued by a wide
variety of corporate and governmental issuers. Although zero coupon securities
and pay-in-kind bonds are generally not traded on a national securities
exchange, such securities are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the investment
restriction under "Investment Restrictions" below.

Current federal income tax law requires the holder of a zero coupon
security or certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and

-17-
<PAGE>

avoid liability for federal income and excise taxes, a Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.

High Yield/High Risk Domestic Corporate Debt Securities

High yield U.S. corporate debt securities include bonds, debentures,
notes and commercial paper and will generally be unsecured. Most of these debt
securities will bear interest at fixed rates. However, a Fund may also invest in
debt securities with variable rates of interest or which involve equity
features, such as contingent interest or participations based on revenues, sales
or profits (i.e., interest or other payments, often in addition to a fixed rate
of return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).

Because the Strategic Income and Investment Quality Bond Funds will
invest primarily in fixed-income securities, the net asset value of each Fund's
shares can be expected to change as general levels of interest rates fluctuate,
although the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities. Except to the extent that
values are affected independently by other factors such as developments relating
to a specific issuer, when interest rates decline, the value of a fixed-income
Fund can generally be expected to rise. Conversely, when interest rates rise,
the value of a fixed-income Fund can generally be expected to decline.

The secondary markets for high yield corporate and sovereign debt
securities are not as liquid as the secondary markets for higher rated
securities. The secondary markets for high yield debt securities are
concentrated in relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield debt securities is generally lower than that for higher-rated
securities and the secondary markets could contract under adverse market or
economic conditions independent of any specific adverse changes in the condition
of a particular issuer. These factors may have an adverse effect on a Fund's
ability to dispose of particular Fund investments and may limit the ability of
those Funds to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Trustees to value such Fund's investment Fund and the
Fund's Trustees may have to use a greater degree of judgment in making such
valuations. Less liquid secondary markets may also affect a Fund's ability to
sell securities at their fair value. In addition, each Fund may invest up to 10%
of its net assets, measured at the time of investment, in illiquid securities,
which may be more difficult to value and to sell at fair value. If the secondary
markets for high yield debt securities are affected by adverse economic
conditions, the proportion of a Fund's assets invested in illiquid securities
may increase.

While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-rated
securities. In addition, such securities generally present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.

High Yield/High Risk Foreign Sovereign Debt Securities

The Strategic Income, High Yield and Investment Quality Bond Funds
expect that a significant portion of their emerging market governmental debt
obligations will consist of "Brady Bonds." In addition, the International Small
Cap, and Balanced Funds may also invest in Brady Bonds. Brady Bonds are debt
securities, generally denominated in U.S. dollars, issued under the framework of
the "Brady Plan," an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. The Brady Plan framework, as
it has developed, contemplates the exchange of external commercial bank debt for
newly issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds issued
to date generally have maturities of between 15 and 30 years from the date of
issuance and have traded at a deep discount from their face value. The Funds may
invest in Brady Bonds of emerging market countries that have been issued to
date, as well as those which may be issued in the future. In addition to Brady
Bonds, the Funds may invest in emerging market governmental obligations issued
as a result of debt restructuring agreements outside of the scope of the Brady
Plan. A substantial portion of the Brady Bonds and other sovereign debt
securities in which the Funds invest are likely to be acquired at a discount,
which involves certain considerations discussed below under "TAXES --Pay-in-kind
Bonds, Zero Coupon Bonds and Discount Obligations."

Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which

-18-
<PAGE>

carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of one
percent above the then current six month LIBOR rate. Regardless of the stated
face amount and stated interest rate of the various types of Brady Bonds, the
Funds will purchase Brady Bonds in secondary markets, as described below, in
which the price and yield to the investor reflect market conditions at the time
of purchase. Brady Bonds issued to date have traded at a deep discount from
their face value. Certain sovereign bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds have
been collateralized as to principal due at maturity (typically 15 to 30 years
from the date of issuance) by U.S. Treasury zero coupon bonds with a maturity
equal to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the International Monetary Fund (the "IMF"), the World
Bank and the debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade securities in
amounts that typically represent between 12 and 18 months of interest accruals
on these instruments with the balance of the interest accruals being
uncollateralized. The Funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories.

Foreign Sovereign Debt Securities

Investing in foreign sovereign debt securities will expose a Fund to
the direct or indirect consequences of political, social or economic changes in
the developing and emerging countries that issue the securities. The ability and
willingness of sovereign obligors in developing and emerging countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which the Funds may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.

The ability of a foreign sovereign obligor to make timely payments on
its external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.

As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.

Sovereign obligors in developing and emerging countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other

-19-
<PAGE>

foreign sovereign debt securities in which the Funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a Fund's holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in negotiating
the terms of these arrangements and may therefore have access to information not
available to other market participants.

In addition to high yield foreign sovereign debt securities, many of
the Funds may also invest in investment grade foreign securities.

Foreign Securities

Securities of foreign issuers include obligations of foreign branches
of U.S. banks and of foreign banks, common and preferred stocks, debt securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs", respectively). ADRs are U.S. dollar-
denominated securities backed by foreign securities deposited in a U.S.
securities depository. ADRs are created for trading in the U.S. markets. The
value of an ADR will fluctuate with the value of the underlying security,
reflect any changes in exchange rates and otherwise involve risks associated
with investing in foreign securities. ADRs in which the Funds may invest may be
sponsored or unsponsored. There may be less information available about foreign
issuers of unsponsored ADRs. EDRs and GDRs are receipts evidencing an
arrangement with a non-U.S. bank similar to that for ADRs and are designed for
use in non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in
the same currency as the underlying security.

Foreign markets, especially emerging markets, may have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a Fund is uninvested and no return is earned thereon. The inability of
a Fund to make intended security purchases due to settlement could cause the
Fund to miss attractive investment opportunities. Inability to dispose of Fund
securities due to settlement problems could result in losses to a Fund due to
subsequent declines in values of the Fund securities or, if the Fund has entered
into a contract to sell the security, possible liability to the purchaser.
Certain foreign markets, especially emerging markets, may require governmental
approval for the repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors. A Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.

Warrants

Subject to certain restrictions, each of the Funds except the National
Municipal Bond and Money Market Funds may purchase warrants, including warrants
traded independently of the underlying securities. Warrants are rights to
purchase securities at specific prices valid for a specific period of time.
Their prices do not necessarily move parallel to the prices of the underlying
securities, and warrant holders receive no dividends and have no voting rights
or rights with respect to the assets of an issuer. Warrants cease to have value
if not exercised prior to the expiration date. It is a non-fundamental
investment restriction of each Fund (except the Emerging Growth Fund and the
Tax-Sensitive Equity Fund) not to purchase warrants if as a result that Fund
would then have more than 10% of its total net assets invested in warrants, or
if more than 5% of the value of the Fund's total net assets would be invested in
warrants which are not listed on a recognized United States or foreign stock
exchange, except for warrants included in units or attached to other securities.

When-Issued Securities ("forward commitments")

In order to help ensure the availability of suitable securities, each
of the Funds may purchase debt securities on a "when-issued" or on a "forward
delivery" basis, which means that the obligations will be delivered to the Fund
at a future date, which may be a month or more after the date of commitment
(referred to as "forward commitments"). It is expected that, under normal
circumstances, a Fund purchasing securities on a when-issued or forward delivery
basis will take delivery of the securities, but the Fund may sell the securities
before the settlement date, if such action is deemed advisable. In general, a
Fund does not pay for the securities or start earning interest on them until the
purchase of the obligation is scheduled to be settled, but it does, in the
meantime, record the transaction and reflect the value each day of the
securities in determining its net asset value. At the time delivery is made, the
value of when-issued or forward delivery securities may be more or less than the
transaction price, and the yields then available in the market may be higher
than those obtained in the transaction. While awaiting delivery of the
obligations purchased on such bases, a Fund will establish a segregated account
consisting of cash or liquid high quality debt securities equal to the amount of
the commitments to purchase when-issued or forward delivery securities. The
availability of liquid assets for this purpose and the effect of asset
segregation on a Fund's ability to meet its current obligations, to honor
requests for redemption and to have its investment Fund managed properly will
limit the extent to which the Fund may purchase when-issued or forward delivery
securities. Except as may be imposed by these factors, there is no limit on the
percentage of a Fund's total assets that may be committed to such transactions.

-20-
<PAGE>

Illiquid Securities

Each of the Funds (except the Tax-Sensitive Equity Fund and the
Emerging Growth Fund, which may not invest more than 15%) is precluded from
investing in excess of 10% of its net assets in securities that are not readily
marketable. Investment in illiquid securities involves the risk that, because of
the lack of consistent market demand for such securities, a Fund may be forced
to sell them at a discount from the last offer price. Excluded from the 10%
limitation (or 15% with regard to the Tax-Sensitive Equity Fund and the Emerging
Growth Fund) are securities that are restricted as to resale but for which a
ready market is available pursuant to exemption provided by Rule 144A adopted
under the Securities Act of 1933, as amended (the "1933 Act") or other
exemptions from the registration requirements of the 1933 Act. Whether
securities sold pursuant to Rule 144A are readily marketable for purposes of the
Fund's investment restriction is a determination to be made by the Subadvisers,
subject to the Trustees' oversight and for which the Trustees are ultimately
responsible. The Subadvisers will also monitor the liquidity of Rule 144A
securities held by the Funds for which they are responsible. To the extent Rule
144A securities held by a Fund should become illiquid because of a lack of
interest on the part of qualified institutional investors, the overall liquidity
of the Fund could be adversely affected. In addition, the Money Market Fund may
invest in commercial paper issued in reliance on the exemption from registration
afforded by Section 4(2) of the 1933 Act. Section 4(2) commercial paper is
restricted as to the disposition under federal securities law, and is generally
sold to institutional investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be made in an exempt transaction.
Section 4(2) commercial paper is normally resold to other institutional
investors like the Money Market Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Money Market Fund's subadviser believes that
Section 4(2) commercial paper meets its criteria for liquidity and is quite
liquid. The Money Market Fund intends, therefore, to treat Section 4(2)
commercial paper as liquid and not subject to the investment limitation
applicable to illiquid securities. The Money Market Fund's subadviser will
monitor the liquidity of Section 4(2) commercial paper held by the Money Market
Fund, subject to the Trustees' oversight and for which the Trustees are
ultimately responsible.

Repurchase Agreements and Reverse Repurchase Agreements

Each of the Funds may enter into repurchase agreements and reverse
repurchase agreements. Repurchase agreements involve the acquisition by a Fund
of debt securities subject to an agreement to resell them at an agreed-upon
price. Under a repurchase agreement, at the time the Fund acquires a security,
it agrees to resell it to the original seller (a financial institution or
broker/dealer which meets the guidelines established by the Trustees) and must
deliver the security (and/or securities that may be added to or substituted for
it under the repurchase agreement) to the original seller on an agreed-upon date
in the future. The repurchase price is in excess of the purchase price. The
arrangement is in economic effect a loan collateralized by securities.

A Fund's risk in a repurchase transaction is limited to the ability of
the seller to pay the agreed-upon sum on the delivery date. In the event of
bankruptcy or other default by the seller, there may be possible delays and
expenses in liquidating the instrument purchased, decline in its value and loss
of interest. Securities subject to repurchase agreements will be valued every
business day and additional collateral will be requested if necessary so that
the value of the collateral is at least equal to the value of the repurchase
obligation, including the interest accrued thereon.

Each Fund of the Fund may enter into "reverse" repurchase agreements.
Under a reverse repurchase agreement, a Fund may sell a debt security and agree
to repurchase it at an agreed upon time and at an agreed upon price. The Fund
retains record ownership of the security and the right to receive interest and
principal payments thereon. At an agreed upon future date, the Fund repurchases
the security by remitting the proceeds previously received, plus interest. The
difference between the amount the Fund receives for the security and the amount
it pays on repurchase is deemed to be payment of interest. The Fund will
maintain in a segregated custodial account cash, Treasury bills or other U.S.
Government securities having an aggregate value equal to the amount of such
commitment to repurchase including accrued interest, until payment is made. In
certain types of agreements, there is no agreed-upon repurchase date and
interest payments are calculated daily, often based on the prevailing overnight
repurchase rate. While a reverse repurchase agreement may be considered a form
of leveraging and may, therefore, increase fluctuations in a Fund's net asset
value per share, each Fund will cover the transaction as described above.

Mortgage Dollar Rolls

Each of the Funds (except the Money Market Fund) may enter into
mortgage dollar rolls. Under a mortgage dollar roll, a Fund sells mortgage-
backed securities for delivery in the future (generally within 30 days) and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on the mortgage-backed securities. A
Fund is compensated by the difference between the current sale price and the
lower forward price for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the initial sale. A Fund
may also be compensated by receipt of a commitment fee. A Fund may only enter
into covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash or cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction. Dollar
roll transactions involve the risk that the market value of the securities sold
by the Fund may decline below the repurchase price of those securities. While a
mortgage dollar roll may be considered a form of

-21-
<PAGE>

leveraging and may, therefore, increase fluctuations in a Fund's net asset value
per share, each Fund will cover the transaction as described above.

Hybrid Instruments

Hybrid instruments (a type of potentially high-risk derivative) have
been developed and combine the elements of futures contracts or options with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of deposit or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.

Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar- denominated Hybrid Instrument whose
redemption price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate was lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, the Fund could limit the downside risk of the security by
establishing a minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest rates were to rise
significantly. The purpose of this arrangement, known as a structured security
with an embedded put option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market risk, and
lowering transactions costs. Of course, there is no guarantee that the strategy
will be successful and the Fund could lose money if, for example, interest rates
do not move as anticipated or credit problems develop with the issuer of the
Hybrid.

The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to the
discussion below of futures, options, and forward contracts for a description of
certain risks associated with such investments.

Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.

Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.

Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental

-22-
<PAGE>

regulatory authority. The various risks discussed above, particularly the market
risk of such instruments, may in turn cause significant fluctuations in the net
asset value of the Fund.

HEDGING AND OTHER STRATEGIC TRANSACTIONS

A discussion of Hedging and Other Strategic Transactions follows. These
strategies will be used for hedging purposes only, including hedging various
market risks (such as interest rates, currency exchange rates and broad or
specific market movements), and managing the effective maturity or duration of
debt instruments held by the Fund. No Fund which is authorized to use any of
these investment strategies will be obligated, however, to pursue any of such
strategies and no Fund makes any representation as to the availability of these
techniques at this time or at any time in the future. In addition, a Fund's
ability to pursue certain of these strategies may be limited by the Commodity
Exchange Act, as amended, applicable rules and regulations of the CFTC
thereunder and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.

General Characteristics of Options

Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Other Strategic Transactions
involving options require segregation of Fund assets in special accounts.

A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Fund's purchase of a put option on a security, for example, might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.

OCC-issued and exchange-listed options, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Index options and
Eurodollar instruments (which are described below under "Eurodollar
Instruments") are cash settled for the net amount, if any, by which the option
is "in-the-money" (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.

A Fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed by
an exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.

Over-the-counter ("OTC") options are purchased from or sold to
securities dealers, financial institutions or other parties (collectively
referred to as "Counterparties" and individually referred to as a
"Counterparty") through a direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all of

-23-
<PAGE>

the terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guaranties and security, are determined by negotiation
of the parties. It is anticipated that any Fund authorized to use OTC options
will generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.

Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Subadviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that are deemed creditworthy by the Subadviser. In the absence of a change in
the current position of the staff of the Securities and Exchange Commission (the
"Commission"), OTC options purchased by a Fund and the amount of the Fund's
obligation pursuant to an OTC option sold by the Fund (the cost of the sell-back
plus the in-the-money amount, if any) or the value of the assets held to cover
such options will be deemed illiquid.

If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.

If and to the extent authorized to do so, a Fund may purchase and sell
call options on securities and on Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered," that is, the Fund must own the securities subject to the call, must
own an offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.

Each Fund reserves the right to purchase or sell options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.

If and to the extent authorized to do so, a Fund may purchase and sell
put options on securities (whether or not it holds the securities in its
portfolio) and on securities indices, currencies and futures contracts. A Fund
will not sell put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential obligations under put
options other than those with respect to futures contracts. In selling put
options, a Fund faces the risk that it may be required to buy the underlying
security at a disadvantageous price above the market price.

General Characteristics of Futures Contracts and Options on Futures Contracts

If and to the extent authorized to do so, a Fund may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management and for permissible non-hedging purposes. Futures contracts
are generally bought and sold on the commodities exchanges on which they are
listed with payment of initial and variation margin as described below. The sale
of a futures contract creates a firm obligation by a Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.

A Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for bona fide hedging, risk management (including duration
management). Maintaining a futures contract or selling an option on a futures
contract will typically require a Fund to deposit with a financial intermediary,
as security for its obligations, an amount of cash or other specified assets
("initial margin") that initially is from 1% to 10% of the face amount of the
contract (but may be higher in some circumstances). Additional cash or assets
("variation margin") may be required to be deposited thereafter daily as the
mark-to-market value of the futures contract fluctuates. The purchase of an
option on a financial futures contract involves payment of a premium for the
option without any further obligation on the part of a Fund. If a Fund exercises
an option on a futures contract it will be obligated to post initial margin (and
potentially variation margin) for the resulting futures position just as it
would for any futures position. Futures

-24-
<PAGE>

contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.

All of the Funds intend to comply with guidelines of eligibility for
exclusion from the definition of the term "commodity pool operator" adopted by
the CFTC and the National Futures Association, which regulate trading in the
futures markets. A Fund will use futures contracts and related options, to the
extent otherwise permitted, primarily for bona fide hedging purposes within the
meaning of CFTC regulations. To the extent that a Fund holds positions in
futures contracts and related options that do not fall within the definition of
bona fide hedging transactions, the aggregate initial margins and premiums
required to establish such positions will not exceed 5% of the fair market value
of the Fund's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into.

The value of all futures contracts sold by a Fund (adjusted for the
historical volatility relationship between such Fund and the contracts) will not
exceed the total market value of the Fund's securities.

Options on Securities Indices and Other Financial Indices

If and to the extent authorized to do so, a Fund may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Fund can achieve many of the same objectives it would achieve through
the sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

Currency Transactions

If and to the extent authorized to do so, a Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars". A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Subadviser.

A Fund's dealings in forward currency contracts and other currency
transactions such as futures contracts, options, options on futures contracts
and swaps will be limited to hedging and other non-speculative purposes,
including transaction hedging and position hedging. Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Fund, which will generally arise in connection with the
purchase or sale of the Fund's portfolio securities or the receipt of income
from them. Position hedging is entering into a currency transaction with respect
to portfolio securities positions denominated or generally quoted in that
currency. A Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held by the Fund that are
denominated or generally quoted in or currently convertible into the currency,
other than with respect to proxy hedging as described below.

A Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, a Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of a Fund's
securities are or are

-25-
<PAGE>

expected to be denominated, and to buy dollars. The amount of the contract would
not exceed the market value of the Fund's securities denominated in linked
currencies.

Currency transactions are subject to risks different from other
portfolio transactions, as discussed below under "Risk Factors."

Combined Transactions

If and to the extent authorized to do so, a Fund may enter into
multiple transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Other Strategic Transaction, as part of a single or combined strategy when,
in the judgment of the Subadviser, it is in the best interests of the Fund to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined transactions
will normally be entered into by a Fund based on the Subadviser's judgment that
the combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination will
instead increase the risks or hinder achievement of the portfolio management
objective.

Swaps, Caps, Floors and Collars

A Fund may be authorized to enter into interest rate, currency and
index swaps, the purchase or sale of related caps, floors and collars and other
derivatives. A Fund will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a Fund
anticipates purchasing at a later date. A Fund will use these transactions for
non-speculative purposes and will not sell interest rate caps or floors if it
does not own securities or other instruments providing the income the Fund may
be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments with
respect to a notional amount of principal). A currency swap is an agreement to
exchange cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate. The
purchase of an interest rate floor entitles the purchaser to receive payments of
interest on a notional principal amount from the party selling the interest rate
floor to the extent that a specified index falls below a predetermined interest
rate or amount. The purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specific index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return with a predetermined range of interest rates or values.

A Fund will usually enter into interest rate swaps on a net basis, that
is, the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors, collars and other similar derivatives are entered into for
good faith hedging or other non-speculative purposes, they do not constitute
senior securities under the Investment Company Act of 1940, as amended (the
"1940 Act"), and, thus, will not be treated as being subject to the Fund's
borrowing restrictions. A Fund will not enter into any swap, cap, floor, collar
or other derivative transaction unless the Counterparty is deemed creditworthy
by the Subadviser. If a Counterparty defaults, a Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.

The liquidity of swap agreements will be determined by a Subadviser
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed to be within the 10% (or 15% with respect to the Emerging Growth Fund
and the Tax-Sensitive Equity Fund) restriction on investments in securities that
are not readily marketable.

Each Fund will maintain cash and appropriate liquid assets in a
segregated custodial account to cover its current obligations under swap
agreements. If a Fund enters into a swap agreement on a net basis, it will
segregate assets with a daily value at least equal to the excess, if any, of the
Fund's accrued obligations under the swap agreement over the accrued amount the
Fund is entitled to receive under the agreement. If a Fund enters into a swap
agreement on other than a net basis, it will segregate assets with a value equal
to the full amount of the Fund's accrued obligations under the agreement. See
"Use of Segregated and Other Special Accounts."

-26-
<PAGE>

Eurodollar Instruments

If and to the extent authorized to do so, a Fund may make investments
in Eurodollar instruments, which are typically dollar-denominated futures
contracts or options on those contracts that are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. A Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.

Risk Factors

Hedging and Other Strategic Transactions have special risks associated
with them, including possible default by the Counterparty to the transaction,
illiquidity and, to the extent the Subadviser's view as to certain market
movements is incorrect, the risk that the use of the Hedging and Other Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options could result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, or cause a Fund to hold a security it might otherwise sell.

The use of futures and options transactions entails certain special
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain over-the-
counter options could have no markets. As a result, in certain markets, a Fund
might not be able to close out a transaction without incurring substantial
losses. Although a Fund's use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to a
Fund that might result from an increase in value of the position. Finally, the
daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium.

Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

Losses resulting from the use of Hedging and Other Strategic
Transactions will reduce a Fund's net asset value, and possibly income, and the
losses can be greater than if Hedging and Other Strategic Transactions had not
been used.

Risks of Hedging and Other Strategic Transactions Outside the United States

When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of positions taken as
part of non-U.S. Hedging and Other Strategic Transactions also could be
adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability of data on which to make trading decisions than
in the United States, (3) delays in a Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lower trading volume and
liquidity.

-27-
<PAGE>

Use of Segregated and Other Special Accounts

Use of many Hedging and Other Strategic Transactions by a Fund will
require, among other things, that the Fund segregate cash or other liquid assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
other liquid assets equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities written
by a Fund, for example, will require the Fund to hold the securities subject to
the call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by a
Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid assets equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a Fund will require the Fund to segregate liquid assets
equal to the exercise price. Except when a Fund enters into a forward contract
in connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency, liquid securities
denominated in that currency equal to a Fund's obligations or to segregate
liquid assets equal to the amount of the Fund's obligations.

OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although a Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.

In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid high grade debt or equity securities or other acceptable
assets. A Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap on
a daily basis and will segregate with its custodian, or designated sub-
custodian, an amount of cash or liquid assets having an aggregate value equal to
at least the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to a Fund's net obligation, if any.

Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
A Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. A
Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contracts or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Hedging and Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.

Other Limitations

No Fund will maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on securities
indices if, in the aggregate, the current market value of the open positions
exceeds the current market value of that portion of its securities portfolio
being hedged by those futures and options plus or minus the unrealized gain or
loss on those open positions, adjusted for the historical volatility
relationship between that portion of the Fund and the contracts (e.g., the Beta
volatility factor). For purposes of the limitation stated in the immediately
preceding sentence, to the extent the Fund has written call options on specific
securities in that portion of its portfolio, the value of those securities will
be deducted from the current market value of that portion of the securities
portfolio. If this limitation should be exceeded at any time, the Fund will take
prompt action to close out the appropriate number of open short positions to
bring its open futures and options positions within this limitation.

-28-
<PAGE>

Warrant Transactions and Risks

Each of the Funds (other than the Money Market Fund) may purchase
warrants, including warrants traded independently of the underlying securities.
Such transactions entail certain risks. A warrant is a security, usually issued
together with a bond or preferred stock, that entitles the holder to buy a
proportionate amount of common stock at a specified price, usually higher than
the market price at the time of issuance, for a period of years or to
perpetuity. In contrast, rights, which also represent the right to buy common
shares, normally have a subscription price lower than the current market value
of the common stock and a life of two to four weeks. A warrant is usually issued
as a sweetener, to enhance the marketability of the accompanying fixed income
securities. Warrants may be considered more speculative than certain other types
of investments in that prior to their exercise they do not entitle a holder to
dividends and voting rights with respect to the securities which may be
purchased by the exercise thereof, nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying security. If a warrant
expires unexercised, the Fund will lose the amount paid for the warrant and any
transaction costs.

INVESTMENT RESTRICTIONS

There are two classes of investment restrictions to which the Trust is
subject in implementing the investment policies of the Funds: fundamental and
nonfundamental. Nonfundamental restrictions are subject to change by the
Trustees of a Fund without shareholder approval. Fundamental restrictions may
only be changed by a shareholder vote.

The Trust may not issue senior securities, except to the extent that
the borrowing of money in accordance with restriction (3) may constitute the
issuance of a senior security. (For purposes of this restriction, purchasing
securities on a when-issued or delayed delivery basis and engaging in Hedging
and Other Strategic Transactions will not be deemed to constitute the issuance
of a senior security.) In addition, unless a Fund is specifically excepted by
the terms of a restriction, each Fund will not:

Fundamental

(1) Invest more than 25% of the value of its total assets in securities
of issuers having their principal activities in any particular industry,
excluding U.S. Government securities and, with respect to the Money Market Fund,
obligations of domestic branches of U.S. banks and with respect to the National
Municipal Bond Fund, obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities or by any state, territory or any possession
of the United States, the District of Columbia, or any of their authorities,
agencies, instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations. For purposes of
this restriction (except with regard to the Emerging Growth Fund), supranational
issuers will be considered to comprise an industry as will each foreign
government that issues securities purchased by a Fund.

(2) Purchase the securities of any issuer if the purchase would cause
more than 5% of the value of the Fund's total assets to be invested in the
securities of any one issuer (excluding U.S. Government securities) or cause
more than 10% of the voting securities of the issuer to be held by the Fund,
except that up to 25% of the value of each Fund's total assets may be invested
without regard to these restrictions. This restriction does not apply to the
Emerging Growth Fund as a non-diversified portfolio.

(3) Borrow money except that each Fund may borrow (i) for temporary or
emergency purposes (not for leveraging) up to 33 1/3% of the value of the Fund's
total assets (including amounts borrowed) less liabilities (other than
borrowings) and (ii) in connection with reverse repurchase agreements, mortgage
dollar rolls and other similar transactions.

(4) Underwrite securities of other issuers except insofar as the Fund
may be considered an underwriter under the Securities Act of 1933 in selling
portfolio securities.

(5) Purchase or sell real estate, except that each Fund may invest in
securities issued by companies which invest in real estate or interests therein
and each of the Funds other than the Money Market Fund may invest in mortgages
and mortgage-backed securities.

(6) Purchase or sell commodities or commodity contracts except that
each Fund other than the Investment Quality Bond and Money Market Funds may
purchase and sell futures contracts on financial instruments and indices and
options on such futures contracts. The Tax-Sensitive Equity, Emerging Growth,
Equity-Income, Small/Mid Cap, International Small Cap, Growth Equity, Global
Equity, Strategic Income and International Growth and Income Funds may purchase
and sell futures contracts on foreign currencies and options on such futures
contracts. The U.S. Government Securities Fund has elected for the present to
not engage in the purchase or sale of commodities or commodity contracts to the
extent permitted by this restriction, but it reserves the right to engage in
such transactions at a future time.

-29-
<PAGE>

(7) Lend money to other persons except by the purchase of obligations
in which the Fund is authorized to invest and by entering into repurchase
agreements. For purposes of this restriction, collateral arrangements with
respect to options, forward currency and futures transactions will not be deemed
to involve the lending of money.

(8) Lend securities in excess of 33% of the value of its total non-cash
assets. For purposes of this restriction, collateral arrangements with respect
to options, forward currency and futures transactions will not be deemed to
involve loans of securities.

Nonfundamental

(9) Knowingly invest more than 10% of the value of its net assets in
securities or other investments not readily marketable, including repurchase
agreements maturing in more than seven days but excluding variable amount master
demand notes, except that the Tax-Sensitive Equity Fund and the Emerging Growth
Fund may so invest up to 15% its net assets.

(10) Purchase securities for the purpose of exercising control or
management.

(11) Purchase securities of foreign issuers, except that (A) the Tax-
Sensitive Equity Fund, International Small Cap, Global Equity, International
Growth and Income and Strategic Income Funds may each, without limitation,
invest up to 100% of its assets in securities issued by foreign entities and/or
denominated in foreign currencies, (B) the Balanced Fund and Growth Equity Fund
may each invest up to 30% of its assets in such securities, (C) the Emerging
Growth Fund and the Equity-Income Fund may invest up to 25% of its assets in
such securities, and (D) each of the other portfolios (other than the U.S.
Government Securities and National Municipal Bond Funds) may invest up to 20% of
its assets in securities issued by foreign entities and/or denominated in
foreign currencies. (In the case of the Small/Mid Cap, Growth Equity and
Balanced Funds, ADRs and U.S. dollar denominated securities are not included in
the percentage limitation.)

In addition to the above policies, the Money Market Fund is subject to
certain restrictions required by Rule 2a-7 under the 1940 Act.

For the purposes of the investment limitations applicable to the
National Municipal Bond Fund, the identification of the issuer of a municipal
obligation depends on the terms and conditions of the obligation. If the assets
and revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee would be considered a separate security
and treated as an issue of such government or entity.

If a percentage restriction is adhered to at the time of an investment,
a later increase or decrease in the investment's percentage of the value of a
Fund's total assets resulting from a change in such values or assets will not
constitute a violation of the percentage restriction, except in the case of the
Money Market Fund where the percentage limitation of restriction (9) must be met
at all times.

PORTFOLIO TURNOVER

The annual rate of portfolio turnover will normally differ for each
Fund and may vary from year to year. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities during the
fiscal year by the monthly average of the value of the Fund's securities
(excluding from the computation all securities, including options, with
maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover generally involves correspondingly greater brokerage
commission expenses, which must be borne directly by the Fund. No portfolio
turnover rate can be calculated for the Money Market Fund due to the short
maturities of the instruments purchased. The portfolio turnover rates for the
periods shown below were as follows:

-30-
<PAGE>

11/1/96 11/1/97
to to
10/31/97 10/31/98

Small/Mid Cap ....................................... 145% %
International Small Cap ............................. 75% %
Growth Equity ....................................... 181% %
Global Equity ....................................... 28% %
Equity-Income ....................................... 36% %
Growth and Income ................................... 39% %
Balanced ............................................ 211% %
Strategic Income .................................... 193% %
Investment Quality Bond ............................. 65% %
U.S. Govt. Securities ............................... 364% %
National Municipal Bond ............................. 29% %
International Growth and Income ..................... 146% %
Tax-Sensitive Equity.................................
Emerging Growth......................................

Prior rates of portfolio turnover do not provide an accurate guide as
to what the rate will be in any future year, and prior rates and estimated rates
are not a limiting factor when it is deemed appropriate to purchase or sell
securities for a Fund.

TEMPORARY DEFENSIVE POSITIONS

The Funds may invest in the types of investments indicated below during
periods when the Funds are assuming a temporary defensive position.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Fund Investments
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Tax-Sensitive Equity U.S. Government obligations, commercial paper, bank obligations, repurchase
agreements, and negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions, in cash, or in
other cash equivalents.
- --------------------------------------------------------------------------------------------------------------------
Emerging Growth Investment grade debt obligations, domestic and foreign money market
obligations, including repurchase agreements, and short-term money market
obligations.
- --------------------------------------------------------------------------------------------------------------------
International Small Cap Cash, cash equivalents, U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, and negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions.
- --------------------------------------------------------------------------------------------------------------------
Small/Mid Cap Fund Equity securities of companies that, at the time of purchase, have total market
capitalization of $5 billion or greater and in excess of that amount, money
market instruments, bank and thrift obligations, obligations issued or
guaranteed by the U.S. Government or by its agencies or instrumentalities,
foreign bank obligations and obligations of foreign branches of domestic banks,
variable rate master demand notes and repurchase agreements.
- --------------------------------------------------------------------------------------------------------------------
Global Equity Cash or short-term and medium-term debt obligations consisting of (i) obligations
of U.S. or foreign governments, their respective agencies or instrumentalities,
(ii) money market instruments, and (iii) instruments denominated in any currency
issued by international development agencies.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

-31-
<PAGE>

<TABLE>

<S> <C>
- --------------------------------------------------------------------------------------------------------------------
Growth Equity Cash, cash equivalents, U.S. government obligations, commercial paper, bank
obligations, repurchase agreements, and negotiable U.S. dollar-denominated
obligations of domestic and foreign branches of U.S. depository institutions,
U.S. branches of foreign depository institutions, and foreign depository
institutions.
- --------------------------------------------------------------------------------------------------------------------
International Growth and Income Money market instruments, obligations of the U.S. Government and its agencies
Fund and instrumentalities, other debt securities, commercial paper, bank obligations
and repurchase agreements.
- --------------------------------------------------------------------------------------------------------------------
Growth and Income All securities authorized for purchase by the Investment Quality Bond Fund
and Money Market Fund.
- --------------------------------------------------------------------------------------------------------------------
Equity-Income Foreign securities, preferred stocks, convertible stocks and bonds, and
warrants, when considered consistent with the portfolio's investment objective
and program; U.S. and foreign dollar-denominated money market securities,
including repurchase agreements, in the two highest rating categories, maturing
in one year or less.
- --------------------------------------------------------------------------------------------------------------------
Balanced Fund U.S. Government obligations, commercial paper, bank obligations, repurchase
agreements, and negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions, in cash, or in
other cash equivalents.
- --------------------------------------------------------------------------------------------------------------------
Strategic Income [High quality bonds.]
- --------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Securities authorized for purchase by the Money Market Fund.
- --------------------------------------------------------------------------------------------------------------------
National Municipal Bond Taxable high-quality short-term money market instruments.
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Securities [Securities authorized for purchase by the Money Market Fund.]
- --------------------------------------------------------------------------------------------------------------------
Money Market N/A
- --------------------------------------------------------------------------------------------------------------------
</TABLE>

MANAGEMENT OF THE FUND

The Trustees are responsible for generally overseeing the conduct of
the Trust's business.

The Trustees and officers of the Fund, together with information as to
their principal occupations during the past five years, are listed below:
<TABLE>
<CAPTION>
Principal Occupation
Name, Position with the Fund During Past Five Years
------ ------------------------ ----------------------
Address and Age
---------------
<S> <C> <C>
William F. Achtmeyer Trustee Co-founder, President and Chief
c/o Cypress Holding Executive Officer of The Parthenon
Company, Inc. Group, a strategic advisory consulting
125 High Street and investment firm.
Boston, MA 02110
Age: 43
</TABLE>

-32-
<PAGE>

<TABLE>

<S> <C> <C>
William F. Devin Trustee Member of the Board of Governors of the
c/o Cypress Holding Boston Stock Exchange. Retired
Company, Inc. Executive Vice President of Fidelity
125 High Street Capital Markets, a division of National
Boston, MA 02110 Financial Services Corporation in Boston.
Age: 59

Bradford K. Gallagher* Chairman of the Board, President of CypressTree Investments,
c/o Cypress Holding Trustee & President Inc. and President and Chief Executive
Company, Inc. Officer of Cypress Holding Company,
125 High Street Inc. Past President of Allmerica
Boston, MA 02110 Financial Services.
Age: 54

Kenneth J. Lavery Trustee Vice President of Massachusetts Capital
c/o Cypress Holding Resource Company.
Company, Inc.
125 High Street
Boston, MA 02110
Age: 47

Don B. Allen Trustee Senior Lecturer,
c/o Cypress Holding William E. Simon
Company, Inc. Graduate School of
125 High Street Business Admin.,
Boston, MA 02110 University of
Age: 69 Rochester.

Joseph T. Grause, Jr. Treasurer Executive Vice President of Cypress
c/o Cypress Holding Holding Company, Inc., November 1995 to
Company, Inc. date; Senior Vice President of Sales and
125 High Street Marketing, The Shareholder Services
Boston, MA 02110 Group, a subsidiary of First Data
Age: 46 Corporation, May 1993 to November 1995.

John I. Fitzgerald Secretary Counsel to CypressTree Funds
c/o Cypress Holding Distributors, Inc., ("CFD") April, 1997
Company, Inc. to date; Prior to joining CFD, Mr.
125 High Street Fitzgerald was Executive Vice
Boston, MA 02110 President--Legal Affairs and Government
Age: 50 Relations at the Boston Stock Exchange.

Thomas J. Brown Assistant Treasurer Principal of Cypress Holding Company,
c/o Cypress Holding Inc., July 1997 to date; consultant to
Company, Inc. financial services industry, October
125 High Street 1995 to June 1997; Executive Vice
Boston, MA 02110 President, Boston Company Advisors,
Age: 52 August 1994 to October 1995.
</TABLE>

-33-
<PAGE>

<TABLE>

<S> <C> <C>
Paul Foley Assistant Secretary Principal of Cypress Holding Company,
c/o Cypress Holding Inc., July 1996 to date; Financial
Company, Inc. Analyst with Fleet Group, June 1995 to
125 High Street July 1996, Financial Analyst with
Boston, MA 02110 Allmerica Financial Services, April 1987
Age 35 to June 1995.
</TABLE>

*Trustee who is an "interested person", as defined in the 1940 Act.

Compensation of Trustees

The Fund does not pay any remuneration to its Trustees who are officers
or employees of the Adviser or its affiliates. Trustees not so affiliated
receive an annual retainer of $3,000, a fee of $750 for each meeting of the
Trustees that they attend in person and a fee of $200 for each such meeting
conducted by telephone. Trustees are reimbursed for travel and other
out-of-pocket expenses. The officers listed above are furnished to the Fund
pursuant to the Advisory Agreement described below and receive no compensation
from the Fund. These officers spend only a portion of their time on the affairs
of the Fund.

Trustee Compensation Table
<TABLE>
<CAPTION>
================================================================================================================
Aggregate Compensation Pension Or Total Compensation From
Trustee From Fund for Fiscal Year Retirement Registrant And Fund
Ended October 31, 1998 Benefits Accrued Complex (15 Funds) Paid
As Part Of Fund for Calendar Year Ended
Expenses December 31, 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bradford K. Gallagher 0 0 0
Trustee
----------------------------------------------------------------------------------------------------------------
Don B. Allen 0
Trustee
----------------------------------------------------------------------------------------------------------------
William F. Achtmeyer 0
Trustee
----------------------------------------------------------------------------------------------------------------
William F. Devin 0
Trustee
----------------------------------------------------------------------------------------------------------------
Kenneth J. Lavery 0
Trustee
================================================================================================================
</TABLE>

No front end sales charge or CDSC is applicable to any sale of Class A
shares to a Trustee or officer of the Fund, or to the immediate families (i.e.,
the spouse, children, mother or father) of such persons.

Principal Holders of Securities

As of [ ], 1999, the following persons owned, of record or
beneficially, five percent or more of the outstanding securities of the
indicated Fund classes:

As of [ ], 1999, the officers and Trustees of the Fund as a
group owned less than 1% of the outstanding shares of each class of each Fund.

-34-
<PAGE>

INVESTMENT MANAGEMENT ARRANGEMENTS

The following information supplements the material appearing in the
Prospectus.

Advisory Arrangements

CypressTree Investments, Inc. is a subsidiary of Cypress Holding
Company, Inc., which is controlled by its management and by Berkshire Partners
IV, L.P. CypressTree Investments Inc. and its affiliates, CypressTree Asset
Management Corporation, Inc. ("CAM") and CypressTree Funds Distributors, Inc.
("CFD"), were formed in 1996 to acquire, advise and distribute mutual funds
through broker dealers, banks and other intermediaries. CAM acts as the Fund's
investment adviser (the "Adviser"), while CFD acts as the Fund's distributor
(the "Distributor"). Until August 1, 1998, CFD was party to a promotional agent
agreement with Wood Logan Associates, Inc. ("Wood Logan") to provide marketing
services in connection with the sales of Fund's shares.

Prior to October 1, 1997, NASL Financial Services, Inc. was both the
investment adviser and the distributor for the Fund (in such capacity, the
"Former Distributor"). Standish, Ayer & Wood, Inc., subadviser to the
Tax-Sensitive Equity Fund, owns 20% of CypressTree Investments, Inc.

The Adviser oversees all aspects of the Fund's business and affairs. In
that connection, the Adviser permits its directors, officers and employees to
serve as Trustees or President, Vice President, Treasurer or Secretary of the
Fund, without cost to the Fund. The Adviser also provides certain services, and
the personnel to perform such services, to the Fund for which the Fund
reimburses the Adviser's costs of providing such services and personnel. Such
services include maintaining certain records of the Fund and performing all
administrative, financial, accounting, bookkeeping and recordkeeping functions
of the Fund, except for any of those functions performed by the Fund's custodian
or transfer and shareholder servicing agents. The reimbursement paid by the Fund
to the Adviser for personnel costs include employee compensation and allocated
portions of the Adviser's related personnel expenses of office space, utilities,
office equipment and miscellaneous office expenses.

As compensation for its services, the Adviser receives a fee from the
Trust computed separately for each Fund. The fee for each Fund is stated as an
annual percentage of the current value of the net assets of the Fund. The fee,
which is accrued daily and payable monthly, is calculated for each day by
multiplying the fraction of one over the number of calendar days in the year by
the annual percentage prescribed for a Fund, and multiplying this product by the
value of the net assets of the Fund at the close of business on the previous
business day of the Fund.

The Advisory Agreement, each Subadvisory Agreement and the Salomon
Brothers Asset Management Limited Consulting Agreement, each dated October 1,
1997, were approved by the Trustees on June 27, 1997 and by the shareholders of
the Funds on September 24, 1997, in connection with the acquisition (the
"Acquisition") of the business of NASL Financial Services, Inc. relating to
acting as investment adviser and distributor of the Fund by CypressTree
Investments, Inc., with the exceptions of the Subadvisory Agreements for the
Tax-Sensitive Equity Fund and the Emerging Growth Fund. Subadvisory Agreements
between the Advisor and Standish, Ayer & Wood, Inc. and Warburg Pincus Asset
Management, Inc. were approved by the Trustees on December 16, 1997 in
conjunction with the addition of the Tax-Sensitive Equity Fund and Emerging
Growth Fund, respectively.

-35-
<PAGE>

The following is a schedule of the management fees each Fund currently
is obligated to pay CAM under the Advisory Agreement (prior to the application
of any fee waivers):
<TABLE>
<CAPTION>
Between Between
------- -------
$50,000,000 $200,000,000
----------- ------------
First and and Excess Over
----- --- --- -----------
Funds $ 50,000,000 $200,000,000 $500,000,000 $500,000,000
----- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax-Sensitive Equity Fund ............. .850% .800% .775% .700%
Emerging Growth Fund .................. .950% .950% .950% .950%
International Small Cap Fund .......... 1.050% 1.000% .900% .800%
Small/Mid Cap Fund .................... .925% .900% .875% .850%
Global Equity Fund .................... .900% .900% .700% .700%
Growth Equity Fund .................... .900% .850% .825% .800%
International Growth and Income Fund... .900% .850% .800% .750%
Growth and Income Fund ................ .725% .675% .625% .550%
Equity-Income Fund .................... .800% .700% .600% .600%
Balanced Fund ......................... .775% .725% .675% .625%
Strategic Income Fund ................. .750% .700% .650% .600%
Investment Quality Bond Fund .......... .600% .600% .525% .475%
National Municipal Bond Fund .......... .600% .600% .600% .600%
U.S. Government Securities Fund ....... .600% .600% .525% .475%
Money Market Fund ..................... .200% .200% .200% .145%
</TABLE>

CAM has agreed to reduce each Fund's advisory fee, or if necessary to
reimburse the Trust, in order to prevent the expenses of a Fund from exceeding a
fixed expense limitation contained in the Advisory Agreement. The fixed
limitation may be terminated by CAM at any time on 30 days' written notice. The
fixed limitation contained in the Advisory Agreement, which is the operative
limitation on the Fund's expenses, limits each Fund's annual expenses, excluding
taxes, Fund brokerage commissions, interest, certain litigation and
indemnification expenses, extraordinary expenses and all of the Fund's
distribution fees as a percentage of average net assets to the following:

Expense
-------
Fund Limitation
---- ----------
Tax-Sensitive Equity Fund ............... 1.400%
Emerging Growth Fund .................... 1.400%
International Small Cap Fund ............ 1.550%
Small/Mid Cap Fund ...................... 1.325%
Global Equity Fund ...................... 1.400%
Growth Equity Fund ...................... 1.300%
International Growth and Income Fund..... 1.400%
Growth and Income Fund .................. 0.990%
Equity-Income Fund ...................... 1.065%
Balanced Fund ........................... 1.040%
Strategic Income Fund ................... 1.150%
Investment Quality Bond ................. 0.900%
U.S. Government Securities Fund ......... 0.900%
National Municipal Bond Fund ............ 0.850%
Money Market Fund ....................... 0.500%

-36-
<PAGE>

Subadvisory Arrangements

Under the terms of each of the Subadvisory agreements between the
Adviser and a Subadviser (the "Subadvisory Agreements"), the Subadviser assigned
to a Fund manages the investment and reinvestment of the assets of such Fund,
subject to the supervision of the Trustees. The Subadviser formulates a
continuous investment program for such Fund consistent with its investment
objectives and policies outlined in this Prospectus. The Subadviser implements
such programs by purchases and sales of securities and regularly reports to the
Adviser and the Trustees with respect to their implementation.

As compensation for their services, the Subadvisers receive fees from
the Adviser computed separately for each Fund. The fee for each Fund is stated
as an annual percentage of the current value of the net assets of the Fund. The
fee, which is accrued daily and payable monthly, is calculated for each day by
multiplying the fraction of one over the number of calendar days in the year by
the annual percentage prescribed for a Fund, and multiplying this product by the
value of the net assets of the Fund at the close of business on the previous
business day of the Fund. Once the average net assets of a Fund exceed specified
amounts, the fee is reduced with respect to the excess. Absent any applicable
fee waivers, the following is a schedule of the management fees the Adviser is
obligated to pay the Subadvisers for each Fund under the Subadvisory Agreements.
THESE FEES ARE PAID BY THE ADVISER AND ARE NOT ADDITIONAL CHARGES TO THE FUNDS
OR THEIR SHAREHOLDERS.

The following is a schedule of fees paid by the Adviser to the
Subadvisers.
<TABLE>
<CAPTION>
Between Between
------- -------
$50,000,000 $200,000,000
----------- ------------
First and and Excess Over
----- --- --- -----------
Funds $ 50,000,000 $200,000,000 $500,000,000 $500,000,000
----- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tax-Sensitive Equity Fund ............ .450% .400% .375% .300%
Emerging Growth Fund ................. .550% .550% .550% .550%
International Small Cap .............. .650% .600% .500% .400%
Small/Mid Cap Fund ................... 525% .500% .475% .450%
Global Equity Fund ................... .500% .450% .375% .325%
Growth Equity Fund ................... .500% .450% .425% .400%
International Growth and Income Fund.. .500% .450% .400% .350%
Growth and Income Fund ............... .325% .275% .225% .150%
Equity-Income Fund ................... .400% .400% .400% .400%
Balanced Fund ........................ .375% .325% .275% .225%
Strategic Income Fund* ............... .350% .300% .250% .200%
Investment Quality Bond Fund ......... .225% .225% .150% .100%
National Municipal Bond Fund ......... .250% .250% .250% .250%
U.S. Government Securities Fund ...... .225% .225% .150% .100%
Money Market Fund .................... .075% .075% .075% .020%
</TABLE>

- --------
* connection with the subadvisory consulting agreement between SBAM and SBAM
Limited, SBAM will pay SBAM Limited, as full compensation for all services
provided under the subadvisory consulting agreement, a portion of its
subadvisory fee, such amount being an amount equal to the fee payable under
SBAM's Subadvisory agreement multiplied by portion of the assets of the
Strategic Income Fund that SBAM Limited has been delegated to manage
divided by the current value of the net assets of the Fund.

-37-
<PAGE>

For the fiscal years ended October 31, 1996, 1997 and 1998, the Fund paid
total advisory fees to the Adviser of $5,398,787, $6,327,793 and __________,
respectively. The amounts represented by each of the Funds are as follows:

Fund 11/1/95 to 11/1/96 to 11/1/97 to
10/31/96 10/31/97 10/31/98
===============================================================================
Small/Mid Cap *63,467 217,083
International Small Cap *47,966 175,637
Growth Equity *40,762 178,839
Global Equity 1,174,747 1,106,316
Equity-Income 936,036 1,128,276
Growth and Income 784,990 1,112,269
International Growth and Income 236,517 280,663
Strategic Income 415,019 561,512
Investment Quality Bond 127,602 113,993
U.S. Government 693,407 567,391
National Municipal Bond 121,407 109,842
Money Market 38,258 40,088
Balanced 718,609 735,884
Tax-Sensitive Equity N/A N/A
Emerging Growth N/A N/A

*For the period March 4, 1996 (commencement of operations) to October 31,
1996.

For the same periods, the Adviser paid total Subadvisory fees of $2,060,667,
$2,533,101 and 2,949,885 respectively. The amounts represented by each of the
Funds are as follows:

Fund 11/1/95 to 11/1/96 to 11/1/97 to
10/31/96 10/31/98 10/31/98
===============================================================================

Small/Mid Cap $36,022* 123,209
International Small Cap $29,693* 108,728
Growth Equity $22,646* 99,355
Global Equity $709,960 578,158
Equity-Income $396,204 506,265
Growth and Income $334,666 467,961
International Growth and Income $131,398 155,924
Strategic Income $192,079 254,934
Investment Quality Bond $47,851 42,747
U.S. Government $260,027 212,772
National Municipal Bond $50,586 45,768
Money Market $14,347 15,033
Balanced $307,622 339,031
Tax-Sensitive Equity N/A N/A
Emerging Growth N/A N/A

*For the period March 4, 1996 (commencement of operations) to October
31, 1996.

-38-
<PAGE>

Under the subadvisory consulting agreement between SBAM and Salomon
Brothers Asset Management Limited ("SBAM Limited"), SBAM Limited
provides certain investment advisory services to SBAM relating to
currency transactions and investments in non-dollar denominated debt
securities for the benefit of the Strategic Income Fund. SBAM pays SBAM
Limited, as full compensation for all services provided under the
subadvisory consulting agreement, a portion of its Subadvisory fee,
such amount being an amount equal to the fee payable under SBAM's
Subadvisory agreement multiplied by the current value of the net assets
of the portion of the assets of the Strategic Income Fund that SBAM
Limited has been delegated to manage divided by the current value of
the net assets of the Fund. The Fund will not incur any additional
expenses in connection with SBAM Limited's services.

For the year ended October 31, 1998 the net investment advisory fees
retained by the Adviser after payment of Subadvisory fees was $[ ], allocated
among the portfolios as follows:

Dollar Amount Annual Percentage of
------------- --------------------
Fund Net Assets
---------------

Small/Mid Cap Fund
International Small Cap Fund
Growth Equity Fund
Global Equity Fund
International Growth and Income Fund
Growth and Income Fund
Equity-Income Fund
Balanced Fund
Strategic Income Fund
Investment Quality Bond Fund
National Municipal Bond Fund
U.S. Government Securities Fund
Money Market Fund
Tax-Sensitive Equity
Emerging Growth

The Advisory Agreement and each Subadvisory Agreement, including the
SBAM Limited Consulting Agreement (collectively, the "Agreements") will continue
in effect as to a Fund for a period no more than two years from the date of its
execution or the execution of an amendment making the agreement applicable to
that Fund only so long as such continuance is specifically approved at least
annually either by the Trustees or by the vote of a majority of the outstanding
voting securities of each of the Funds of the Fund, provided that in either
event such continuance shall also be approved by the vote of the majority of the
Trustees who are not interested persons of any party to the Agreements, cast in
person at a meeting called for the purpose of voting on such approval. The
required shareholder approval of any continuance of any of the Agreements shall
be effective with respect to any Fund if a majority of the outstanding voting
securities of the class of capital stock of that Fund vote to approve such
continuance, notwithstanding that such continuance may not have been approved by
a majority of the outstanding voting securities of the Fund.

If the shareholders of any Fund fail to approve any continuance of any
Agreement, the Adviser or Subadviser (including SBAM Limited), as applicable,
will continue to act as such with respect to such Fund pending the required
approval of the continuance of such Agreement, of a new contract with the
Adviser or Subadviser or different investment adviser or subadviser, or other
definitive action. In the case of the Adviser, the compensation received in
respect of such a Fund during such period will be no more than its actual costs
incurred in furnishing investment advisory and management services to such Fund
or the amount it would have received under the Agreement in respect of such
Fund, whichever is less. In the case of the Subadvisers, the compensation
received by them in respect of such a Fund during such a period will be no more
than that permitted by Rule 15a-4 under the 1940 Act.

The Agreements may be terminated at any time, without the payment of
penalty, by the Trustees or by the vote of a majority of the outstanding voting
securities of the applicable Fund of the Trust, with respect to any Fund by the
vote of a majority of the outstanding shares

-39-
<PAGE>

of such Fund, or by the Adviser or applicable Subadviser on 60 days' written
notice to the other party or parties to the Agreement and, in the case of the
Subadvisory Agreements, to the Fund. Each of the Agreements will automatically
terminate in the event of its assignment.

The Agreements may be amended by the parties provided that such
amendment is specifically approved by the vote of a majority of the outstanding
voting securities of the Trust or applicable Fund(s), as the case may be, and by
the vote of a majority of the Trustees who are not interested persons of the
Trust, of the Adviser or of the applicable Subadviser or of SBAM Limited, cast
in person at a meeting called for the purpose of voting upon such approval. The
required shareholder approval of any amendment shall be effective with respect
to any Fund if a majority of the outstanding voting securities of that Fund vote
to approve the amendment, notwithstanding that the amendment may not be approved
by a majority of the outstanding voting securities of (i) any other Fund
affected by the amendment or (ii) all the Funds of the Trust.

Each Subadvisory Agreement, except the J.P. Morgan Subadvisory
Agreement and the SBAM Limited Consulting Agreement, provides that the
Subadviser or SBAM Limited will not be liable to the Trust or the Adviser for
any losses resulting from any matters to which the agreement relates other than
losses resulting from the Subadviser's or SBAM Limited's willful misfeasance,
bad faith or gross negligence in the performance of, or from reckless disregard
of, its duties. The J.P. Morgan Subadvisory Agreement provides that the
subadviser will not be liable to the Trust or CAM for any losses resulting from
any error of judgment made in the good faith exercise of the Subadviser's
investment discretion in connection with selecting investments, except for
losses resulting from willful misfeasance, bad faith or gross negligence of, or
from reckless disregard of, it duties, and that it shall not be liable for any
losses resulting from any other matters except for losses resulting from willful
misfeasance, bad faith or negligence in the performance of, or from disregard
of, its duties.

Fund Expenses

Subject to the expense limitations discussed above, the Trust is
responsible for the payment of all expenses of its organization, operations and
business, except for: (1) those expenses the Adviser has agreed to bear pursuant
to the Advisory Agreement, (2) those expenses the Distributor has agreed to bear
pursuant to its Distribution Agreement with the Trust, or (3) those expenses the
Subadvisers have agreed to pay pursuant to the Subadvisory Agreements. Among the
expenses to be borne by the Fund, in addition to certain expenses incurred by
the Adviser or Distributor, as described above, are the expense of the advisory
and distribution fees; all charges and expenses relating to the transfer,
safekeeping, servicing and accounting for the Trust's property, including
charges of depositories, custodians and other agents; all expenses of
maintaining and servicing shareholder accounts, including charges of the Trust's
transfer, dividend disbursing, shareholder recordkeeping, redemption and other
agents; costs of shareholder reports and other communications to current
shareholders; the expenses of meetings of the Trust's shareholders and the
solicitation of management proxies in connection therewith; all expenses of
preparing Trust Prospectuses and Statements of Additional Information; the
expenses of determining the Trusts' net asset value per share; the compensation
of Trustees who are not directors, officers or employees of the Adviser and all
expenses of meetings of the Trustees; all charges for services and expenses of
the Trust's legal counsel and independent auditors; all fees and expenses of
registering and qualifying, and maintaining the registration and qualification
of, the Trust and its shares under all federal and state laws applicable to the
Trust and its business activities; all expenses associated with the issue,
transfer and redemption of Trust shares; brokers' and other charges incident to
the purchase, sale or lending of the Trust's securities; taxes and other
governmental fees payable by the Fund; and any nonrecurring expenses including
litigation expenses and any expenses the Trust may incur as a result of its
obligation to indemnify its Trustees, officers and agents. All expenses are
accrued daily and deducted from total income before dividends are paid.

DISTRIBUTION PLANS

The Trust currently offers three classes of shares in each Fund: "Class
A" shares, "Class B" shares and "Class C" shares.

In addition to the front end sales charge which may be deducted at the
time of purchase of Class A shares and the CDSC which may apply on redemption of
Class B shares, each class of shares of each Fund is authorized under the
Distribution Plan applicable to that class of shares (the "Class A Plan," the
"Class B Plan" and the "Class C Plan," collectively, the "Plans") adopted
pursuant to Rule 12b-1 under the 1940 Act to use the assets attributable to such
class of shares of the Fund to finance certain activities relating to the
distribution of shares to investors. The Plans are "compensation" plans
providing for the payment of a fixed percentage of average net assets to finance
distribution expenses. The Plans provide for the payment by each class of shares
of each Fund of the Trust, other than the Money Market Fund, of a monthly
distribution and service fee to the Distributor, as principal underwriter for
the Fund. Portions of the fees prescribed below are used to provide payments to
the Distributor, to promotional agents, to brokers, dealers or financial
institutions (collectively, "Selling Agents") and to Service Organizations for
ongoing account services to shareholders and are deemed to be "service fees" as
defined in paragraph (b)(9) of Section 2830 of the Conduct Rules of the National
Association of Securities Dealers, Inc.

-40-
<PAGE>

Under the Class A Plan, Class A shares of each Fund (except as
described in the next sentence) are subject to a fee of up to .35% of their
respective average annual net assets, five-sevenths of which (.25%) constitutes
a "service fee." Class A shares of the National Municipal Bond Fund are subject
to a fee of up to .15% of Class A average annual net assets, the entire amount
of which constitutes a "service fee," and Class A shares of the Money Market
Fund bear no such fees. Under the Class B Plan, Class B shares of each Fund
(with the exception of the Money Market Fund) are subject to a fee of up to
1.00% of their respective average annual net assets, one-fourth (.25%) of which
constitutes a "service fee." Under the Class C Plan, Class C shares of each Fund
(with the exception of the Money Market Fund) are subject to a fee of up to
1.00% of their respective average annual net assets, one-fourth (.25%) of which
constitutes a "service fee."

Payments under the Plans are used primarily to compensate the
Distributor for distribution services provided by it in connection with the
offering and sale of the applicable class of shares, and related expenses
incurred, including payments by the Distributor to compensate or reimburse
Selling Agents for sales support services provided and related expenses incurred
by such Selling Agents. Such services and expenses may include the development,
formulation and implementation of marketing and promotional activities, the
preparation, printing and distribution of prospectuses and reports to recipients
other than existing shareholders, the preparation, printing and distribution of
sales literature, expenditures for support services such as telephone facilities
and expenses and shareholder services as the Trust may reasonably request,
provision to the Trust of such information, analyses and opinions with respect
to marketing and promotional activities as the Trust may, from time to time,
reasonably request, commissions, incentive compensation or other compensation
to, and expenses of, account executives or other employees of the Distributor or
Selling Agents, attributable to distribution or sales support activities,
respectively, overhead and other office expenses of the Distributor or Selling
Agents, attributable to distribution or sales support activities, respectively,
and any other costs and expenses relating to distribution or sales support
activities. The Distributor may pay directly Selling Agents and may provide
directly the distribution services described above (prior to August 1, 1998, it
arranged for such payment or the performance of some or all of such services by
Wood Logan, the Trust's promotional agent, at such level of compensation as had
been agreed to by the Distributor and Wood Logan).

The distribution and service fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase shares without
the assessment of a front end sales charge, and, with respect to the Class C
shares, without the assessment of a front end sales charge or a CDSC, and at the
same time permit the Distributor to compensate securities dealers with respect
to sales of such shares.

The Distributor is authorized by each Plan to retain any excess of the
fees it receives thereunder over its payments to selected dealers and its
expenses incurred in connection with providing distribution services. Thus,
payments under a Plan may result in a profit to the Distributor.

The Distributor may from time to time assist dealers by, among other
things, providing sales literature to, and holding educational programs for the
benefit of, dealers' registered representatives. Participation of registered
representatives in such informational programs may require the sale of minimum
dollar amounts of shares of the Funds of the Trust. The Distributor will also
provide additional promotional incentives to dealers in connection with sales of
shares of all classes of the Funds of the Trust. These incentives shall include
payment for travel expenses, including lodging (which may be at a luxury
resort), incurred in connection with trips taken by qualifying registered
representatives and members of their families within or outside the United
States. Incentive payments will be provided for out of the front end sales
charges and CDSCs retained by the Distributor, any applicable Distribution Plan
payments or the Distributor's other resources. Other than Distribution Plan
payments, the Fund does not bear distribution expenses. The staff of the
Securities and Exchange Commission has indicated that dealers who receive more
than 90% of the sales charge may be considered underwriters.

Each of the Distributor and, with respect to shares purchased before
October 1, 1997, the Former Distributor currently pays a trail commission to
securities dealers, with respect to accounts that such dealers continue to
service for shares sold after April 1, 1994 as follows: Class A shares--.25%
annually, commencing from the date the purchase order is accepted, for all Funds
(except the National Municipal Bond Fund, for which the trail commission is
.15%, and the Money Market Fund, for which no trail commission is paid); Class B
shares--.25% annually, for all Funds (except the National Municipal Bond Fund,
for which the trail commission is .15%, and the Money Market Fund, for which no
trail commission is paid); and Class C shares--1.0% annually, for all Funds
other than the Investment Quality Bond, U.S. Government Securities, National
Municipal Bond and Money Market Funds and .90% annually, for the Investment
Quality Bond, U.S. Government Securities and National Municipal Bond Fund (no
trail commission is paid on the Money Market Fund). The trail commission payable
following conversion of Class B and Class C shares to Class A shares will be in
accordance with the amounts paid for Class A shares. For Class B and Class C
shares sold on or after May 1, 1995, trail commissions commence 13 months after
purchase. For Class B and Class C shares sold prior to May 1, 1995, trail
commissions commence the date the purchase order is accepted. Trail commissions
for shares sold prior to April 1, 1994 will be paid as noted below.

-41-
<PAGE>

In the case of Class B shares and Class C shares sold on or after
May 1, 1995, the Distributor and, with respect to shares purchased before
October 1, 1997, the Former Distributor, will advance to securities dealers the
first year service fee at a rate equal to 0.25% of the purchase price of such
shares and, as compensation therefor, the Distributor may retain the service fee
paid by the Fund with respect to such shares for the first year after purchase.
In the case of sales of Class B shares, the Distributor will pay each dealer a
fee of 4% of the amount of Class B shares purchased (0.25% is the advancement of
the first year service fee and the remainder is a commission or transaction
fee). No commission or transaction fee is paid for sales of shares of Class B of
the Money Market Fund. In the case of sales of Class C shares, the Distributor
will pay each securities dealer a fee of 1% (0.90% in the case of the Investment
Quality Bond, U.S. Government Securities and National Municipal Bond Fund of the
purchase price of Class C shares purchased through such securities dealer (0.25%
is the advancement of the first year service fee and the remainder is a
commission or transaction fee). No commission or transaction fee is paid for
sales of shares of Class C of the Money Market Fund.

In adopting the Plans, the Trustees determined that the adoption of the
Plans is in the best interests of the Trust and its shareholders, that there is
a reasonable likelihood that the Plans will benefit the Trust and its
shareholders, and that the Plans are essential to, and an integral part of, the
Trust's program for financing the sale of shares of the various Funds of the
Trust to the public.

The Distributor is a broker/dealer registered under the Securities
Exchange Act of 1934, as amended ("1934 Act") and a member of the NASD. The
Distributor's address is the same as that of the Trust.

Neither a Plan nor any related agreements can take effect until
approved by a majority vote of both all the Trustees and those Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the operation of a Plan or in any agreements related to it (the
"Qualified Trustees"), cast in person at a meeting called for the purpose of
voting on such Plan and the related agreements.

The Plans will continue in effect only so long as their continuance is
specifically approved at least annually by the Trustees in the manner. The
Trustees will receive quarterly and annual statements concerning distribution
and shareholder servicing expenditures. In such statements, only expenditures
properly attributable to the sale or servicing of a particular class of shares
will be used to justify any distribution or servicing fee charged to that class.
Expenditures not related to the sale or servicing of a particular class will not
be presented to the Trustees to justify any fee attributable to that class. The
statements, including the allocations upon which they are based, will be subject
to the review and approval of the Qualified Trustees in the exercise of their
fiduciary duty. Each Plan may be terminated at any time with respect to any one
or more Funds by a majority vote of the Qualified Trustees or by vote of a
majority of the outstanding voting securities attributable to Class A, Class B
and Class C shares, as applicable, of such Portfolio or Funds. If a Plan is
terminated by the Trustees or is otherwise discontinued with respect to one or
more Funds, no further payments would be made by the Trust in respect of the
Class A, Class B and Class C shares, as applicable, of such Fund or Funds under
that Plan. A Plan may remain in effect with respect to Class A, Class B, Class C
or shares, as applicable, of a Fund even if it has been terminated with respect
to the Class A, Class B and Class C shares, as applicable, of one or more other
Funds.

A Plan may not be amended with respect to any class of any Fund so as
to materially increase the amount of the fees payable thereunder unless the
amendment is approved by a vote of at least a majority of the outstanding voting
securities of such class of such Fund. In addition, no material amendment to a
Plan may be made unless approved by the Trustees in the manner described above
for Trustee approval of the Plans.

For the period November 1, 1997 to October 31, 1998, the Fund paid
distribution and service fees pursuant to the Class A Plan to the Distributor of
$[ ] comprised of:

-42-
<PAGE>

$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund,
$ from the National Municipal Bond Fund,
$ from the Tax-Sensitive Equity Fund, and
$ from the Emerging Growth Fund.

Of the total, $[ ] was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. Of this latter amount,
approximately $[ ] was spent for sales literature and printing prospectuses for
other than current shareholders, $[ ] represented allocated overhead expenses of
Wood Logan and $[ ] represented allocated compensation of personnel of Wood
Logan. The balance of the fees were, in accordance with the Class A Plan,
retained by the Distributor and used to fund shareholder servicing, promotional
activities and expenses. In addition, $[ ] of the total distribution fees for
Class A were paid to securities dealers, comprised of:

$ from the Small/Mid Cap Fund,
$ from the International Small Cap Fund,
$ from the Growth Equity Fund,
$ from the Global Equity Fund,
$ from the Equity-Income Fund,
$ from the Growth and Income Fund,
$ from the Strategic Income Fund,
$ from the Balanced Fund,
$ from the Investment Quality Bond Fund,
$ from the U.S. Government Securities Fund,
$ from the International Growth and Income Fund,
$ from the National Municipal Bond Fund,
$ from the Tax-Sensitive Equity Fund, and
$ from the Emerging Growth Fund.

For the period November 1, 1997 to October 31, 1998, the Fund paid
distribution and service fees pursuant to the Class B Plan to the Distributor of
$[ ] comprised of:

Of the total, none was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. The balance of the fees were, in
accordance with the Class B Plan, retained by the Distributor and used to fund
shareholder servicing, promotional activities and expenses. $[ ] of the total
distribution fees for Class B were paid to securities dealers, comprised of:

-43-
<PAGE>

For the period November 1, 1997 to October 31, 1998, the Fund paid
distribution and service fees pursuant to the Class C Plan to the Distributor of
$[ ], comprised of:

Of the total, $[ ] was paid by the Distributor to Wood Logan for
providing promotional and shareholder services. Of this latter amount,
approximately $[ ] was spent for sales literature and printing prospectuses for
other than current shareholders, $[ ] represented allocated overhead expenses of
Wood Logan and $[ ] represented allocated compensation of personnel of Wood
Logan. The balance of the fees were, in accordance with the Class C Plan,
retained by the Distributor and used to fund shareholder servicing, promotional
activities and expenses. In addition, $[ ] of the total distribution fees for
Class C were paid to securities dealers, comprised of:

-44-
<PAGE>

Underwriters

For the periods November 1, 1995 to October 31, 1996, November 1,
1996 to October 31, 1997 and November 1, 1997 to October 31, 1998, the
Distributor received underwriting commissions of $1,046,375, $880,600 and $[ ],
respectively. The amounts were comprised as reflected below, with respect to
shares of the following Funds:

Fund 11/1/95 to 11/1/96 to 11/1/97 to
11/31/96 10/31/97 10/31/98

Small/Mid Cap *$77,609 49,974
International Small Cap *$47,504 33,696
Growth Equity *$51,483 36,270
Global Equity $93,621 36,504
Equity-Income $137,617 110,319
Growth and Income $141,037 256,762
International Growth and Income $64,345 33,761
Strategic Income $114,585 104,745
Investment Quality Bond $23,097 16,552
U.S. Government $218,181 120,538
National Municipal Bond $32,640 7,803
Balanced $44,656 46,676
Tax-Sensitive Equity N/A N/A
Emerging Growth N/A N/A

*For the period March 4, 1996 (commencement of operations) to October 31, 1996.

Of the total underwriting commissions received during the three fiscal
year periods, $0, $0 and $[ ], respectively, were retained by the Distributor.
The balance of such commissions was paid to securities dealers and the
promotional agent. During such periods the Distributor did not receive directly
or indirectly from the Fund any compensation on the redemption or repurchase of
Fund shares, brokerage commissions or other underwriting compensation.

PORTFOLIO BROKERAGE

Pursuant to the Subadvisory Agreements, the Subadvisers are responsible
for placing all orders for the purchase and sale of portfolio securities of the
Fund, the portfolio transactions for which are the responsibility of the
Adviser. The Subadvisers have no formula for the distribution of the Fund's
brokerage business, their intention being to place orders for the purchase and
sale of securities with the primary objective of obtaining the most favorable
overall results for the Fund. The cost of securities transactions for each Fund
will consist primarily of brokerage commissions or dealer or underwriter
spreads. Bonds and money market instruments are generally traded on a net basis
and do not normally involve either brokerage commissions or transfer taxes.

Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the Subadvisers
will, where possible, deal directly with dealers who make a market in the
securities unless better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account.

-45-
<PAGE>

The Subadvisers consider various factors in selecting brokers through
which orders for client accounts are executed. The Subadvisers' primary
consideration is the broker's ability to provide the best execution of the trade
(including both trade price and commission). Assuming equal execution
capabilities, the Subadvisers also take other factors into account.

In determining which brokers provide best execution, the Subadvisers
look primarily to the stock price quoted by the broker, and normally place
orders with the broker through which they can obtain the most favorable price.
If the same price is available from more than one broker, a Subadviser's
judgment as to the following factors may influence the selection of a broker for
a particular trade: the execution, clearance and settlement capabilities of the
brokers under consideration; the nature of the security being traded; the
difficulty of execution; the size of the transaction; the desired timing of the
trade; the activity existing and expected in the market for the particular
security; confidentiality; the financial stability of the brokers under
consideration; actual or apparent operational problems of any broker under
consideration; and the negotiated commission rates available at the time of the
trade. The Subadvisers may also consider the willingness of particular brokers
to sell shares of the Fund, subject to best execution and difficulty of
execution.

The Subadvisers also consider the nature and extent of research
services provided when they select brokers. Assuming equal execution
capabilities as described above, the Subadvisers may direct commission business
to brokers who provide research services. Such services include, but are not
limited to: analyses and reports concerning economic factors and trends,
industries, specific securities, portfolio strategy, and valuation and
performance of accounts; advice regarding critical factors supporting research
recommendations and special reports or information based on the specific
requests of a Subadviser's portfolio manager/analysts. The Subadvisers may also
from time to time obtain research services prepared by third parties and
provided by brokers in exchange for a predetermined amount of commission
business. These services include portfolio monitoring, analysis and performance
measurement systems, various economic forecasting and research services covering
stocks and bonds, research and trading conferences, and a source of information
as to block trading opportunities. Some third party arrangements are cancelable
at any time while others require notice. Such third party arrangements do not
involve a substantial amount of the Subadvisers' commission business on behalf
of clients.

In accordance with industry practice, commission rates are normally
determined through negotiations with brokers conducted by the Subadvisers'
traders. These negotiations take into account industry norms for particular
transactions, the size and type of trades, the size and expertise of the
brokerage firm involved and the nature of brokerage and research services
provided, including special services in connection with a particular trade.
(Such special services could include, among other things, the assumption of
market risk in connection with a trade or series of trades or the facilitation
of trades in a thin or volatile market.) Commission rates paid by the
Subadvisers in those cases may be higher than those charged by brokers for
execution of similar trades without the provision of research and/or special
services.

No precise monetary value can be assigned to research and special
execution services furnished to the Subadvisers by brokers. The Subadvisers will
review all research services and will determine if the amounts of commissions
directed to brokers are reasonable in relation to the value of the brokerage and
research services provided, viewed in terms of both particular transactions and
the Subadvisers' overall responsibilities with respect to the accounts over
which they exercise investment discretion. Each Subadviser will maintain an
internal allocation procedure to identify those brokers who provide them with
research services and the amount of research services they provide, and will
endeavor to direct sufficient commissions to them to ensure the continued
receipt of such services as the Subadviser believes to be valuable.

Research services furnished by brokers will generally be used in
servicing all of the Portfolios of the Fund advised by a Subadviser and any
other accounts over which that Subadviser exercises investment discretion,
although not all of such services may be used in connection with any particular
Fund that paid commissions to the brokers providing such services.

The Subadvisers' practices in selecting brokers will be reviewed
periodically by the Trustees of the Fund.

The Subadvisers and/or their affiliates currently manage portfolios and
accounts other than those of the Fund. Although investment recommendations or
determinations for the Fund's Portfolios will be made by the Subadvisers
independently from the investment recommendations and determinations made by
them for any other portfolio or account or by the Subadvisers' affiliates for
the portfolios or accounts they manage, investments deemed appropriate for the
Fund's Portfolios by the Subadvisers may also be deemed appropriate by them or
affiliated advisers for other portfolios or accounts, so that the same security
may be purchased or sold at or about the same time for both the Fund's
Portfolios and such other portfolios or accounts. In such circumstances, the
Subadvisers may determine that orders for the purchase or sale of the same
security for the Fund's Portfolios and one or more other portfolios or accounts
should be combined, in which event the transactions will be priced and allocated
in a manner deemed by the Subadvisers to be equitable and in the best interests
of the Fund's Portfolios and such other portfolios or accounts. While in some
instances combined orders could adversely affect the price or volume of a
security, the Subadvisers and the Fund believe that its participation in such
transactions on balance will produce better overall results for the Fund.

-46-
<PAGE>

For the fiscal years ended October 31, 1996, 1997 and 1998, the Fund
paid brokerage commissions in connection with portfolio transactions of
$1,768,058, $1,102,121, and $[ ] respectively. The amounts represented by each
of the Funds are as follows:

Fund 11/1/95 to 11/1/96 to 11/1/97 to
10/31/96 10/31/97 10/31/98
- -----------------------------------------------------------------------------

Small/Mid Cap *$ 24,367 70,946
International Small Cap *$ 47,513 64,279
Growth Equity *$ 65,354 62,974
Global Equity $542,895 185,238
Equity-Income $605,408 98,858
Growth and Income $141,134 135,545
International Growth and Income $173,403 108,863
Balanced $167,984 375,418
Tax-Sensitive Equity N/A N/A
Emerging Growth N/A N/A

* For the period March 4, 1996 (commencement of operations) to October 31, 1996.

Salomon Brothers Inc ("Salomon"), J.P. Morgan Securities Inc and J.P. Morgan
Securities Ltd. ("J.P. Morgan"), Morgan Stanley & Co. Incorporated and Dean
Witter Reynolds & Co. ("Dean Witter") are affiliated brokers of the Fund due to
the positions of Salomon, J.P. Morgan and MSDW Investment Management,
respectively, as Subadvisers to Fund portfolios.

From November 1, 1995 to October 31, 1996, brokerage commissions were paid to
Goldman, Sachs & Co. as follows:
- --------------------

<TABLE>
<CAPTION>
Fund 11/1/95 to 10/31/96 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $9,019 18.98% 0.77%
Growth Equity $1,259 1.93% 0.74%
Global Equity $49,434 9.11% 1.87%
Equity-Income $32,267 5.33% 2.15%
Growth and Income $5,892 4.17% 1.03%
International Growth and $1,744 1.01% 1.79%
Income
Balanced $9,195 5.47% 0.28%
</TABLE>

-47-
<PAGE>

From November 1, 1995 to October 31, 1996, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------

<TABLE>
<CAPTION>
Fund 11/1/95 to 10/31/96 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $1,747 3.68% 0.13%
Growth Equity $978 1.50% 0.32%
Global Equity $1,996 0.37% 0.11%
Equity-Income $17,942 2.96% 0.41%
Growth & Income $8,968 6.35% 1.20%
International Growth & $846 0.49% 0.42%
Income
Balanced $7,604 4.53% 2.00%
</TABLE>

From November 1, 1996 to October 31, 1997, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------

Fund 11/1/96 to 10/31/97 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity 1,444 .78% 1.02%
Equity-Income 1,452 1.47% 1.06%
Growth & Income 3,780 2.75% 2.27%
Balanced 5,414 1.44% 2.07%
Investment Quality Bond 0 N/A N/A
U.S. Government 0 N/A N/A
Money Market 0 N/A N/A
</TABLE>

From November 1, 1997 to October 31, 1998, brokerage commissions were paid to
Salomon Brothers Inc as follows:
- --------------------

<TABLE>
<CAPTION>
Fund 11/1/97 to 10/31/98 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
Equity-Income
Growth & Income
Balanced
Investment Quality Bond
U.S. Government
Money Market
</TABLE>

-48-
<PAGE>

From November 1, 1995 to October 31, 1996, brokerage commissions were paid to
Morgan Stanley as follows:
- --------------

<TABLE>
<CAPTION>
Fund 11/1/95 to 10/31/96 % of Portfolio's Brokerage % of aggregate $
Commissions Represented or amount of
the period transactions for the
period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Small Cap $1,689 3.55% 0.21%
Global Equity $91,029 16.77% 21.92%
Equity-Income $27,173 4.49% 1.02%
Growth & Income $34,889 3.46% 0.87%
Int. Growth & Income $1,514 0.87% 1.06%
Balanced $5,712 3.40% 2.17%
Growth Equity $625 0.96% 0.41%
Small/Mid Cap $0 0.00% 1.00%
</TABLE>

From November 1, 1995 to October 31, 1996, brokerage commissions were paid to
J.P. Morgan Securities as follows:
- ----------------------

<TABLE>
<CAPTION>
Fund 11/1/95 to 10/31/96 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity $3,108 0.57% 0.11%
Equity-Income $26,767 4.42% 0.89%
Growth & Income $3,804 2.70% 0.52%
Balanced $4,691 2.79% 0.20%
</TABLE>

From January 1, 1996 to October 31, 1997, brokerage commissions were paid to
J.P.Morgan Securities as follows:
- ---------------------

<TABLE>
<CAPTION>
Fund 1/9/96 to 10/31/97 % of Portfolio's Brokerage % of aggregate $
Commissions Represented amount of
for the period transactions for the
period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity 2,448 1.32% 1.73%
Equity-Income 1,698 1.72% 1.15%
Growth & Income 4,516 3.33% 2.95%
Balanced 2,294 .61% .59%
</TABLE>

-49-
<PAGE>

From January 1, 1997 to October 31, 1998, brokerage commissions were paid to
J.P.Morgan Securities as follows:
- ---------------------

<TABLE>
<CAPTION>
Fund 1/9/97 to 10/31/98 % of Portfolio's Brokerage % of aggregate $ amount
Commissions Represented amount of
for the period transactions for the
period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity
Equity-Income
Growth & Income
Balanced
</TABLE>

From November 1, 1997 to October 31, 1998, brokerage commissions were paid to
Dean Witter Reynolds & Co. as follows:
- -------------------------

<TABLE>
<CAPTION>
Fund 11/1/97 to 10/31/98 % of Portfolio's Brokerage % of aggregate $ amount
Commissions Represented amount of
for the period transactions for the
period
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>

MULTIPLE PRICING SYSTEM

The Trust's Multiple Pricing System permits an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.

Class A Shares. Purchases of Class A shares of less than $1 million are
offered for sale at net asset value per share plus a front end sales charge of
up to 4.75% payable at the time of purchase (with the exception of Class A
shares of the Money Market Fund, which are offered without such a charge).
Purchases of Class A shares of $1 million or more are offered for sale at net
asset value without a front end sales charge but are subject to a contingent
deferred sales charge ("CDSC") of 1% of the dollar amount subject thereto during
the first year after purchase. In addition, Class A shares are subject to a
distribution fee of up to .10% of their respective average annual net assets and
a service fee of up to .25% of their respective average annual net assets (with
the exception of Class A shares of the Money Market Fund, which bear no such
fees, and Class A shares of the National Municipal Bond Fund, which are subject
to a service fee of up to .15% of Class A average annual net assets and are not
subject to any distribution fee). Certain purchases of Class A shares qualify
for reduced front end sales charges.

Class B Shares. Class B shares are offered for sale for purchases of
$250,000 or less. Class B shares are offered for sale at net asset value without
a front end sales charge, but are subject to a CDSC of 5% of the dollar amount
subject thereto during the first and second year after purchase, and declining
by 1% each year thereafter to 0% after the sixth year. In addition, Class B
shares are subject to a distribution fee of up to .75% of their respective
average annual net assets and a service fee of up to .25% of their respective
average annual net assets (with the exception of Class B shares of the Money
Market Fund, which bear no such fees). The Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The higher ongoing distribution and service fees paid by Class B shares
will cause such shares to have a higher expense ratio and to pay lower dividends
than Class A shares. Class B shares purchased on or after October 1, 1997 will
automatically convert to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted.

Class C Shares. Class C shares are offered for purchases of less than
$1 million, at net asset value without a front end sales charge. Class C shares
are subject to a CDSC of 1% of the dollar amount subject thereto during the
first year after purchase. Class

-50-
<PAGE>

C shares are subject to a distribution fee of up to .75% of their respective
average annual net assets and a service fee of up to .25% of their respective
average annual net assets (with the exception of Class C shares of the Money
Market Fund, which bear no such fees). Class C shares, like Class B shares,
enjoy the benefit of permitting all of the investor's dollars to work from the
time the investment is made. The higher ongoing distribution and service fees
paid by Class C shares will cause such shares to have a higher expense ratio and
to pay lower dividends than Class A shares. Class C shares will automatically
convert to Class A shares ten years after the end of the calendar month in which
the shareholder's order to purchase was accepted.

Contingent Deferred Sales Charge. Purchases of $1 million or more of
Class A shares are subject to a CDSC of 1% if redeemed within one year of
purchase; purchases of Class B shares are subject to a CDSC of 5% during the
first and second year after purchase declining by 1% each year thereafter to 0%
after the sixth year; and Class C shares are subject to a CDSC of 1% if redeemed
within one year of purchase. The applicable percentage is assessed on an amount
equal to the lesser of the original purchase price or the redemption price of
the shares redeemed. The CDSC is not applicable with respect to redemption of
shares of the Money Market Fund which were initially purchased as such and which
were never exchanged for shares of the same class of another Fund. However, in
the case of shares of the Money Market Fund which were obtained through an
exchange, such shares are subject to any applicable CDSC due at redemption.
Similarly, shares initially purchased as shares of the Money Market Fund which
are subsequently exchanged for shares of the same class of other Funds will be
subject to any applicable CDSC due at redemption.

Conversion Feature. Class B shares (purchased on or after October 1,
1997) and Class C shares will automatically convert to Class A shares eight
years and ten years, respectively, after the end of the calendar month in which
the shareholder's order to purchase was accepted and will thereafter no longer
be subject to the higher distribution and service fees. Such conversion will be
on the basis of the relative net asset values per share, without the imposition
of any sales charge, fee or other charge. (For Class B shares purchased prior to
October 1, 1997 such conversion will take place six years after purchase.) The
purpose of the conversion feature is to relieve the holders of Class B shares
and Class C shares from most of the burden of distribution-related expenses at
such time as when the shares have been outstanding for a duration sufficient for
the Distributor to have been substantially compensated for distribution-related
expenses incurred in connection with Class B shares or Class C shares, as the
case may be. Accordingly, Class B and Class C shares of the Money Market Fund do
not convert to Class A shares of the Money Market Fund at any time, as shares of
all classes of the Money Market Fund do not bear any distribution or service
fees. In addition, because Class B and Class C shares of the Money Market Fund
are not subject to any distribution or service fees, the applicable conversion
period is tolled for any period of time in which Class B or Class C shares are
held in that Fund. For example, if Class B shares of a Fund other than the Money
Market Fund are exchanged for Class B shares of the Money Market Fund two years
after purchase and are subsequently exchanged one year later for Class B shares
of a Fund other than the Money Market Fund, the one year of ownership in the
Money Market Fund does not count in the determination of the time of conversion
to Class A shares.

For purposes of the conversion of Class B and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
Fund account will be considered to be held in a separate sub-account. Each time
any Class B shares or Class C shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares or Class C shares, as the case may be, in the sub-account
will also convert to Class A shares.

The Trust believes that the conversion of either Class B or Class C
shares to Class A shares does not constitute a taxable event under Federal
income tax law. If the Trust's view on this matter changes, it may suspend
conversion of Class B or Class C shares. In that event, which the Trust
considers unlikely, no further conversions of Class B or Class C shares would
occur, and those shares might continue to be subject to higher distribution and
service fees for an indefinite period that may extend beyond the period ending
eight years or ten years, respectively, after the end of the calendar month in
which the shareholder's order to purchase was accepted.

Factors for Consideration. The Trust's Multiple Pricing System is
designed to provide investors with the option of choosing the class of shares
which is best suited to their individual circumstances and objectives. The
different sales charges, distribution and service fees and conversion features
applicable to each class, as outlined above, should all be taken into
consideration by investors in making the determination of which alternative is
best suited for them. To assist investors in evaluating the costs and benefits
of purchasing shares of each class, the information provided above under the
caption "Fee Table and Example" sets forth the charges applicable to each class
of shares and illustrates an example of a hypothetical investment in each class
of shares of each Fund.

There are several key distinctions among the classes of shares that
investors should understand and evaluate in comparing the options presented by
the Multiple Pricing System. Class A shares are subject to lower distribution
and service fees than are Class B and Class C shares, and, accordingly, pay
correspondingly higher dividends per share. However, because a front end sales
charge is

-51-
<PAGE>

deducted at the time of purchase for purchases of less than $1 million of Class
A shares, investors purchasing Class A shares do not have all of their funds
invested initially and, therefore, initially own fewer shares than they would
own if they had invested the identical sum in Class B shares or Class C shares
instead. In addition, Class C shares are subject to the same ongoing
distribution and service fees as Class B shares but are subject to a CDSC for a
shorter period of time (one year as opposed to six years) than Class B shares.
However, Class B shares convert to Class A shares, and lower ongoing
distribution and service fees, in a shorter time frame than do Class C shares.

In light of these distinctions among the classes of shares, investors
should weigh such factors as (i) whether they qualify for a reduced front end
sales load for a purchase of Class A shares; (ii) whether, at the time of
purchase, they anticipate being subject to a CDSC upon redemption if they
purchase Class A shares (purchases of $1 million or more), Class B shares or
Class C shares; (iii) the differential in the relative amounts that would be
paid during the anticipated life of investments (which are made at the same time
and in the same amount) in each class which are attributable to (a) the front
end sales charge (for purchases of less than $1 million) and any applicable CDSC
(for purchases of $1 million or more) and accumulated distribution and service
fees payable with respect to Class A shares and (b) the accumulated distribution
and service fees (and any applicable CDSC) payable with respect to Class B
shares or Class C shares prior to their conversion to Class A shares; and (iv)
to what extent the differential referred to above might be offset by the higher
yield of Class A shares. Investors should also weigh these considerations
against the fact that the higher continued distribution and service fees
associated with Class B shares and Class C shares will be offset to the extent
any return is realized on the additional funds initially invested and that there
can be no assurance as to the return, if any, which will be realized on such
additional funds. Class A shares are, in general, the most beneficial for the
investor who qualifies for reduced front end sales charges. For this reason,
Class B shares are not offered for purchases in excess of $250,000 and Class C
shares are not offered for purchases of $1 million or more. Investors should
consult their investment representative for assistance in evaluating the
relative benefits of the different classes of shares.

Dividends paid by a Fund with respect to each class of shares will be
calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne solely by the
applicable class. Shares of a Fund may be exchanged for shares of the same class
of any other Fund, but not for shares of other classes of any Fund.

Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to individuals by mutual funds are currently
taxed at a federal income tax rate of 20%. Taxable dividends from any source,
including long-term capital gains, distributed to corporations by mutual funds
are currently taxed at federal income tax rates of up to 35%. Additionally,
state taxes on mutual fund distributions reduce after-tax returns.

CAPITAL STOCK

All shares of beneficial interest, $.001 par value per share, of each
Fund have equal voting rights (except as described below with respect to matters
specifically affecting a class of shares) and have no preemptive or conversion
rights. The Trust's Declaration of Trust permits the issuance of multiple
classes of shares pursuant to the Multiple Pricing System. Shares of each class
of a Fund represent interests in that Fund in proportion to each share's net
asset value. The per share net asset value of each class of shares in a Fund is
calculated separately and may differ as between classes as a result of the
differences in distribution and service fees payable by the classes and the
allocation of certain incremental class-specific expenses to the appropriate
class to which such expenses apply.

All shares of the Trust have equal voting rights and will be voted in
the aggregate, and not by series (Fund) or class, except where voting by series
or class is required by law or where the matter involved affects only one series
or class (for example, matters pertaining to the plan of distribution relating
to Class A shares will only be voted on by Class A shares). Matters required by
the 1940 Act to be voted upon by each affected series include changes to (i) the
Advisory Agreement, (ii) a Subadvisory Agreement and (iii) fundamental
investment objectives and policies.

The Trust is not generally required to hold annual meetings of
shareholders. However, the Trustees may call special meetings of shareholders
for action by shareholder vote as may be requested in writing by the holders of
25% or more of the outstanding shares of the Trust (10% in the case of a meeting
requested for the purpose of removing a Trustee) or as may be required by
applicable laws. Shareholders seeking to call a meeting for the purpose of
removing a Trustee will be assisted by the Trust in communicating with other

-52-
<PAGE>

shareholders, provided the shareholders seeking to call a meeting are at least
ten in number, have been shareholders for at least six months and hold in the
aggregate at least one percent of the outstanding shares or shares having a
value of at least $25,000, whichever is less. Also, Trustees may be removed by
action of the holders of two-thirds or more of the outstanding shares of the
Fund. The Trustees are authorized to create additional series and classes of
shares at any time without approval by shareholders.

Under Massachusetts law, shareholders of a business trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the Trust. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of each Fund of the
Trust and requires that notice of such disclaimer be given in each instrument
entered into or executed by the Trust. The Declaration of Trust also provides
for indemnification out of a Fund's property for any shareholder of such Fund
held personally liable for any of the Fund's obligations. Thus, the risk of a
shareholder being personally liable as a partner for obligations of a Fund is
limited to the unlikely circumstance in which the Fund itself would be unable to
meet its obligations.

PURCHASE, REDEMPTION AND PRICING

Certain Qualified Purchasers. No front end sales charge or CDSC is
applicable to any sale of Class A shares to a Trustee or officer of the Fund, or
to the immediate families (i.e., the spouse, children, mother or father) of such
persons, or any full-time employee or registered representative of
broker/dealers having Dealer Agreements with the Distributor ("Selling Broker")
and their immediate families (or any trust, pension, profit sharing or other
benefit plan for the benefit of such persons), or any full-time employee of a
bank, savings and loan, credit union or other financial institution that
utilizes a Selling Broker to clear purchases of Fund shares, and their immediate
families. In addition, no front end sales charge or CDSC is applicable on any
sale to CypressTree or any of its affiliates, the Subadvisers or Wood Logan, or
to a director, officer, full-time employee or sales representative of
CypressTree or any of its affiliates, the Subadvisers or any of their affiliates
or of Wood Logan, or to the immediate families of such persons, or any trust,
pension, profit-sharing or other benefit plan for the benefit of such persons.

No front end sales charge or CDSC on Class A shares is applicable to
continuing purchase payments made in connection with Code Section 401 qualified
plans that were invested in the Fund prior to April 1, 1994.

A qualified retirement plan that is currently a shareholder of the Fund
may make additional purchases of Class A shares at net asset value (i.e.,
without the imposition of a front end sales load or CDSC). A commission or
transaction fee of 1.00% will be paid by the Distributor to broker-dealers,
banks and other financial service firms subject to a chargeback to the firm for
redemptions made within one year from the date of purchase.

Class A shares may be purchased at net asset value by certain
broker-dealers and other financial institutions which have entered into an
agreement with the Distributor, which includes a requirement that such shares be
sold for the benefit of clients participating in a "wrap account" or a similar
account program under which such clients pay a fee to such broker-dealer or
other financial institution. Class A shares may also be purchased at net asset
value by registered investment advisers for the benefit of client accounts if
the adviser charges a fee (other than brokerage commissions) for his services.

Determination of Net Asset Value

The following supplements the discussion set forth in the Prospectus.
The assets belonging to each class of shares of a Fund will, in each case, be
invested together in a single portfolio. The net asset value of each class will
be determined separately by subtracting the expenses and liabilities allocated
to that class from the assets belonging to that class.

The Trustees have authorized the Funds to value certain debt securities
by reference to valuations obtained from pricing services which take into
account appropriate factors such as institution-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations of such
securities, without extensive reliance upon quoted prices, since such valuations
are believed by the Trustees to more accurately reflect the fair value of such
securities.

Securities held by each of the Funds other than the Money Market Fund,
except for money market instruments with remaining maturities of 60 days or
less, are valued as follows: securities which are traded on stock exchanges are
valued at the last sales price as of the close of the Exchange, or lacking any
sales, at the closing bid prices. Securities traded only in the
"over-the-counter" market are valued at the last bid prices quoted by brokers
that make markets in the securities at the close of trading on the Exchange.
Securities

-53-
<PAGE>

and assets for which market quotations are not readily available or not obtained
from a pricing service are valued at fair value as determined in good faith by
the Trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the Trustees. If approved by the Trustees, the Fund
may make use of a pricing service or services in determining the net asset value
of the classes of the Funds.

All instruments held by the Money Market Fund and money market
instruments with a remaining maturity of 60 days or less held by the other Funds
will be valued on an amortized cost basis. Under this method of valuation, the
instrument is initially valued at cost (or in the case of instruments initially
valued at market value, at the market value on the day before its remaining
maturity is such that it qualifies for amortized cost valuation); thereafter,
the Fund assumes a constant proportionate amortization in value until maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price that would be
received upon sale of the instrument.

The Money Market Fund uses the amortized cost valuation method in
reliance upon Rule 2a-7 under the 1940 Act. As required by Rule 2a-7, the Money
Market Fund will maintain a dollar weighted average maturity of 90 days or less.
The Trustees have established procedures designed to stabilize, to the extent
reasonably possible, the Money Market Fund's price per share (for each class) as
computed for the purposes of sales and redemptions at $1.00.

Redemption in Kind

Although it is each of the Funds' present policy to make payment of
redemption proceeds in cash, if the Trustees determine it appropriate,
redemption proceeds may be paid in whole or in part by a distribution in kind of
marketable securities held by that Fund subject to the limitation that each Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one account.
If a redemption in kind is made, a shareholder might be required to bear
transaction costs, including brokerage commissions, to dispose of such
securities. The Fund will endeavor to only distribute securities for which there
is an active trading market.

Repurchase of Shares

The Distributor is authorized to repurchase Fund shares through certain
securities dealers who have entered into dealer agreements with the Distributor.
The offer to repurchase may be suspended by the Distributor at any time. Dealers
may charge for their services in connection with a repurchase, but neither the
Fund nor the Distributor makes any such charge. Repurchase arrangements differ
from redemptions in that the dealer buys the shares as principal from his
customer in lieu of tendering shares to the Fund for redemption as agent for the
customer. The proceeds to the shareholder will be the net asset value of the
shares repurchased as next determined after receipt of the repurchase order by
the dealer. By a repurchase, the customer should be able to receive the sale
proceeds from the dealer more quickly. Shareholders should contact their dealers
for further information as to how to effect a repurchase and the dealer's
charges applicable thereto.

Payment for the Shares Presented

Payment for shares presented for redemption will be based on the net
asset value of the applicable class of the applicable Fund next computed after a
request is received in proper form at the Transfer Agent's office. Certain
redemptions of Class A, B and C shares may be subject to a CDSC, which will be
deducted from the redemption proceeds. Payment proceeds will be mailed within
seven days following receipt of all required documents. However, payment may be
postponed or the right of redemption suspended (i) for any period during which
the New York Stock Exchange is closed for other than customary weekend and
holiday closing or during which trading on the New York Stock Exchange is
restricted; (ii) for any period during which an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets; or (iii) for such other periods as the Commission
may by order permit for the protection of shareholders, provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions described in (i) and (ii) exist. Payment of proceeds may also be
delayed if the shares to be redeemed or repurchased were purchased by check and
that check has not cleared (which may be up to 15 days or more).

-54-
<PAGE>

Custodian and Transfer and Dividend Disbursing Agents

State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, currently acts as Custodian of all the
Fund's assets, as well as the bookkeeping, transfer and dividend disbursing
agent for all of the Funds of the Fund. State Street has selected various banks
and trust companies in foreign countries to maintain custody of certain foreign
securities. State Street is authorized to use the facilities of the Depository
Trust Company, the Participants Trust Company and the book-entry system of the
Federal Reserve Banks.

PERFORMANCE INFORMATION

From time to time the Trust may advertise certain information about the
performance of all classes of one or more of the Funds. Such performance
information may include time periods prior to the establishment of the
multi-class distribution system. Information about performance of a class of
shares of a Fund is not intended to indicate future performance. The Trust's
annual report to shareholders, which is available without charge upon request,
contains further discussions of Fund performance.

The Funds may advertise the yield and/or total return performance for
all classes of one or more of the Funds in accordance with the rules of the
Commission. The National Municipal Bond Fund may also present from time to time
yield, tax-equivalent yield and standardized and nonstandardized total return in
advertisements. When yield is used in sales literature, the total return figures
will also be included. The Commission has issued rules setting forth the uniform
calculation of both yield and total return, but shareholders' actual experience
may be more or less than the figures produced by these formulas.

Each Fund may include the total return for all classes of shares in
advertisements or other written material. Each such piece will include at least
the average annual total return quotations for one year, five years, ten years
(if available) and/or from the commencement of operations. Total return is
measured by comparing the value of an investment at the beginning of the
relevant period to the redemption value of the investment at the end of the
period; the calculation assumes the initial investment is made at the current
maximum net offering price, assumes immediate reinvestment of any dividends or
capital gains distributions and adjusts for the current maximum sales charge of
4.75% for Class A shares and the applicable CDSC imposed on a redemption of
Class B shares or Class C shares held for the period indicated. Yield and total
return are calculated separately for each class of a Fund.

Each of the Funds may advertise yield for all classes, accompanied by
total return. The yield will be computed by dividing the net investment income
per share earned during a recent one month period (after deducting expenses net
of reimbursements applicable to each class) by the maximum offering price
(including the maximum front end sales charge or applicable CDSC) on the last
day of the period, and annualizing the result (assuming compounding of interest)
in order to arrive at annual percentage rate. The National Municipal Bond Fund
may also present from time to time the tax-equivalent yield of all classes. The
tax-equivalent yield is calculated by determining the portion of yield which is
tax-exempt and calculating the equivalent taxable yield and adding to such
amount any fully taxable yield.

The Money Market Fund may advertise yield and effective yield for all
classes. The yield is based upon the income earned by the Fund over a seven-day
period and is then annualized, i.e., the income earned in the period is assumed
to be earned every seven days over a 365 day period and is stated as a
percentage of the investment. Effective yield is calculated similarly, but when
annualized the income earned by the investment is assumed to be reinvested
weekly in shares of the same class and thus compounded in the course of a 365
day period. The effective yield will be higher than the yield because of the
compounding effect of this assumed reinvestment.

All performance information may be compared with data published by
Lipper Analytical Services, Inc. or to unmanaged indices of performance,
including, but not limited to, the Dow Jones Industrial Average, S&P 500, S&P
MidCap 400 Index, Value Line Composite, Lehman Brothers Bond, Government
Corporate, Municipal, Corporate and Aggregate Indices, Merrill Lynch Government
& Agency and Intermediate Agency Indices, the Salomon Brothers Non-Dollar WGBI
10 Index, Russel 2000 Growth Index, the EAFE Index or the Morgan Stanley Capital
International World Index. In addition, during certain time periods the yield
and total return of a class and/or a Fund may be affected by expense waivers
and/or expense reimbursements. When so affected, the yield and total return
figures will be accompanied by a statement regarding such waiver and/or
reimbursement. While performance information may be helpful in evaluating
whether a Fund may be fulfilling its objective, past performance should not be
regarded as representative of future results. Yields and net asset values will
fluctuate with market conditions and the value of shares redeemed may be more or
less than their cost. The Money Market Fund operates under procedures designed
to stabilize the net asset value of all classes at $1.00 per share. A Fund will
include performance data for each class of a Fund in any advertisement or
information including performance data of such Fund. The Fund may also utilize
performance information in hypothetical illustrations provided in narrative
form.

-55-
<PAGE>

A Fund may advertise its yield and/or total return performance for all
classes of shares of one or more of the Funds, calculated in accordance with the
rules of the Commission. Such performance information may include time periods
prior to the implementation of the Multiple Pricing System on April 1, 1994, and
will be calculated as described below. For purposes of quoting and comparing the
performance of the classes of the Funds to that of other mutual funds and to
stock or other relevant indices in advertisements or in reports to shareholders,
performance will be stated in terms of total return and yield. Both "total
return" and "yield" figures are based on historical performance, show the
performance of a hypothetical investment and are not intended to indicate future
performance.

Under the rules of the Commission, funds advertising performance must
include total return quotes, "T" below, calculated according to the following
formula:

P(1 + T)/n/ = ERV

Where:

P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the "n" year
period (or fractional portion thereof) at the end of
such period.

The average annual total return will be calculated under the foregoing
formula and the time periods used in advertising will be based on rolling
calendar quarters, updated to the last day of the most recent quarter prior to
submission of the advertising for publication, and will cover one, five, and ten
year periods (if available) plus the time period since the effective date of the
Fund's registration statement. When the period since inception for a Fund is
less than one year, the total return quoted will be the aggregate return for the
period. In calculating the ending redeemable value, for Class A shares, the
current maximum front end sales charge of 4.75% (as a percentage of the offering
price) is deducted from the initial $1,000 payment, and for Class B shares, the
applicable CDSC imposed on a redemption of shares held for the period is
deducted. The formula also assumes that all dividends and distributions have
been reinvested at net asset value as described in the Prospectus on the
reinvestment dates during the period. Total return, or "T" in the formula above,
is computed by finding the average annual compounded rates of return over the 1,
5 and 10 year periods (or fractional portions thereof) that would equate the
initial amount invested to the ending redeemable value. Any sales charges that
might in the future be made applicable to reinvestments would be included as
would any recurring account charges that might be imposed by the Trust.

The figures shown in the table below are, for all classes, restated to
reflect front end sales charges and CDSCs currently payable by each class of
shares under the Multiple Pricing System (as described above), and (for all of
the tables presented below) are based on the distribution and service fees and
other expenses actually paid by each Fund for the periods presented, rather than
the distribution and service fees and other expenses currently payable by each
class of shares under the Multiple Pricing System, which in certain cases are
different. Until April 1, 1994, each Fund paid distribution and service fees
under the Prior Plan.

The following tables set forth the average annual total returns for
each class of shares of each Fund for certain periods of time ending October 31,
1998, restated to reflect the effects of the maximum front end sales charges and
any applicable CDSCs payable by an investor under the Multiple Pricing System:

Class A shares

Through

10/31/98 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 17.06 N/A 10.59 (03-04-96)
International Small Cap (1.70) N/A 3.34 (03-04-96)
Growth Equity 19.19 N/A 17.87 (03-04-96)
Global Equity 20.11 12.35 9.45 (11-07-90)
Equity-Income 21.19 15.33 9.81 (08-28-89)
</TABLE>

-56-
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Growth & Income 25.68 16.67 15.01 (05-01-91)
International Growth and Income (1.37) N/A 4.86 (01-09-95)
Strategic Income 5.32 N/A 7.30 (11-01-93)
Balanced 11.45 11.31 8.65 (08-28-89)
Investment Quality Bond 3.41 5.57 7.09 (05-01-91)
U.S. Government Securities 2.45 5.22 6.90 (08-28-89)
National Municipal Bond 3.68 N/A 4.34 (07-06-93)
Tax-Sensitive Equity (01-06-98)
Emerging Growth (01-06-98)
</TABLE>

Class B shares

Through

10/31/98 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 16.86 N/A 10.28 (03-04-96)
International Small Cap (2.46) N/A 2.79 (03-04-96)
Growth Equity 19.50 N/A 18.07 (03-04-96)
Global Equity 20.63 12.79 9.92 (11-07-90)
Equity-Income 21.29 15.79 10.19 (08-28-89)
Growth & Income 26.40 17.23 15.57 (05-01-91)
International Growth and Income (2.08) N/A 4.90 (01-09-95)
Strategic Income 4.86 N/A 7.37 (11-01-93)
Balanced 11.27 11.71 9.03 (08-28-89)
Investment Quality Bond 3.05 5.86 7.55 (05-01-91)
U.S. Government Securities 1.84 5.45 7.24 (08-28-89)
National Municipal Bond 2.94 N/A 4.40 (07-06-93)
Tax-Sensitive Equity (01-06-98)
Emerging Growth (01-06-98)
</TABLE>

Class C shares

Through

10/31/98 One Year Five Years Since Inception Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 20.92 N/A 13.17 (03-04-96)
International Small Cap 1.54 N/A 5.72 (03-04-96)
Growth Equity 23.50 N/A 20.75 (03-04-96)
Global Equity 25.54 13.03 9.91 (11-07-90)
Equity-Income 25.33 16.01 10.19 (08-28-89)
Growth & Income 30.37 17.38 15.53 (05-01-91)
International Growth and Income 1.91 N/A 6.20 (01-09-95)
Strategic Income 8.86 N/A 7.96 (11-01-93)
Balanced 15.21 11.95 9.03 (08-28-89)
Investment Quality Bond 7.05 6.18 7.55 (05-01-91)
U.S. Government Securities 5.84 5.77 7.24 (08-28-89)
National Municipal Bond 6.94 N/A 4.80 (07-06-93)
Tax-Sensitive Equity (01-06-98)
Emerging Growth (01-06-98)
</TABLE>

-57-
<PAGE>

The Funds have been and still are subject to certain fee reimbursements.
Absent such reimbursement, the returns shown above would be lower.

The performance data quoted represents past performance; investment returns
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. On
July 10, 1992, the former Aggressive, Moderate and Conservative Asset Allocation
Trusts were reorganized into the Balanced Fund. The Balanced Fund's investment
objectives, policies and restrictions are identical to the old Moderate Asset
Allocation Trust. The performance figures shown above for the Balanced Fund
therefore are based on the past performance of the former Moderate Asset
Allocation Trust for the period prior to July 10, 1992.

A Fund's yield is a way of showing the rate of income the Fund earns on its
investments as a percentage of the Fund's share price. Under the rules of the
Commission, yield must be calculated according to the following formula:

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

Where:

a = dividends and interest earned during the
period.

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

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

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

Yields for the classes of the Funds used in advertising are computed by dividing
the class of the Fund's interest and dividend income for a given 30 day period,
net of expenses, by the average number of shares entitled to receive
distributions during the period, dividing this figure by the offering price
(including the applicable front end sales charge or CDSC) at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. Income is calculated for purposes of yield
quotations in accordance with standardized methods applicable to all stock and
bond mutual funds. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation. Income calculated for the purposes
of calculating the Fund's yield differs from income as determined for other
accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yield quoted for a
class of a Fund may differ from the rate of distributions paid over the same
period or the rate of income reported in the Fund's financial statements. The
yields for Classes A, B and C of the Investment Quality Bond Fund for the thirty
day period ended October 31, 1998 were [ ]%, [ ]% and [ ]%, respectively. The
yields for Classes A, B and C of the U.S. Government Securities Fund for the
thirty day period ended October 31, 1998 were [ ]%, [ ]% and [ ]%, respectively.
The yields for Classes A, B and C of the Strategic Income Fund for the thirty
day period ended October 31, 1998 were [ ]%, [ ]% and [ ]%, respectively.

Yield quotations for the Investment Quality Bond and U.S. Government
Securities and Strategic Income Funds will reflect the fact that such Funds will
have paid no advisory fees during certain periods of their operations.
Therefore, the yield for those Funds encompassing the periods during which no
advisory fees were paid will be higher than the yields the Funds would have
realized had the suspension of advisory fees not been in effect.

-58-
<PAGE>

The yields for Classes A, B and C of the National Municipal Bond Fund for
the thirty day period ended October 31, 1998 were [ ]%, [ ]% and [ ]%,
respectively. With respect to the National Municipal Bond Fund, tax-equivalent
yields are computed by dividing that portion of yield that is tax-exempt by one,
minus a stated income tax rate and adding the quotient to that portion, if any,
of the yield that is not tax-exempt.
---

Yields for the Money Market Fund will be computed on the basis of seven-day
periods, and such quotations will be in lieu of total return quotations for the
one, five and ten year periods described above. Yields will be computed by
dividing the net change, exclusive of capital changes, in the value of a
hypothetical account having a balance of one share at the beginning of the
seven-day period by the value of the account at the beginning of the period and
multiplying the return so determined ("base period return") by 365/7. Effective
yields will be computed by compounding the base period return in accordance with
the following formula:

Effective yield = [(Base period return +1)365/7] - 1

For the seven-day period ended October 31, 1998, yields for Classes A, B
and C of the Money Market Fund were [ ]%, [ ]% and [ ]%, respectively. For the
seven-day period ended October 31, 1997, the effective yields for Classes A, B
and C of the Money Market Fund were [ ]%, [ ]% and [ ]%, respectively.

Yield and total return are calculated separately for each class of shares
of a Fund. As discussed above, these calculations adjust for the different front
end sales charges and CDSCs currently payable with respect to each class, and
are based on distribution and service fees and other expenses actually paid by
each Fund for the periods presented.

The Trust may also from time to time include in advertising a total
aggregate return figure or an average annual total return figure that is not
calculated according to the formula set forth above in order to compare
performance more accurately with other measures of investment return. Each class
of a Fund may quote an aggregate total return figure in comparing total return
with data published by Lipper Analytical Services, Inc. or with the performance
of various indices including, but not limited to, the Dow Jones Industrial
Average, the Standard & Poor's 500 Stock Index, the Value Line Composite Index,
the Lehman Brothers Bond, Government Corporate, Corporate and Aggregate Indices,
Merrill Lynch Government & Agency Index, Merrill Lynch Intermediate Agency
Index, Morgan Stanley Capital International Europe, Australia, Far East Index or
the Morgan Stanley Capital International World Index. For such purposes,
aggregate total return is calculated for the specified periods of time by
assuming the investment of $1,000 in shares of a class of a Fund and assuming
the reinvestment of each dividend or other distribution at net asset value on
the reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value. The Trust does not, for these purposes, deduct
from the initial value invested any amount representing front end sales charges
or CDSCs applicable to a class. To calculate its average annual total return,
the aggregate return is then annualized according to the Commission's formula
for total return quotes, outlined above. When the period since inception is less
than one year, the total return quoted will be the aggregate return for the
period. The Trust will, however, disclose the maximum front end sales charge or
CDSC applicable to each class and will also disclose that the performance data
does not reflect sales charges and that the inclusion of sales charges would
reduce the performance quoted. Such alternative total return information will be
given no greater prominence in such advertising than the information prescribed
under Commission rules and all advertisements containing performance data will
include a legend disclosing that such performance data represent past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. The Trust may also advertise the performance
rankings assigned certain Funds (or classes thereof) or their investment
subadvisers by various publications and statistical services, including but not
limited to SEI, Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis, Intersec Research Survey of Non-U.S. Equity Fund Returns, Frank
Russell International Universe, and any other data which may be presented from
time to time by such analysis as Dow Jones, Morningstar, Chase Investment
Performance, Wilson Associates, Stanger, CDA Investment Technology, the Consumer
Price Index ("CPI"), The Bank Rate Monitor National Index, IBC/Donaghue's
Average/U.S. Government and Agency, or as they appear in various publications
including but not limited to The Wall Street Journal, Forbes, Barrons, Fortune,
Money Magazine, The New York Times, Financial World and Financial Services Week.

Calculated in the manner set forth immediately above, the average annual
total returns for each class of shares of each Fund for the one and five year
periods ended October 31, 1998 and since inception to October 31, 1998 are as
follows:

-59-
<PAGE>

<TABLE>
<CAPTION>
Class A shares

Through

10/31/98 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 22.90 N/A 13.88 (03-04-96)
International Small Cap 3.20 N/A 6.42 (03-04-96)
Growth Equity 25.13 N/A 21.38 (03-04-96)
Global Equity 26.10 13.44 10.20 (11-07-90)
Equity-Income 27.24 16.45 10.45 (08-28-89)
Growth & Income 31.95 17.80 15.86 (05-01-91)
International Growth and Income 3.55 N/A 6.68 (01-09-95)
Strategic Income 10.57 N/A 8.60 (11-01-93)
Balanced 17.01 12.39 9.29 (08-28-89)
Investment Quality Bond 8.57 6.60 7.89 (05-01-91)
U.S. Government Securities 7.56 6.25 7.53 (08-28-89)
National Municipal Bond 8.85 N/A 5.51 (07-06-93)
Tax-Sensitive Equity
Emerging Growth
</TABLE>

Class B shares

Through

10/31/98 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 21.86 N/A 13.08 (03-04-96)
International Small Cap 2.54 N/A 5.72 (03-04-96)
Growth Equity 24.50 N/A 20.75 (03-04-96)
Global Equity 25.63 13.03 9.92 (11-07-90)
Equity-Income 26.29 16.00 10.19 (08-28-89)
Growth & Income 31.40 17.43 15.57 (05-01-91)
International Growth and Income 2.92 N/A 6.19 (01-09-95)
Strategic Income 9.86 N/A 7.97 (11-01-93)
Balanced 16.27 11.95 9.03 (08-28-89)
Investment Quality Bond 8.05 6.17 7.55 (05-01-91)
U.S. Government Securities 6.84 5.77 7.24 (08-28-89)
National Municipal Bond 7.94 N/A 4.80 (07-06-93)
Tax-Sensitive Equity
Emerging Growth
</TABLE>

Class C shares

Through

10/31/98 One Year % Five Years % Since Inception % Inception Date
<S> <C> <C> <C> <C>
Small/Mid Cap 21.92 N/A 13.17 (03-04-96)
International Small Cap 2.54 N/A 5.72 (03-04-96)
Growth Equity 24.50 N/A 20.75 (03-04-96)
Global Equity 25.54 13.02 9.91 (11-07-90)
Equity-Income 26.33 16.00 10.19 (08-28-89)
Growth & Income 31.37 17.37 15.53 (05-01-91)
</TABLE>

-60-
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
International Growth and Income 2.91 N/A 6.20 (01-09-95)
Strategic Income 9.86 N/A 7.99 (11-01-93)
Balanced 16.21 11.94 9.03 (08-28-89)
Investment Quality Bond 8.05 6.17 7.55 (05-01-91)
U.S. Government Securities 6.84 5.77 7.24 (08-28-89)
National Municipal Bond 7.94 N/A 4.80 (07-06-93)
Tax-Sensitive Equity
Emerging Growth
</TABLE>

The Funds have been and still are subject to certain fee reimbursements.
Absent such reimbursement, the returns shown above would be lower.

The Trust may also from time to time include in advertising and sales
literature the following: 1) information regarding its portfolio subadvisers,
such as information regarding a subadviser's specific investment expertise,
client base, assets under management or other relevant information; 2)
quotations about the Trust, its portfolios or its investment subadvisers that
appear in various publications and media; and 3) general discussions of economic
theories, including but not limited to discussions of how demographics and
political trends may effect future financial markets, as well as market or other
relevant information. The Trust will include performance data for each class of
shares of a Fund in any advertisement or information including performance data
of such Fund.

Taxable Equivalent Yields
<TABLE>
<CAPTION>
=============================================================================================
Single Joint Marginal A Tax-Exempt Yield of:
Federal
Income Tax 3% 4% 5% 6% 7% 8%
Taxable Income** Rate
Is Equivalent to a Taxable Yield of:
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
under $25,350 under $42,350 15% 3.53, 4.71, 5.88, 7.06, 8.24, 9.41
----------------------------------------------------------------------------------------------
$25,350-$61,400 $42,350- 28% 4.17, 5.56, 6.94, 8.33, 9.72, 11.11
$102,300
----------------------------------------------------------------------------------------------
$61,400-$128,100 $102,300- 31% 4.35, 5.80, 7.25, 8.70, 10.14, 11.59
$155,950
----------------------------------------------------------------------------------------------
$128,100-$278,450 $155,950- 36% 4.69, 6.25, 7.81, 9.38, 10.94, 12.50
$278,450
----------------------------------------------------------------------------------------------
over $278,450 over $278,450 39.6% 4.97, 6.62, 8.28, 9.93, 11.59, 13.25
==============================================================================================
</TABLE>

* Certain taxpayers may, to the extent such taxpayers itemize deductions or
claim personal exemptions, be subject to a higher marginal rate. In addition,
the tax rate on net capital gains of individuals may not exceed 28%.

**Taxable Income amounts apply for taxable years beginning in 1996. The amounts
are indexed annually for inflation.

TAXES

The following information supplements the disclosure contained in the
Prospectus under the heading "Taxes." No attempt is made to present a detailed
explanation of all federal, state, local and foreign tax concerns, and the
discussion set forth here and in the Prospectus do not constitute tax advice.
Investors are urged to consult their own tax advisers with specific questions
relating to federal, state, local and foreign taxes.

-61-
<PAGE>

Each Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to continue to so qualify. Qualification as a RIC requires, among other
things, that each Fund: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stocks or
securities (b) diversify its holdings so that, at the end of each quarter of
each taxable year, (i) at least 50% of the total value of a Fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
regulated investment companies and other securities with such other securities
limited, in respect of any issuer, to an amount not greater than 5% of the total
value of a Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities (other than U.S. government securities or the securities of other
regulated investment companies) of any one issuer.

As a RIC, a Fund will not be subject to federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of a Fund's net long-term capital
gains over net short-term capital Losses), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes with respect to
each taxable year at least 90% of the sum of its net investment income, its net
tax-exempt income and the excess, if any, of net short term capital gains over
net long-term capital losses for such year. Each Fund expects to designate
amounts retained as undistributed net capital gains in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.

A Fund will be subject to a nondeductible 4% excise tax on the amount by
which the aggregate income it distributes in any calendar year is less than the
sum of: (a) 98% of a Fund's ordinary income for such calendar year; (b) 98% of
its capital gain net income (the excess of capital gains over capital losses,
both long- and short-term) for the one-year period ending on October 31 of each
year; and (c) 100% of the undistributed ordinary income and gains from prior
years. For this purpose, any income or gains retained by a Fund subject to
corporate income tax will be considered to have been distributed by year-end.
Each Fund expects to distribute substantially all of its net income and gain,
and, assuming that it does so, it will not be subject to this excise tax.

Pay-in-kind Bonds, Zero Coupon Bonds and Discount Obligations. Certain
Funds may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in discount obligations such as zero coupon securities, certain
sovereign debt securities and stripped mortgage securities having original issue
discount or market discount (if a Fund elects to accrue the market discount on a
current basis with respect to such instruments). Such income would be treated as
income earned by the Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to the Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. For example, pursuant to a provision of the Code governing the
treatment of securities such as the stripped mortgage securities described in
this Statement of Additional Information, a principal-only ("PO") class will be
treated as having been issued with original issue discount and, consequently,
will result in income to the Fund without a corresponding distribution of cash
to the Fund. A portion of the amount received on a PO class will constitute a
return of the Fund's investment and as such will not be income.

Special Rules for Certain Foreign Currency Transactions.

Investments in Passive Foreign Investment Companies. Investment by a Fund
in certain "passive foreign investment companies" could subject the Fund to a
U.S. federal income tax (including interest charges) on distributions received
from the company or on proceeds received from the disposition of shares in the
company, which tax cannot be eliminated by making distributions to Fund
shareholders. However, the Fund may elect to treat a passive foreign investment
company as a "qualified electing fund," in which case the Fund will be required
to include its share of the company's income and net capital gain annually,
regardless of whether it receives any distribution from the company. The Fund
also may make an election to mark the gains (and to a limited extent losses) in
such holdings "to the market" as though it had sold and repurchased its holdings
in those PFICs on the last day of the Fund's taxable year. Such gains and losses
are treated as ordinary income and loss. The qualified electing fund and
mark-to-market elections may have the effect of accelerating the recognition of
income (without the receipt of cash) and increase the amount required to be
distributed for the Fund to avoid taxation. Making either of these elections
therefore may require a Fund to liquidate other investments (including when it
is not advantageous to do so) to meet its distribution requirement, which also
may accelerate the recognition of gain and affect a Fund's total return.

-62-
<PAGE>

Foreign Withholding Taxes. Certain dividends and interest received by a
Fund may be subject to foreign withholding taxes. If more than 50% in value of a
Fund's total assets at the close of any taxable year consists of stocks or
securities of foreign corporations, the Fund may elect to treat any foreign
income taxes paid by it as paid by its shareholders. If eligible, the Fund(s)
intend to make this election. If a Fund makes this election, its shareholders
will be required to include in income their respective pro rata portions of
foreign income taxes paid by the Fund(s) and, if they itemize their deductions,
will be entitled to deduct such respective pro rata portions in computing their
taxable income or, alternatively, to claim foreign tax credits (subject to the
limitations discussed below). A shareholder's ability to claim a foreign tax
credit or deduction in respect of eligible foreign taxes paid by a Fund may be
subject to certain limitations imposed by the Code, as a result of which a
shareholder may not get a full credit or deduction for the amount of such taxes
(including a holding period requirement). Each year that a Fund makes this
election, it will report to its shareholders the amount per share of foreign
income taxes it has elected to have treated as paid by its shareholders.

Depending on the residence of the shareholder for tax purposes,
distributions may also be subject to state and local taxes or withholding taxes.
Most states provide that a RIC may pass through to its shareholders state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities. For residents of these states, distributions derived from
a Fund's interest income from these securities should be free from state and
local income taxes. Certain states, however, do not permit RICs to pass through
to their shareholders the state and local income tax exemptions available to
direct owners of certain types of U.S. government securities unless the RIC owns
a required amount of those securities. The Trust believes that the non-pass
through provisions in these states are questionable. Shareholder's dividends
attributable to a Fund's income from repurchase agreement involving U.S.
government securities generally are subject to state and local income taxes,
although states and regulations vary in their treatment of such income. The
exemption from state and local income taxes does not preclude states from
asserting other taxes on the ownership of U.S. government securities. To the
extent that a Fund invests to a substantial degree in U.S. government securities
that are subject to favorable state and local tax treatment, shareholders of
such a Fund will be notified as to the extent to which distributions from the
Fund are attributable to interest on such securities.

National Municipal Bond Fund

The National Municipal Bond Fund intends to qualify to pay "exempt-interest
dividends," as that term is defined in the Code, by holding at the end of each
quarter of its taxable year at least 50% of the value of its total assets in the
form of municipal obligations described in section 103(a) of the Code. Because
the National Municipal Bond Fund will primarily invest in municipal obligations,
dividends from the Fund will generally be exempt from regular federal income tax
in the hands of shareholders subject to the possible application of the
alternative minimum tax. Further, gain from a sale of redemption of shares of
the National Municipal Bond Fund will be taxable to shareholders as capital gain
even though the increase in value of such shares is attributable to tax-exempt
income. Thus, it will normally be advantageous for the National Municipal Bond
Fund to declare exempt-interest dividends frequently.

Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent that the Fund receives income from municipal obligations
treated as a tax preference item for purposes of the alternative minimum tax, a
portion of the dividends paid by it, although otherwise exempt from federal
income tax, will be taxable to shareholders to the extent that their tax
liability will be determined under the alternative minimum tax. The Fund will
annually supply shareholders with a report indicating the percentage of
portfolio income attributable to municipal obligations subject to the
alternative minimum tax. Additionally, taxpayers must disclose to the Internal
Revenue Service on their tax returns the entire amount of tax-exempt interest
(including exempt-interest dividends on shares of the Fund) received or accrued
during the year.

In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings", referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Fund, is included in calculating ACE. Taxpayers that may be subject to the
alternative minimum tax should consult their tax advisers before investing in
the Fund.

Under the Omnibus Budget Reconciliation Act of 1993, all or a portion of
the National Municipal Bond Fund's gain from the sale or redemption of tax-
exempt obligations acquired after April 30, 1993 attributable to market discount
will be treated as ordinary income rather than capital gain. This rule may
increase the amount of ordinary income dividends received by shareholders.

Shares of the Fund would not be a suitable investment for tax-exempt
institutions and may not be a suitable investment for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts,
because such plans and

-63-
<PAGE>

accounts are generally tax-exempt and, therefore, would not gain any additional
benefit from the receipt of exempt-interest dividends from the Fund. Moreover,
subsequent distributions of such dividends to the beneficiaries will be taxable.

In addition, the Fund may not be an appropriate investment for entities
that are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. A "substantial user" is defined under United States
Treasury Regulations to include a non-exempt person who regularly uses a part of
such facilities in his trade or business and, unless such facility, or part
thereof, is constructed, reconstructed or acquired specifically for the non-
exempt person, whose gross revenue derived with respect to the facilities
financed by the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities. "Related persons" include certain related
natural persons, affiliated corporations, partnerships and their partners and S
Corporations and their shareholders. The foregoing is not a complete statement
of all of the provisions of the Code covering the definitions of "substantial
user" and "related person". For additional information, investors should consult
their tax advisers before investing in the Fund.

In addition, the receipt of exempt-interest dividends from each of the
Funds affect the federal tax liability of certain foreign corporations, S
corporations and insurance companies. The Code may also require shareholders
that receive exempt-interest dividends to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments.

FINANCIAL STATEMENTS

The Independent Auditor's Report, financial highlights and financial
statements in respect of the Trust included in the Annual Report of the Trust
for the fiscal year ended October 31, 1998 of the Trust to shareholders filed on
Form N-30D under the Investment Company Act of 1940, as amended, filed
electronically on [ ], 1998 (File No. ________; Accession No. ______ ), are
incorporated by reference into this Statement of Additional Information.

-64-
<PAGE>

Item 23. Exhibits
--------

(1) (a) Amended and Restated Agreement and Declaration of Trust dated
February 18, 1994. (8)

(b) Declaration of Trust Amendment -- Establishment and Designation
of Additional Series of Shares for the International Growth and
Income Fund, dated December 28, 1994. (8)

(d) Declaration of Trust Amendment - Establishment and Designation of
Additional Series of Shares for the Growth Equity, International
Small Cap, and Small/Mid Cap Funds dated February 28, 1996. (8)

(e) Declaration of Trust Amendment - Redesignation of Series of
Shares of Beneficial Interest known as the Growth Fund dated
February 28, 1996. (8)

(f) Declaration of Trust Amendment - Redesignation of Series of
Shares of Beneficial Interest known as the Global Growth Fund and
the Asset Allocation Fund dated October 1, 1996. (8)

(g) Declaration of Trust Amendment - Establishment of the Tax-
Sensitive Equity Fund and Emerging Growth Fund series. (10)

(2) By-laws of North American Funds -- previously filed as Exhibit (b)(2)
to North American Funds initial registration statement on Form N-1A
(File No. 33-27958) dated April 5, 1989. (10)

(3) See Articles 4 and 5 of the North American Funds Amended and Restated
Declaration of Trust; and see Articles 2 and 9 of the By-laws of North
American Funds.

(4) (a) Advisory Agreement dated October 1, 1997 between North American
Funds and CypressTree Asset Management Corporation, Inc. (9)

1
<PAGE>

(b) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Fred Alger Management, Inc., dated October
1, 1997. (9)

(c) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Wellington Management Company, dated October
1, 1997. (9)

(d) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Salomon Brothers Asset Management, Inc.
dated October 1, 1997. (9)

(e) Salomon Brothers Asset Management Limited Subadvisory Consulting
Agreement dated October 1, 1997. (9)

(f) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and J.P. Morgan Investment Management, Inc.
dated October 1, 1997. (9)

(g) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Founders Asset Management, Inc., dated
October 1, 1997. (9)

(h) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Morgan Stanley Asset Management Inc. dated
October 1, 1997. (9)

(i) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and T. Rowe Price Associates Inc. dated October
1, 1997. (9)

(j) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Manufacturers Adviser Corporation dated
October 1, 1997. (9)

(k) Amendment to Advisory Agreement between North American Funds and
CypressTree Asset Management Corporation, Inc. dated December 31,
1997. (10)

(l) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Standish, Ayer & Wood, Inc. dated January 1,
1998. (10)

2
<PAGE>

(m) Subadvisory Agreement between CypressTree Asset Management
Corporation, Inc. and Warburg, Pincus Asset Management, Inc.
dated January 1, 1998. (10)

(5) (a) Distribution Agreement Between North American Funds and NASL
Financial Services, Inc. (7)

(b) Amendment dated September 30, 1997 to Distribution Agreement
between North American Funds and NASL Financial Services, Inc.
dated as of January 1, 1996. (9)

(c) Distribution Agreement Between North American Funds and
CypressTree Funds Distributors, Inc. dated October 1, 1997. (9)

(d) Promotional Agreement among CypressTree Funds Distributors, Inc.,
Wood Logan Associates, Inc., and North American Security Life
Insurance Company dated October 1, 1997. (9)

(e) Most Recent Form of Dealer Agreement Among CypressTree Funds
Distributors, Inc. and Selected Broker-Dealers. (11)

(f) Assignment of Dealer Agreement among CypressTree Funds
Distributors, Inc. Wood Logan Associates, Inc. and Manufacturers
Securities Services, LLC dated October 1, 1997. (9)

(g) Form of Notice of Assignment of Dealer Agreement among CypressTree
Funds Distributors, Inc., Wood Logan Associates, Inc. and
Manufacturers Securities Services, LLC. (9)

(6) Not applicable.

(7) (a) Custodian Agreement Between North American Funds and Boston Safe
Deposit and Trust Company. (1)

(b) Custodian Agreement Between North American Funds and State Street
Bank and Trust Company. (1)

(d) Forms of Sub-Custodian Agreements Between State Street Bank and
Trust Company and the Bank of New York, Chemical Bank and Bankers
Trust. (5)

3
<PAGE>

(8) Not applicable.

(9) (a) Opinion of Ruth Ann Fleming, Esq. (10)

(b) Opinion of Christina M. Perrino, Esq. (10)

(d) Opinion of Christina M. Perrino, Esq. (10)

(e) Opinion of Jeffrey M. Ulness, Esq. (10)

(f) Opinion of Tracy A. Kane, Esq. (10)

(g) Opinion of Counsel of Betsy Anne Seel, Esq. (10)

(h) Opinion of Counsel of Betsy Anne Seel, Esq. (6)

(i) Opinion of Ropes & Gray dated December 18, 1997 regarding the
Tax-Sensitive Equity Fund and the Emerging Growth Fund. (10)

(10) Consent of Coopers & Lybrand, L.L.P. (10)

(11) Not applicable.

(12) Letter Containing Investment Undertaking of North American Life
Assurance Company. (3)

(13) (a) Amended and Restated Rule 12b-1 Distribution Plan for Class A
shares dated September 26, 1997. (9)

(b) Amended and Restated Rule 12b-1 Distribution Plan for Class B
shares dated September 26, 1997. (9)

(14) Financial Data Schedules. (10)

(15) Amended and Restated Rule 18f-3 plan dated October 1, 1997. (9)

(16) (a) Power of Attorney of Bradford K. Gallagher. (9)

(b) Power of Attorney of William F. Achtmeyer. (9)

4
<PAGE>

(d) Power of Attorney of William F. Devin. (9)

(e) Power of Attorney of Kenneth J. Lavery. (9)

(f) Power of Attorney of Joseph T. Grause,. (9)

(g) Power of Attorney of Thomas J. Brown. (9)

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

(1) Previously filed as Exhibit to North American Fund's initial registration
statement on Form N-1A No. 33-27958) dated November 1, 1991.

(2) Previously filed as Exhibit to North American Fund's Post-Effective
Amendment No. 1 on Form N-1A (File No. 33-27958) dated December 29, 1989.

(3) Previously filed as Exhibit to North American Funds' Post-Effective
Amendment No. 2 on Form N-1A (File No. 33-27958) dated August 29, 1990.

(4) Previously filed as Exhibit to North American Fund's Post-Effective
Amendment No. 7 on Form N-1A (File No. 33-27958) dated November 1, 1991.

(5) Previously filed as Exhibit to North American Funds' Post-Effective
Amendment No. 17 on Form N-1A (File No. 33-27958) dated April 1, 1994.

(6) Previously filed as Exhibit to North American Funds Post effective
Amendment No. 21 on Form N1-A (File No. 33-27958) dated December 15, 1995.

(7) Previously filed as Exhibit to North American Funds Post-Effective
Amendment No. 22 on Form N-1A (File No. 33-27958) dated February 23, 1996.

(8) Previously filed as Exhibit to North American Funds' Post-Effective
Amendment No. 25 on Form N-1A dated December 30, 1996.

(9) Previously filed as Exhibit to North American Funds' Post-Effective
Amendment No. 26 on Form N-1A (File No. 33-27958) dated October 17, 1997.

(10) Previously filed as Exhibit to North American Funds' Post-Effective
Amendment No. 27 on Form N-1A (File No. 33-27958) dated December 30, 1997.

(11) Filed herewith.

5
<PAGE>

Item 24. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------

No person is directly or indirectly controlled by the Registrant. With
respect to the portfolios of the Registrant, no person controls the Registrant
by virtue of share ownership in the Registrant.

While the Registrant disclaims any such control relationship, it may be
deemed to be controlled by its investment adviser by virtue of the advisory
relationship. In such case, the Registrant and its adviser, CypressTree Asset
Management Corporation, Inc. ("CAM"), a Delaware corporation, may be deemed to
be under common control of the adviser's parent corporation. CAM is a wholly-
owned subsidiary of CypressTree Investments, Inc. ("CypressTree"), a Delaware
corporation which is based in Boston, Massachusetts. CypressTree is also the
parent company of CypressTree Funds Distributors, Inc, a Delaware corporation
and the Registrant's distributor. CypressTree is an affiliate of Cypress
Holding Company, Inc., a Delaware corporation, which is controlled by its
management and by Berkshire Fund IV, L.P. Berkshire Fund IV, L.P., a
Massachusetts Investment Partnership, is sponsored by Berkshire Partners, LLC, a
private equity investor based in Boston; the general partner of Berkshire Fund
IV, L.P. is Berkshire Investors, LLC.

The following is a list of the equity ownership interests in CypressTree as
of December 7, 1998:

1. Cypress Holding Company, Inc. 31.07%
2. Berkshire Fund IV, L.P. 50.07%
3. Berkshire Investors, LLC 2.72%
4. Standish, Ayer & Wood, Inc. 15.64%

Item 25. Indemnification
---------------

Sections 6.4 and 6.5 of the Agreement and Declaration of Trust of the
Registrant provide that the Registrant shall indemnify each of its Trustees and
officers against all liabilities, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and against
all expenses, including but not limited to accountants and counsel fees,
reasonably incurred in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such trustee or officer may be or
may have been involved as a party or otherwise or with which such person may be
or may have been threatened, while in office or thereafter, by reason of being
or having been such a trustee or officer, except that indemnification shall not
be provided if it shall have been finally adjudicated in a decision on the
merits by the court or other body before which the proceeding was brought that
such trustee or officer (i) did not act in good faith in the reasonable belief
that his or her action was in the best interests of the Registrant or (ii) is

6
<PAGE>

liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office.

Registrant has previously provided the undertaking set forth in Rule 481
under the Securities Act of 1933.

Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------

See "Management of the Fund" in the Prospectus and Statement of Additional
Information and "Investment Management Arrangements" in the Statement of
Additional Information for information regarding the business of the Adviser and
each of the Subadvisors. For information as to the business, profession,
vocation or employment of a substantial nature of each director, officer or
partner of the Adviser and each of the Subadvisors, reference is made to the
respective Form ADV, as amended, filed under the Investment Advisers Act of
1940, each of which is herein incorporated by reference.

Item 27. Principal Underwriters
----------------------

a. CypressTree Funds Distributors, Inc., the Registrant's principal
underwriter, does not serve as principal underwriter, depositor or
investment adviser to any other investment company.

b. Officers and Directors of Principal Underwriter

<TABLE>
<CAPTION>
Positions And
Name and Principal Positions and Offices Offices with
Business Address with Underwriter Registrant
---------------- ---------------- ----------
<S> <C> <C>
Bradford K.Gallagher* President Chairman &
President

Joseph T. Grause, Jr.* Vice President & Treasurer
Treasurer

John I. Fitzgerald* General Counsel & Secretary
Chief Financial Officer

Paul Foley* Vice President Assistant
Secretary

Leana D. Vacirca* Secretary None

</TABLE>

7
<PAGE>

* c/o Cypress Holding Company, Inc.
125 High Street
Boston, MA 02110

c. Not applicable.

Item 28. Location of Accounts and Records
--------------------------------

All accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 are kept by CypressTree
Asset Management Corporation, Inc., the Registrant's investment adviser, at its
offices at 286 Congress Street, Boston, Massachusetts 02210; by Standish, Ayer
& Wood, Inc., the investment subadvisor to the Tax-Sensitive Equity Fund, at
its offices at One Financial Center, Boston, Massachusetts 02111; by Warburg,
Pincus Asset Management, Inc. the investment subadvisor to the Emerging Growth
Fund, at its offices at 466 Lexington Avenue., New York, New York, 10017-3147;
by Wellington Management Company, LLP, the investment subadvisor to the Growth
and Income Fund and the Investment Quality Bond Fund, at its offices at 75 State
Street, Boston, Massachusetts 02109; by Salomon Brothers Asset Management Inc
("SBAM"), the investment subadvisor to the U.S. Government Securities Fund,
Strategic Income Fund and National Municipal Bond Fund, at its offices at 7
World Trade Center, New York, New York 10048; by Salomon Brothers Asset
Management Limited, which provides certain advisory services to SBAM relating to
currency transactions and investments in non-dollar denominated debt securities
for the benefit of the Strategic Income Fund, at its offices at Victoria Plaza,
111 Buckingham Palace Road, London SW1W OSB, England; by J.P. Morgan Investment
Management Inc., the investment subadvisor to the International Growth and
Income Fund, at its offices at 522 5th Avenue, New York, New York 10036; by Fred
Alger Management, Inc., the investment adviser to the Small/Mid Cap Fund, at its
offices at One World Trade Center, New York, New York 10048; by Founders Asset
Management, LLC, the investment adviser to the International Small Cap and
Growth Equity Fund, at its offices at 2930 East Third Avenue, Denver, Colorado
80206; by the Registrant at its principal business office located at 286
Congress Street, Boston, Massachusetts 02110; by T. Rowe Price Associates, Inc.,
the investment subadvisor to the Equity-Income Fund, at its offices at 100 East
Pratt Street, Baltimore, Maryland 21202; by Morgan Stanley Dean Witter
Investment Management Inc., the investment subadvisor of the Global Equity Fund,
at its offices at 1221 Avenue of the Americas, New York, New York 10020; by
Manufacturers Adviser Corporation, the investment subadvisor to the Money Market
Trust, at its offices at 200 Bloor Street East, Toronto, Ontario, Canada M4W
lE5; by Boston Safe Deposit and Trust Company, custodian for the Global Growth
Fund's assets, at its offices at One Boston Place, Boston, Massachusetts 02108;
or by State Street Bank and Trust Company, the custodian and transfer agent for
all the other portfolios of the Registrant, at its offices at 225 Franklin
Street, Boston, Massachusetts 02110.

Item 29. Not applicable.

8
<PAGE>

Item 30. The Registrant undertakes to furnish to each person to whom a
prospectus of the Registrant is delivered a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.

9
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, North American Funds has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, duly authorized, in the City of Boston, and Commonwealth of
Massachusetts on the 10th day of December, 1998.

NORTH AMERICAN FUNDS
--------------------
Registrant

By: /s/ Bradford K. Gallagher
--------------------------------
Bradford K. Gallagher, President

Attest:

/s/ John I. Fitzgerald
- -------------------------
John I. Fitzgerald
Secretary
<PAGE>

Pursuant to the requirements of the Securities Act of 1933, as amended,
this amended Registration Statement has been signed by the following persons in
the capacities and on the 10th day of December, 1998.

Title
-----
*
- --------------------------------------
William F. Achtmeyer Trustee

*
- --------------------------------------
Don B. Allen Trustee

*
- --------------------------------------
William F. Devin Trustee

/s/ Bradford K. Gallagher
- --------------------------------------
Bradford K. Gallagher Trustee, Chairman and President

*
- --------------------------------------
Kenneth J. Lavery Trustee

/s/ Joseph T. Grause, Jr. Vice President and Treasurer
- -------------------------------------- (Principal Financial Officer)
Joseph T. Grause, Jr.

/s/ Thomas J. Brown Assistant Treasurer
- -------------------------------------- (Principal Accounting Officer)
Thomas J. Brown

* /s/ Bradford K. Gallagher
- --------------------------------------
Bradford K. Gallagher Attorney-in-fact

-2-
<PAGE>

Exhibit Index

(5)(e) Most Recent Form of Dealer Agreement Among CypressTree Funds
Distributors, Inc. and Selected Broker-Dealers

<PAGE>

Exhibit (5)(e)

DEALER AGREEMENT

AGREEMENT dated as of __________, 199__ by and among CypressTree Funds
Distributors, Inc. ("Cypress"), a Delaware corporation and ___________________
("Selling Dealer"), each of whom is registered as a broker-dealer under the
Securities and Exchange Act of 1934, as amended, and is a member of the
National Association of Securities Dealers, Inc. ("NASD").

I. INTRODUCTION

WHEREAS, Cypress has been appointed Principal underwriter of the shares of one
or more management investment companies registered under the Investment Company
Act of 1940 (the "Act") engaged in a continuous offering of shares ("Fund" or
"Funds") and has the rights as agent for the Funds to sell shares of the Funds;
and

WHEREAS, Selling dealer wishes to participate in the distribution of the shares
of the Funds;

NOW THEREFORE, in consideration of the premises of the mutual covenants
hereinafter contained, the parties hereto agree as follows:

II. AGREEMENT TO SELL

Subject to the terms of and conditions set forth in the Agreement, Cypress
shall, acting as agent for the Funds and not as principal, sell shares of the
Funds to Selling Dealer which shall, acting as principal (dealer) for its own
account and not as broker or agent for, or employee of, Cypress or the Fund,
resell such shares to the public.

III. TERMS AND CONDITIONS

All transactions in shares of the Funds shall be subject to the following terms
and conditions:

1. Shares will be offered pursuant to the then current prospectus of a
Fund. If such prospectus contains provisions inconsistent with this Agreement,
the prospectus shall control.

2. Orders received from Selling Dealer will be accepted through Cypress
only at the public offering price applicable to each order as set forth in the
then current prospectus of a Fund. All orders from Selling Dealer will be
confirmed by or on behalf of a Fund in writing. Procedures for processing orders
<PAGE>

shall be determined by Cypress and instructions relating thereto shall be
forwarded to selling Dealer from time to time. A Fund and Cypress each may
accept or reject any order in their sole discretion.

3. Cypress will pay to Selling Dealer from its own assets, and not from
Fund assets, such discounts or commission payments as specified in Schedule A
hereto and in the circumstances set forth in the then current prospectus of a
Fund.

4. If any shares of a Fund sold to Selling Dealer under the terms of this
Agreement are tendered for redemption or repurchase within seven business days
after the date of the confirmation of the original purchase by Selling Dealer,
Selling Dealer shall forfeit its rights to any discount or commission with
respect to such shares. Cypress shall notify Selling Dealer of any such
redemption or repurchase within ten business days from the date on which the
request for redemption or repurchase is delivered to Cypress or to a Fund, and
Selling Dealer shall immediately refund to Cypress any discount or commission
allowed or paid in connection with such sale. In the event of any such
redemption or repurchase, Cypress shall refund to a Fund its share of the sales
charge.

5. Selling Dealer shall purchase shares of a Fund only from the Fund
through Cypress and from Selling Dealer's customers. It is expressly understood
that Selling Dealer will not purchase shares subject to a periodic repurchase
offer from its customers. If shares are purchased from a Fund, Selling Dealer
agrees that all such purchases shall be made only to cover orders already
received by Selling Dealer or for its own bona fide investment. If shares are
purchased from customers, Selling Dealer agrees to pay such customers not less
than the price to be paid by a Fund with respect to purchase accepted through
Cypress at such time.

6. Selling Dealer shall sell shares only: (a) to customers at the public
offering price which is the next determined net asset value per share after the
order is received, in states where shares of the Fund may be legally sold by
Selling Dealer and in accordance with the terms of the then current prospectus,
registrations and permits of the Fund; and (b) to the Fund upon tender for
redemption or repurchase, which redemption or repurchase shall be effected in
the manner set forth in the then current prospectus of a Fund. In the event of
such a tender, excluding those pursuant to Rule 23c-3 under the Act, Selling
Dealer may act as principal for its own account, it agrees to

2
<PAGE>

pay its customer not less than the price received from a Fund or Cypress acting
for a Fund. If selling Dealer acts as agent for its customer, it agrees not to
charge the customer more than a fair commission for handling the transaction.

7. All sales of shares of a Fund by Selling Dealer shall be made at the
public offering price as determined as set forth in the then current prospectus
of a Fund, and the Selling Dealer shall not withhold orders from Cypress so as
to profit as a result of such withholding.

8. Cypress will not forward to a Fund for acceptance any conditional order
from Selling Dealer for the sale, repurchase or redemption of shares of the
Fund.

9. Payment for shares ordered by Selling Dealer must be received by a
Fund's transfer agent by the later of: (a) three business days after Selling
Dealer receives such customer's purchase order; or (b) one business day after
Selling Dealer receives payment from the customer. If such payment is not so
received, a Fund or Cypress as agent for a Fund reserves the right, without
notice, to immediately cancel the sale, in which case Selling Dealer shall be
held responsible for any loss, including loss of profit, suffered by Cypress or
a Fund resulting from the failure of Selling Dealer to make payment as specified
above.

10. Unless other arrangements for payment and delivery are made, shares of
a Fund sold to Selling Dealer pursuant to this Agreement shall be available for
delivery, against payment, at the office of State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, unless otherwise agreed to by
Cypress.

11. No person is authorized to make any representations concerning the
shares of a Fund except those contained in the then current prospectus of a Fund
and in such other printed information subsequently issued by a Fund of Cypress
as information supplemental to such prospectus. Any such supplemental materials
shall not be modified by Selling Dealer without the prior written consent of
Cypress. Moreover, Selling Dealer shall not make use of any advertisement or
sales literature which refers specifically to a Fund unless such material has
been approved in writing by Cypress prior to its first use by Selling Dealer. In
purchasing shares of a Fund from Cypress, Selling Dealer shall rely solely on
the

3
<PAGE>

representations contained in the then current prospectus of a Fund and
supplemental information referred to above.

12. Cypress shall provide Selling Dealer upon request, without any expense
to Selling Dealer, copies in reasonable numbers of the then current prospectus
of a Fund, any information issued supplementing such prospectus and such other
material as Cypress determines is necessary or desirable for use in connection
with sales of the shares of a Fund.

13. A Fund and Cypress each reserve the right in their discretion, without
notice, to suspend sales or withdraw the offering of the shares of a Fund
entirely.

14. Cypress will, upon request, inform Selling Dealer as to the states in
which shares of a Fund have been qualified for sale under, or are exempt from
the requirements of, applicable state securities laws. Cypress assumes no
responsibility or obligation, however, as to Selling Dealer's right to sell
shares of a Fund in any jurisdiction.

15. Selling Dealer appoints a Fund's transfer agent as its agent to execute
the purchase transactions of shares of a Fund in accordance with the terms and
provisions of any account, program, plan, or service established or used by
Selling Dealer's customers and to confirm each purchase to such customers on
Selling Dealer's behalf. Selling Dealer guarantees the legal capacity of its
customers purchasing shares of a Fund and any other person or entity in whose
name shares are to be registered.

16. In the event of a tender pursuant to a Rule 23c-3 periodic repurchase
offer conducted in accordance with procedures described in a Fund's prospectus,
Selling Dealer may act as principal for its own account or as agent for its
customer. Selling Dealer shall notify Cypress daily during the pendency of a
repurchase offer of the number of shares tendered by its customers, or by itself
acting as principal, for repurchase. Selling Dealer will be responsible for the
receipt of tendered shares by its customers, and forwarding such tenders to a
Fund or Cypress in a timely fashion, according to the terms of the repurchase
offer, and shall indemnify and hold harmless Cypress from any claims relating to
a customer's participation in a repurchase offer or failure to so participate.
Selling Dealer agrees to cooperate reasonably with a Fund, Cypress or any
affiliate of a Fund or Cypress, in the conduct of repurchase offers.

4
<PAGE>

17. Selling Dealer agrees that it will not sell any shares of a Fund
subject to a periodic repurchase offer to any account over which it exercises
discretionary authority.

GENERAL PROVISIONS

A. WAIVER

Failure of any party to insist upon strict compliance with any of the terms
and conditions of this Agreement shall not be construed as a waiver of any of
the terms and conditions, but the same shall remain in full force and effect. No
waiver of any of the provisions of this Agreement shall be deemed to be, or
shall constitute, a waiver of any other provisions, whether or not similar, nor
shall any waiver constitute a continuing waiver.

B. BINDING EFFECT

This Agreement shall be binding on and shall inure to the benefit of
parties to it and respective successors and assigns, provided that Selling
Dealer may assign this Agreement or any of the rights and obligations hereunder
only with the prior written consent of Cypress.

C. REGULATIONS

All parties agree to observe and comply with the existing laws, rules and
regulations of applicable local, state, and federal regulatory authorities and
with those which may be enacted or adopted while this Agreement is in force
regulating the business contemplated hereby in any jurisdiction in which the
business described herein is to be transacted.

D. DISPUTES

All parties agree to this Agreement agree to abide by the NASD's Business
Conduct Rules and agree that any dispute arising hereunder shall be submitted to
arbitration held in Boston, Massachusetts in accordance with the Code of
Arbitration Procedure of the NASD, or similar rules or codes, in effect at the
time of submission of any such dispute.

5
<PAGE>

E. GOVERNING LAW

This Agreement shall be construed in accordance with and governed by the
laws of the Commonwealth of Massachusetts.

F. AMENDMENT OF AGREEMENT

Cypress reserves the right to amend this Agreement at any time and Selling
Dealer agrees that an order to purchase shares of a Fund placed after notice of
any such amendment shall constitute Selling Dealer's consent to any such
amendment.

G. TERMINATION

Each of the parties to this Agreement has the right to cancel this
Agreement with or without cause on notice to the other party. Each of the
parties represents that it is a member in good standing of the NASD and agrees
that termination or suspension of such membership at any time shall immediately
terminate this Agreement.

H. LIABILITY

Cypress shall have full authority to take such action as it may deem
advisable in respect of all matters pertaining to the continuous offering.
Cypress shall be under no liability to Selling Dealer except for lack of good
faith, gross negligence, willful misconduct, and for obligations expressly
assumed by Cypress in this Agreement. Nothing contained in this paragraph is
intended to operate as, and the provisions of this paragraph shall not in any
way whatsoever constitute, a waiver by Selling Dealer of compliance with any
provision of the Securities Act, or of the rules and regulations of the
Securities and exchange Commission issued under the Securities Act.

I. PROSPECTUS

If the Prospectus contains any provisions inconsistent with the terms of
the Agreement, the Prospectus shall control.

J. NOTICES

All notices or communications shall be sent to the address shown below, or
to such other address as the party may request by giving written notice to the
other party.

6
<PAGE>

For CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, MA 02110
(800) 872-8037
Attention: Thomas J. Brown

For Selling Dealer

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

Tel. _______________________________

Attention: ________________________

CRD Number: ________________________

I. SIGNATURES

CypressTree Funds Distributors, Inc.

By:
-----------------------------------------------
Name and Title (Please Print)

- --------------------------------------------------
Signature

Selling Dealer:

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

By:
-----------------------------------------------
Name and Title (Please Print)

- --------------------------------------------------
Signature

- --------------------------------------------------
Back Office/Operations Contact

Tel:______________________________________________

7
<PAGE>

Tim Barns

Prior to joining Cypress, Mr. Barns was a founding member of BankBoston's
Leverage Finance Group dedicated to the origination of and investment in
leveraged bank loans. Mr. Barns managed a $2.5 billion loan portfolio that
experienced essentially no credit losses.

In addition, Mr. Barns co-managed a $2 billion portfolio of commercial and
industrial problem loans and was a key player in accomplishing the Bank's
dramatic reduction of problem assets.

As Vice President for European American Bank he managed a loan workout team
responsible for a $500 million loan portfolio. Mr. Barns was also a lending
officer in the Bank's energy and utility division.

Mr. Barns began his career with Ingersoll-Rand in the construction and mining
division.