NATIONS INSTITUTIONAL RESERVES, 485APOS, 1999-02-17

NATIONS INSTITUTIONAL RESERVES
485APOS, 1999-02-17

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As filed with the Securities and Exchange Commission
on February 17, 1999
Registration No. 33-33144; 811-6030

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|

Post-Effective Amendment No. 24 |X|

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|

Amendment No. 25 |X|

(Check appropriate box or boxes)
------------------------
THE CAPITOL MUTUAL FUNDS
(Exact Name of Registrant as specified in Charter)
111 Center Street
Little Rock, Arkansas 72201
(Address of Principal Executive Offices, including Zip Code)
--------------------------
Registrant's Telephone Number, including Area Code: (800) 321-7854
Richard H. Blank, Jr.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
(Name and Address of Agent for Service)
With copies to:
Robert M. Kurucza, Esq. Carl Frischling, Esq.
Marco E. Adelfio, Esq. Kramer, Levin, Naftalis
Morrison & Foerster LLP & Frankel
2000 Pennsylvania Ave., N.W., Suite 5500 919 Third Avenue
Washington, D.C. 20006 New York, New York 10022

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

<TABLE>
<S> <C>
|_| Immediately upon filing pursuant to Rule 485(b); or |_| on (date) pursuant to Rule 485(b), or

|_| 60 days after filing pursuant to Rule 485(a), or |_| on (date) pursuant to Rule 485(a)(1)

|X| 75 days after filing pursuant to paragraph (a)(2) |_| on (date) pursuant to paragraph (a)(2) of Rule 485

</TABLE>

If appropriate, check the following box:

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

<PAGE>

EXPLANATORY NOTE

This Post-Effective Amendment No. 24 to the Registration Statement of The
Capitol Mutual Funds (d/b/a/ Nations Institutional Reserves) (the "Trust") is
provided in order to register six new shell funds: Nations California Municipal
Bond Fund, Nations California Tax-Exempt Reserves, Nations Asset Allocation
Fund, Nations Capital Income Fund, Nations Intermediate Bond Fund and Nations
Blue Chip Fund.

<PAGE>

THE CAPITOL MUTUAL FUNDS
D/B/A NATIONS INSTITUTIONAL RESERVES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A
<S> <C>
Item No. Prospectus
- -------- ----------
1. Cover Page............................................... Cover Page

2. Synopsis................................................. Expenses Summary

3. Condensed Financial Information.......................... Financial Highlights; How
Performance Is Shown

4. General Description of Registrant........................ Cover Page; Objectives;
How Objectives Are
Pursued; Organization And
History

5. Management of the Fund.................................. How The Funds Are Managed

5A. Management's Discussion of Fund Performance............. *

6. Capital Stock and Other Securities....................... How To Buy Shares; How
The Funds Value Their
Shares; How Dividends And
Distributions Are Made;
Tax Information

7. Purchase of Securities Being Offered..................... Cover Page; How To Buy
Shares

8. Redemption or Repurchase................................. How To Redeem Shares; How
To Exchange Shares

9. Legal Proceedings........................................ Organization And History

PART B
Item No.

10. Cover Page............................................... Cover Page

- ----------
* Not Applicable

1
<PAGE>

11. Table of Contents....................................... Table of Contents

12. General Information and History......................... The Trust

13. Investment Objectives and Policies...................... Description of Permitted
Investments; Investment
Limitations; Securities
Lending

14. Management of the Registrant............................ Trustees and Officers

15. Control Persons and Principal Holders of Securities..... 5% Shareholders

16. Investment Advisory and Other Services.................. The Adviser; The
Administrator and
Co-Administrator;
Distribution and
Shareholder Servicing
Plans; and Custodian and
Transfer Agent

17. Brokerage Allocation ................................... Portfolio Transactions

18. Capital Stock and Other Securities...................... Description of Shares

19. Purchase, Redemption and Pricing of Securities
being Offered........................................... Net Asset-Value --
Purchases and
Redemptions; Distributor

20. Tax Status.............................................. Taxes

19. Underwriters............................................ Distribution and
Shareholder Servicing Plans

20. Calculation of Performance Data......................... Performance Information

21. Financial Statements.................................... Experts and Financial
Information
</TABLE>
2
<PAGE>

PART C
Item No.

Information required to be in Part C is set forth under the appropriate Item, so
numbered, in Part C of this document.

<PAGE>

[REDHERRING APPEARS ON LEFT SIDE OF PAGE]

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

PRELIMINARY PROSPECTUS DATED FEBRUARY 12, 1999
SUBJECT TO COMPLETION

Prospectus
This Prospectus describes NATIONS CALIFORNIA TAX-EXEMPT RESERVES (the "Fund")
of Nations Institutional Reserves (formerly known as The Capitol Mutual Funds)
(the "Trust"), an open-end management investment company which seeks to provide
a convenient and economical means of investing in one or more professionally
managed funds. The Fund is a non-diversified money market fund. This Prospectus
describes one class of shares of the Fund -- Adviser Class Shares.

The Fund's Adviser Class Shares are offered to institutional investors that
meet the $100,000 minimum initial investment requirement and to NationsBank,
N.A. ("NationsBank", and Bank of America National Trust and Savings Association
("Bank of America")), their affiliates and correspondents, for the investment
of their own funds or funds for which they act in a fiduciary, agency or
custodial capacity.

IT IS A NON-FUNDAMENTAL POLICY OF THE FUND TO USE ITS BEST EFFORTS TO MAINTAIN
A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE.

AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

This Prospectus sets forth concisely the information about the Fund that a
prospective purchaser of Adviser Class Shares should consider before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund is contained in a separate Statement of
Additional Information (the "SAI"), that has been filed with the Securities and
Exchange Commission (the "SEC") and is available without charge by writing or
calling the Trust at the address or telephone number shown below. The SAI for
the Trust, dated September 1, 1998, as supplemented, is incorporated by
reference in its entirety into this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
in this Prospectus and other information regarding registrants that file
electronically with the SEC. NationsBanc Advisors, Inc. ("NBAI") is the
investment adviser to the Fund. TradeStreet Investment Associates, Inc.
("TradeStreet") is the investment sub-adviser to the Fund. As used herein the
term "Adviser" shall mean NBAI and/or TradeStreet as the context may require.
For additional information, see "How The Fund Is Managed."

SHARES OF NATIONS FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, NATIONSBANK, BANK OF AMERICA OR ANY OF THEIR
AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.

NATIONSBANK AND CERTAIN OF ITS AFFILIATES PROVIDE SERVICES TO NATIONS FUNDS,
FOR WHICH THEY ARE COMPENSATED. STEPHENS INC., WHICH IS NOT AFFILIATED WITH
NATIONSBANK, IS THE SPONSOR AND ADMINISTRATOR AND SERVES AS THE DISTRIBUTOR FOR
NATIONS FUNDS.

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

Nations California Tax-Exempt Reserves

Adviser Class Shares
May 21, 1999

For Fund information call:
1-800-626-2275

Nations Institutional Reserves
c/o Stephens Inc.
One NationsBank Plaza
33rd Floor
Charlotte, NC 28255

[NATIONS FUNDS LOGO APPEARS HERE]

ADVISER 5/99
<PAGE>

Table Of Contents

About The Prospectus Summary 3
Fund -----------------------------------------------------

Expenses Summary 4
-----------------------------------------------------

Objective 5
-----------------------------------------------------

How Objective Is Pursued 5
-----------------------------------------------------

General Investment Policies 5
-----------------------------------------------------

How Performance Is Shown 7
-----------------------------------------------------

How The Fund Is Managed 7
-----------------------------------------------------

Organization And History 10
-----------------------------------------------------

How To Buy Shares 10
-----------------------------------------------------

About Your How To Redeem Shares 11
Investment -----------------------------------------------------

How To Exchange Shares 12
-----------------------------------------------------

Shareholder Servicing Plan 12
-----------------------------------------------------

How The Fund Values Its Shares 13
-----------------------------------------------------

How Dividends And Distributions Are Made;

Tax Information 13
-----------------------------------------------------

Financial Highlights 14
-----------------------------------------------------

Appendix A -- Portfolio Securities 16
-----------------------------------------------------

Appendix B -- Description Of Ratings 23
-----------------------------------------------------

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

2
<PAGE>

About The Fund

Prospectus Summary
o TYPE OF COMPANY: Open-end management investment company.
o INVESTMENT OBJECTIVE AND POLICIES:

o Nations California Tax-Exempt Reserves' investment objective is to seek
current income exempt from Federal income tax and California state
personal tax, a stable share price, and daily liquidity.

o INVESTMENT ADVISER: NationsBanc Advisors, Inc. serves as the investment
adviser to the Fund. NBAI provides investment management services to more than
60 investment company portfolios in the Nations Funds Family. TradeStreet
Investment Associates, Inc., an affiliate of NBAI, provides investment
sub-advisory services to the Fund. For more information about the investment
adviser and investment sub-adviser to the Fund, see "How The Fund Is Managed."

o DIVIDENDS AND DISTRIBUTIONS: The Fund declares dividends daily and pays them
monthly. The Fund's net realized capital gains, including net short-term
capital gains, are distributed at least annually.

o RISK FACTORS: Although NBAI, together with the sub-adviser, seek to achieve
the investment objective of the Fund, there is no assurance that they will be
able to do so. Investments in the Fund are not insured against loss of
principal. Although the Fund seeks to maintain a stable net asset value of
$1.00 per share, there is no assurance that it will be able to do so. For a
discussion of these and other factors, see "General Investment Policies --
Restraints on Investments by the Fund" and "Appendix A."

o MINIMUM PURCHASE: The minimum initial investment in Adviser Class Shares is
$100,000.

3
<PAGE>

Expenses Summary

Expenses are one of several factors to consider when investing in the Fund. The
following tables summarize operating expenses for Adviser Class Shares of the
Fund. There are no transaction fees imposed upon the purchase, redemption or
exchange of shares. The Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in the Fund over specified periods.

Annual Operating Expenses
(as a percentage of average net assets)

<TABLE>
<CAPTION>
Nations
California
Tax-Exempt
Reserves
<S> <C>
Management Fees (After Fee Waivers) .10%
Rule 12b-1 Fees (Shareholder Servicing Fees) .25%
Other Expenses (After Expense Reimbursements) .10%
Total Operating Expenses (After Fee Waivers and Expense Reimbursements) .45%
</TABLE>

Example: An investor would pay the following expenses on a $1,000 investment in
Adviser Class Shares of the Fund assuming (1) a 5% annual return and (2)
redemption at the end of each time period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Nations California Tax-Exempt Reserves $5 $14 $25 $57
</TABLE>

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in Adviser Class Shares will
bear either directly or indirectly. The figures contained in the above table
are based on estimates. There is no assurance that any fee waivers and/or
reimbursements will continue. In particular, to the extent Other Expenses are
less than those shown, waivers and/or reimbursements of Management Fees, if
any, may decrease. Shareholders will be notified of any decrease that
materially increases Total Operating Expenses. If fee waivers and/or
reimbursements are decreased or discontinued, the amounts contained in the
"Example" above may increase. The information set forth in the foregoing table
and example relates only to the Adviser Class Shares. The Fund also offers
Capital Class, Liquidity Class, Daily Class, Investor Class, Service Class,
Trust Class and Market Class Shares. For a more complete description of the
Fund's operating expenses, see "How The Fund Is Managed."

Absent fee waivers and expense reimbursements, "Management Fees," "Other
Expenses" and "Total Operating Expenses" for Advisor Class Shares of the Fund
would have been .15%, .14% and .54%, respectively.

THE FOREGOING SHOULD NOT BE CONSIDERED TO BE AN ACTUAL REPRESENTATION OF PAST
OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.

4
<PAGE>

Objective

The Fund endeavors to achieve its investment objective by investing in a
non-diversified portfolio of high quality money market instruments with
remaining maturities of 397 days or less from the date of purchase. Securities
subject to repurchase agreements may have longer maturities.

Nations California Tax-Exempt Reserves:
Nations California Tax-Exempt Reserves' investment objective is to seek current
income exempt from Federal income tax and California state personal income tax,
a stable share price, and daily liquidity.

Although the Adviser seeks to achieve the investment objective of the Fund,
there is no assurance that it will be able to do so. No single Fund should be
considered, by itself, to provide a complete investment program for any
investor. Investments in the Fund are not insured against loss of principal.

How Objective Is Pursued

Nations California Tax-Exempt Reserves

In pursuing its investment objective, the Fund will invest primarily in
municipal securities issued by or on behalf of the State of California and
other governmental issuers. The Fund is a non-diversified fund that maintains
an average maturity of 90 days or less, and invests only in securities with
maturities of 13 months or less. Under normal market conditions, at least 80%
of the Fund's total assets will be invested in municipal securities which are
exempt from California state personal income tax and at no time will more than
5% of the Fund's net assets be invested in any one category of taxable
securities. The Fund operates as a non-diversified fund (except to the extent
diversification is required for federal income tax purposes).

The Fund may hold cash reserves pending investment, or may invest in taxable
obligations, during temporary defensive periods if, in the opinion of the
Adviser, desirable tax-exempt obligations are unavailable.

Although the Fund is permitted to invest a portion of its assets in second tier
securities (as defined below) in accordance with Rule 2a-7 under the 1940 Act,
the Fund invests only in first tier securities (as defined below). For more
information concerning the Fund's investments, see "Appendix A."

General Investment Policies

For a description of the Fund's permitted investments see "Appendix A" and for
further information about ratings see "Appendix B."

Restraints on Investments by the Fund: In order for the Fund to value its
investments on the basis of amortized cost (see "How The Fund Values Its
Shares"), investments must be in accordance with the requirements of Rule 2a-7
under the 1940 Act, some of which are described below. A money market fund is
limited to acquiring obligations with a remaining maturity of 397 days or less,
or obligations with greater maturities, provided such obligations are subject
to demand features or resets which are less than 397 days, and to maintaining a
dollar-weighted average portfolio maturity of 90 days or less. Quality
requirements generally limit investments to U.S. dollar denominated instruments
determined to present minimal credit risks and that, at the time of
acquisition, are rated in the first or second rating categories (known as
"first tier" and "second tier" securities, respectively) by the required number
of NRSROs (at least two or, if only one NRSRO has rated the security, that one
NRSRO) or, if unrated by any NRSRO, are (i) comparable in priority and

5
<PAGE>

security to a class of short-term securities of the same issuer that has the
required rating, or (ii) determined to be comparable in quality to securities
having the required rating. In the event that the Fund's investment
restrictions or permissible investments are more restrictive than the
requirements of Rule 2a-7, the Fund's own restrictions will govern.

Year 2000 Issue: Many computer programs employed throughout the world use two
digits to identify the year. Unless modified, these programs may not correctly
handle the change from "99" to "00" on January 1, 2000, and may not be able to
perform necessary functions. Any failure to adapt these programs in time could
hamper the Fund's operations. The Fund's principal service providers have
advised the Fund that they have been actively working on implementing necessary
changes to their systems, and that they expect that their systems will be
adapted in time, although there can be no assurance of success. Because the
Year 2000 issue affects virtually all organizations, the companies or
governmental entities in which the Fund invests could be adversely impacted by
the Year 2000 issue, although the extent of such impact cannot be predicted. To
the extent the impact on a portfolio holding is negative, the Fund's return
could be adversely affected.

Investment Limitations: The Fund is subject to a number of investment
limitations. The following investment limitations are matters of fundamental
policy and may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares. Other investment limitations that
cannot be changed without such a vote of shareholders are described in the SAI.

The Fund may not:

1. Purchase securities (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) of any one issuer if as a result
more than 5% of its total assets would be invested in securities of such issuer
or it would own more than 10% of the voting securities of such issuer except
that (a) up to 25% of the Fund's total assets may be invested without regard to
this limitation; and (b) the Fund's assets may be invested in securities of one
or more diversified management investment companies to the extent permitted by
the 1940 Act.

2. Purchase any securities which would cause more than 25% of the total assets
of the Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in U.S. Government Obligations.

3. Make loans, except that (a) the Fund may purchase or hold debt instruments
in accordance with its investment objective and policies; and (b) the Fund may
enter into repurchase agreements and non-negotiable time deposits, provided
that repurchase agreements and non-negotiable time deposits maturing in more
than seven days, illiquid restricted securities and other securities which are
not readily marketable do not exceed, in the aggregate, 10% of the Fund's net
assets.

The foregoing percentages will apply at the time of the purchase of a security.

Although certain investment policies of the Fund are fundamental policies, its
investment objective is non-fundamental and may be changed without shareholder
approval. In addition, although the Fund intends to maintain a stable net asset
value of $1.00 per share, this is not a fundamental policy. There is no
assurance that the Fund will be able to maintain a constant net asset value of
$1.00 per share.

Fundamental policies cannot be changed with respect to the Fund without the
consent of the holders of a majority of the Fund's outstanding shares. The term
"majority of the outstanding shares" means the vote of (i) 67% or more of the
Fund's shares present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii)
more than 50% of the Fund's outstanding shares, whichever is less.

6
<PAGE>

How Performance Is Shown

From time to time the Fund may advertise the "yield", "effective yield" and
"tax-equivalent yield" of a class of shares. YIELD, EFFECTIVE YIELD AND TAX-
EQUIVALENT YIELD FIGURES ARE BASED ON HISTORICAL DATA AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE.

The "yield" of a class of shares of the Fund refers to the income generated by
an investment in the Fund over a stated seven-day period. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an investment in a class
of shares of the Fund is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this
assumed reinvestment.

The "tax-equivalent yield" of each class of shares of the Fund shows the level
of taxable yield which, after payment of Federal income tax in respect of such
yield, equals the class's yield. The tax-equivalent yield of a class of shares
will always be higher than its yield.

Investment performance, which will vary, is based on many factors, including
market conditions, the composition of the Fund's portfolio and the Fund's
operating expenses. Investment performance also often reflects the risks
associated with the Fund's investment objective and policies. These factors
should be considered when comparing the Fund's investment results to those of
other mutual funds and other investment vehicles.

Since yields fluctuate, yield data cannot necessarily be used to compare an
investment in the Fund with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed-upon or guaranteed fixed
yield for a stated period of time. Any fees charged by selling and/or servicing
agents to their customers' accounts in connection with investments in the Fund
will not be included in calculations of yield.

In addition to Adviser Class Shares, the Fund offers Liquidity Class, Capital
Class, Market Class, Daily Class, Trust Class, Investor Class and Service Class
Shares of the Fund. Each class of shares may bear different sales charges,
shareholder servicing fees and other expenses, which may cause the performance
of a class to differ from the performance of the other classes. Performance
quotations will be computed separately for each class of the Fund's shares. The
Fund's annual report contains additional performance information and is
available upon request without charge from the Fund's distributor or an
investor's Agent (as defined below). To obtain additional information regarding
the Fund's other classes of shares which may be available to you or to obtain
the Fund's annual report, call Nations Funds at the toll-free number indicated
on the cover of this Prospectus.

How The Fund Is Managed

The business and affairs of Nations Institutional Reserves are managed under
the direction of its Board of Trustees. The Trust's SAI contains the names of
and general background information concerning each Trustee of Nations
Institutional Reserves.

As described below, the Fund is advised by NBAI which is responsible for the
overall management and supervision of the investment management of the Fund.
The Fund also is sub-advised by a separate investment sub-adviser, which as a
general matter is responsible for the day-to-day investment decisions for the
Fund.

The Trust and the Advisers have adopted codes of ethics which contain policies
on personal securities transactions by "access persons," including portfolio
managers and investment analysts. These policies substantially comply in all
material respects with the recommendations set forth in the May 9,

7
<PAGE>

1994 Report of the Advisory Group on Personal Investing of the Investment
Company Institute.

Investment Adviser: NationsBanc Advisors, Inc. serves as investment adviser to
the Fund. NBAI is a wholly owned subsidiary of NationsBank, which in turn is a
wholly owned banking subsidiary of BankAmerica Corporation, a bank holding
company organized as a Delaware corporation. NBAI has its principal offices at
One NationsBank Plaza, Charlotte, North Carolina 28255.

TradeStreet Investment Associates, Inc., with principal offices at One
NationsBank Plaza, Charlotte, North Carolina 28255, serves as investment
sub-adviser to the Fund. TradeStreet is a wholly owned subsidiary of
NationsBank. TradeStreet provides investment management services to
individuals, corporations and institutions.

Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment policies, the Adviser formulates
guidelines and lists of approved investments for the Fund, makes decisions with
respect to and places orders for the Fund's purchases and sales of portfolio
securities and maintains records relating to such purchases and sales. The
Adviser is authorized to allocate purchase and sale orders for portfolio
securities to certain financial institutions including, in the case of agency
transactions, financial institutions which are affiliated with NationsBank or
which have sold shares in the Fund, if the Adviser believes the quality of the
transactions and the commissions are comparable to what they would be with
other qualified brokerage firms. From time to time, to the extent consistent
with its investment objective, policies and restrictions, the Fund may invest
in securities of companies with which NationsBank has a lending relationship.

For the services provided and expenses assumed pursuant to the investment
advisory agreement, NBAI is entitled to receive advisory fees, computed daily
and paid monthly, at an annual rate of .30% of the average daily net assets of
the Fund.

For the services provided and the expenses assumed pursuant to the investment
sub-advisory agreement, NBAI will pay TradeStreet sub-advisory fees, computed
daily and paid monthly, at the annual rate of .033% of the average daily net
assets of the Fund.

NBAI, TradeStreet and the co-administrators of the Fund have voluntarily agreed
to waive their fees (and reimburse the Fund for certain expenses) in order to
limit the total annualized operating expenses of the Adviser Class Shares
(exclusive of Rule 12b-1 fees) of the Fund (as a percentage of average daily
net assets) to .20%.

NBAI, TradeStreet, the administrator and the co-administrator each reserves the
right, in its sole discretion, to terminate this voluntary fee waiver at any
time. Shareholders will be notified in advance if and when the waiver is
terminated.

For the fiscal period from March 1, 1997, to February 28, 1998 the Pacific
Horizon Funds paid Bank of America, under a previous investment advisory
agreement, fees computed daily and paid monthly, at the annual rate of .10% of
the Fund's daily net assets.

The Tax-Exempt Money Market Management Team of TradeStreet is responsible for
the day-to-day management of the Fund.

Morrison & Foerster LLP, counsel to Nations Funds and special counsel to
NationsBank, has advised Nations Funds and NationsBank that NationsBank and its
affiliates may perform the services contemplated by the investment advisory
agreement and this Prospectus without violation of the Glass-Steagall Act. Such
counsel has pointed out, however, that there are no controlling judicial or
administrative interpretations or decisions and that future judicial or
administrative interpretations of, or decisions relating to, present federal or
state statutes, including the Glass-Steagall Act, and regulations relating to
the permissible activities of banks and their subsidiaries or affiliates, as
well as future changes in such federal or state statutes, regulations and
judicial or administrative decisions or interpretations thereof, could prevent
such entities from continuing to perform, in whole or in part, such services.
If such entities were prohibited from performing any such services, it is
expected that new agreements would be proposed or entered into with another
entity or entities qualified to perform such services.

Other Service Providers: Stephens Inc. ("Stephens"), with principal offices at
111 Center Street, Little Rock, Arkansas 72201, serves as co-administrator of
the Fund. NBAI also serves as co-administrator of the Fund with Stephens.

8
<PAGE>

Under the co-administration arrangements, Stephens and NBAI provide various
administrative, accounting and corporate secretarial services to the Fund.
Stephens and NBAI shall be entitled to receive a combined fee at the annual
rate of .10% of the Fund's average daily net assets, as well as certain
out-of-pocket expenses, as well as certain out-of-pocket expenses.

The Bank of New York ("BNY"), located at 90 Washington Street, New York, New
York 10286, serves as sub-administrator for the Fund. Under the sub-
administration arrangements, BNY assists NBAI and Stephens in performing
certain administrative and accounting services.

Shares of the Fund are sold on a continuous basis by Stephens, as the Fund's
sponsor and distributor. Stephens is a registered broker/dealer. The Trust has
entered into a distribution agreement with Stephens which provides that
Stephens has the exclusive right to distribute shares of the Fund. No
compensation is paid to Stephens for distribution services for the Adviser
Class Shares.

The Adviser may also pay out of its own assets amounts to Stephens and other
broker/dealers in connection with the provision of administrative and/or
distribution related services to shareholders.

In addition, Stephens has established a non-cash compensation program, pursuant
to which broker/dealers or financial institutions that sell shares of the
Fund may earn additional compensation, including trips to sales seminars or
vacation destinations, tickets to sporting events, theater or other
entertainment, opportunities to participate in golf or other outings and gift
certificates for meals or merchandise. This non-cash compensation program may
be amended or terminated at any time by Stephens.

BNY (the "Custodian") provides custodial services for the assets of the Fund.In
return for providing custodial services to the Nations Funds Family, the BNY is
entitled to receive, in addition to out-of-pocket expenses, fees at the rate of
(i) 3/4 of one basis point per annum on the aggregate net assets of all
Nations Funds' non-money market funds up to $10 billion; and (ii) 1/2 of one
basis point on the excess including all Nations Funds' money market funds.

First Data Investor Services Group, Inc. ("First Data"), a wholly owned
subsidiary of First Data Corporation, with principal offices at One Exchange
Place, Boston, Massachusetts 02109, serves as transfer agent (the "Transfer
Agent") for the Fund's shares.

PricewaterhouseCoopers LLP serves as the independent accountant of the Trust.
Their address is 160 Federal Street, Boston, Massachusetts 02110.

Expenses: The accrued expenses of the Fund are deducted from the Fund's total
accrued income before dividends are declared. These expenses include, but are
not limited to: fees paid to the Adviser, Stephens, BNY and First Data; taxes;
interest; fees (including fees paid to Nations Funds' Trustees and directors);
federal and state securities registration and qualification fees; brokerage
fees and commissions; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; charges of
the Custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholder reports and shareholder meetings;
other expenses which are not expressly assumed by the Adviser, Stephens, BNY or
First Data under their respective agreements with Nations Funds; and any
extraordinary expenses. Adviser Class Shares may bear certain class specific
expenses and also bear certain additional shareholder service and distribution
costs. Any general expenses of Nations Institutional Reserves that are not
readily identifiable as belonging to a particular investment portfolio are
allocated among all portfolios in the proportion that the assets of a portfolio
bears to the assets of Nations Institutional Reserves or in such other manner
as the Board of Trustees deems appropriate.

9
<PAGE>

Organization And History

The Fund is a member of the Nations Funds Family, which consists of Nations
Fund Trust, Nations Fund, Inc., Nations Fund Portfolios, Inc., Nations
Institutional Reserves, Nations Annuity Trust and Nations LifeGoal Funds, Inc.
The Nations Funds Family currently has more than 70 distinct investment
portfolios and total assets in excess of $60 billion.

Nations Institutional Reserves: Nations Institutional Reserves (formerly known
as The Capitol Mutual Funds), is an open-end management investment company
established as a Massachusetts business trust under an Agreement and
Declaration of Trust dated January 22, 1990. The Agreement and Declaration of
Trust permits the Trust to offer separate series of units of beneficial
interest ("shares") and different classes of each series. The Fund is a series
of the Trust. Except for differences between classes of the Fund pertaining to
distribution and shareholder servicing arrangements, each share of the Fund
represents an equal proportionate interest in the Fund. This Prospectus relates
only to the Adviser Class Shares of Nations California Tax-Exempt Reserves.

To obtain additional information regarding the Fund's other classes of shares
which may be available to you, contact Nations Funds at 1-800-626-2275.

Each share held entitles the shareholder of record to one vote. As a
Massachusetts business trust, the Trust is not required to hold annual meetings
but approval will be sought for certain changes in the operation of the Trust
and for the election of Trustees under certain circumstances. In addition, a
Trustee may be removed by the remaining Trustees or by shareholders at a
special meeting called upon written request of shareholders owning at least 10%
of the outstanding shares of the Trust. In the event that such a meeting is
requested, the Trust will provide appropriate assistance and information to the
shareholders requesting the meeting.

As of , 1999, NationsBank, Bank of America and their affiliates possessed
or shared power to dispose or vote with respect to more than 25% of the
outstanding shares of the Trust and therefore could be considered to be a
controlling person of the Trust for purposes of the 1940 Act. For more detailed
information concerning the percentage of each class or series of shares over
which NationsBank and its affiliates possessed or shared power to dispose or
vote as of a certain date, see the SAI.

The management and affairs of the Trust are supervised by the Trustees under
the laws of the Commonwealth of Massachusetts. The Trustees have approved
contracts under which, as described above, certain companies provide essential
management services to the Trust. Further information regarding individual
Trustees may be found in the SAI.

About Your Investment

How To Buy Shares

Adviser Class Shares are offered to institutional investors, including
NationsBank, its affiliates and correspondents, for the investment of their own
funds or funds for which they act in a fiduciary, agency or custodial capacity.
The minimum initial investment in Adviser Class Shares is $100,000.

10
<PAGE>

fer Agent or their respective agents. A purchase order must be received by
Stephens, the Transfer Agent or their respective agents by 12:00 noon, Eastern
time. A purchase order received after such time will not be accepted; notice
thereof will be given to the institution placing the order and any funds
received will be returned promptly to the sending institution. If federal funds
are not available by 4:00 p.m., Eastern time, the order will be canceled.

The purchase price is the net asset value per share next determined after
acceptance of the order by Stephens, the Transfer Agent or their respective
agents. The agents are responsible for transmitting orders for purchases of
Adviser Class Shares by their customers and delivering required funds on a
timely basis. Stephens is also responsible for transmitting orders it receives
to Nations Funds.

Telephone Transactions: Shareholders may effect purchases, redemptions and
exchanges by telephone.See "How to Redeem Shares" and "How to Exchange Shares"
below. If a shareholder desires to elect the telephone transaction feature
after opening an account, a signature guarantee will be required. Shareholders
should be aware that by electing the telephone transaction feature, such
shareholders may be giving up a measure of security that they may have if they
were to authorize written requests only. A shareholder may bear the risk of any
resulting losses from a telephone transaction. Nations Funds will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine, and if Nations Funds and its service providers fail to employ such
measures, they may be liable for any losses due to unauthorized or fraudulent
instructions. Nations Funds provides written confirmation to shareholders of
each telephone share transaction. In addition, Nations Funds reserves the right
to record all telephone conversations. Shareholders should be aware that during
periods of significant economic or market change, telephone transactions may be
difficult to complete.

How To Redeem Shares

Redemption orders must be received on a Business Day before 12:00 noon, Eastern
time, and payment will normally be wired the same day. The Trust reserves the
right to wire redemption proceeds within three Business Days after receiving a
redemption order if, in the judgment of the Adviser, an earlier payment could
adversely impact the Fund. Redemption orders will not be accepted by Stephens,
the Transfer Agent or their respective agents after 12:00 noon, Eastern time,
for execution on that Business Day. The redemption price is the net asset value
per share next determined after acceptance of the redemption order by Stephens,
the Transfer Agent or their respective agents. Redeemed shares are not entitled
to dividends declared on the day the redemption order is effective. A
redemption will generally result in a taxable capital gain or loss for Federal
income tax purposes.

The Trust may redeem an investor's account upon 30 days' written notice if the
balance in the investors' account drops below $500 as a result of redemptions.
Share balances also may be redeemed at the direction of an Agent pursuant to
arrangements between the Agent and its Customers. The Trust also may redeem
shares of the Fund involuntarily or make payment for redemption in readily
marketable securities or other property under certain circumstances in
accordance with the 1940 Act.

Prior to effecting a redemption of Adviser Class Shares represented by
certificates, the Transfer Agent must have received such certificates at its
principal office. All such certificates must be endorsed by the redeeming
shareholder or accompanied by a signed stock power, in each instance with the
signature guaranteed by a commercial bank or a member of a major stock
exchange, unless other arrangements satisfactory to Nations Funds have
previously been made. Nations Funds may require any additional information
reasonably necessary to evidence that a redemption has been duly authorized.

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<PAGE>

How To Exchange Shares

The exchange feature enables a shareholder of Adviser Class Shares of the Fund
to acquire Adviser Class Shares of another fund when that shareholder believes
that a shift between Funds is an appropriate investment decision. An exchange
of Adviser Class Shares for Adviser Class Shares of another fund is made on the
basis of the next calculated net asset value per share of the Fund after the
exchange order is received.

The Fund and each of the other funds of Nations Funds may limit the number of
times this exchange feature may be exercised by a shareholder within a
specified period of time. Also, the exchange feature may be terminated or
revised at any time by Nations Funds upon such notice as may be required by
applicable regulatory agencies (presently 60 days for termination or material
revision), provided that the exchange feature may be terminated or materially
revised without notice under certain unusual circumstances.

The current prospectus for each fund of Nations Funds describes its investment
objective and policies, and shareholders should obtain a copy and examine it
carefully before investing. Exchanges are subject to the minimum investment
requirement and any other conditions imposed by each fund. In the case of any
shareholder holding a share certificate or certificates, no exchanges may be
made until all applicable share certificates have been received by the Transfer
Agent and deposited in the shareholder's account. For Federal income tax
purposes, an exchange will be treated in the same manner as a redemption of
shares.

The Adviser Class Shares exchanged must have a current value of at least
$100,000. Nations Funds and Stephens reserve the right to reject any exchange
request. Only shares that may legally be sold in the state of the investor's
residence may be acquired in an exchange. Only shares of a class that is
accepting investments generally may be acquired in an exchange.

During periods of significant economic or market change, telephone exchanges
may be difficult to complete. In such event, shares may be exchanged by mailing
your request directly to the institution through which the original shares were
purchased.

Shareholder Servicing Plan

The Trustees have approved a Shareholder Servicing Plan (the "Servicing Plan")
with respect to Adviser Class Shares of the Fund. Pursuant to the Servicing
Plan, the Trust, on behalf of the Fund, may enter into shareholder servicing
agreements ("Servicing Agreements") with banks, broker/dealers and other
financial institutions, including certain affiliates of NationsBank ("Servicing
Agents" also referred to as "Agents"). Under the Servicing Agreements, the
Servicing Agents will provide various shareholder support services to their
customers that are the owners of Adviser Class Shares ("Customers"), including
general shareholder liaison services; processing purchase, exchange and
redemption requests from Customers and placing orders with Stephens or the
Transfer Agent; processing dividend and distribution payments from the Fund on
behalf of Customers; providing sales information periodically to customers
showing their position in Adviser Class Shares; arranging for bank wires; and
providing such other similar services as may reasonably be requested.

The Servicing Plan authorizes the Trust to pay the Servicing Agents a fee,
calculated daily and paid monthly, at a rate set from time to time by the Board
of Trustees, provided that the annual rate may not exceed .25% of the average
daily net asset value of the Fund's Adviser Class Shares. The Servicing Plan
also provides that, to the extent any portion of the fees payable under the
Servicing Plan is deemed to be for services primarily intended to result in the
sale of Fund shares, such fees are deemed approved and may be paid under the
Servicing Plan. Accordingly, the Servicing Plan was approved and will be
operated pursuant to Rule 12b-1 under the 1940 Act.

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<PAGE>

The Trust understands that Servicing Agents may charge fees to their Customers
who are the owners of Adviser Class Shares for additional services provided in
connection with their Customers' accounts. These fees would be in addition to
any amounts which may be received by Servicing Agents under their Servicing
Agreements with the Trust. The Servicing Agreements require Servicing Agents to
disclose to their Customers any compensation payable to the Servicing Agents by
the Trust and any other compensation payable by Customers in connection with
the investment of their assets in Adviser Class Shares. Customers should read
this Prospectus in light of the terms governing their accounts with their
Servicing Agents.

Nations Funds may suspend or reduce payments under the Servicing Plan at any
time, and payments are subject to the continuation of the Servicing Plan
described above and the terms of the Servicing Agreements. See the SAI for more
details on the Servicing Plan.

How The Fund Values Its Shares

The net asset value of a share of each class is calculated by dividing the
total value of its respective assets, less liabilities, by the number of shares
in the class outstanding. Shares are valued as of 12:00 noon, Eastern time, on
each Business Day. Currently, the days on which the Federal Reserve Bank of New
York is closed (other than weekends) are: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Memorial Day (observed), Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.

The assets of the Fund are valued based upon the amortized cost method.
Although Nations Funds seeks to maintain the net asset value per share of the
Fund at $1.00, there can be no assurance that its net asset value per share
will not vary.

How Dividends And Distributions Are Made; Tax Information

Dividends and Distributions: The net income of the Fund is determined and
declared on each Business Day as a dividend to shareholders of record as of
12:00 noon, Eastern time, on the day of declaration. Dividends are paid by the
Fund in additional shares of the same class, unless the shareholder has elected
to take such payment in cash, on the first Business Day of each month.
Shareholders may change their election by providing written notice to the
Transfer Agent at least 15 days prior to the change.

The amount of dividends payable on Capital Class Shares will be more than the
dividends payable on Liquidity Class, Adviser Class, Market Class, Daily Class,
Investor Class, Service Class and Trust Class Shares because of the
distribution and/or shareholder servicing expenses charged to such shares.

Tax Information: The following discussion regarding taxes is based on tax laws
which were in effect as of the date of this Prospectus and summarizes only some
of the important tax considerations generally affecting the Fund and its
shareholders. It is not intended as a substitute for careful tax planning;
shareholders should consult their own tax advisors with respect to their
specific tax situation. Further Federal income tax considerations are discussed
in the SAI.

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<PAGE>

Dividends distributed from the Fund attributable to income from other
investments and net short-term capital gain will be taxable (for both Federal
and state purposes) to shareholders as ordinary income. Corporate shareholders
of the Fund will not be able to deduct a portion of their distributions when
determining their taxable income.

The Fund will pass on to shareholders any net capital gain (for this purpose,
generally the excess of net long-term capital gain over net short-term capital
loss) earned by the Fund as capital gain distributions. In general, these
distributions will be taxable to shareholders as long-term capital gain.
Noncorporate shareholders may be taxed on such distributions at preferential
rates.

To the extent dividend and other distributions from the Fund are taxable, such
distributions will be taxable to shareholders when paid, whether such
distributions are paid in cash or automatically reinvested in additional Fund
shares. However, distributions declared in October, November and December of
one year and distributed in January of the following year will be taxable as if
they paid on December 31 of the first year. At the end of each year,
shareholders will be notified as to the federal income tax status of their
distributions from the Fund during the year.

As long as the Fund continually maintains a $1.00 net asset value per share, a
shareholder ordinarily will not recognize taxable gain or loss on the
redemption or exchange of his or her Fund shares.

Foreign shareholders may be subject to different tax treatment, including
withholding taxes. In certain circumstances, U.S. residents may also be subject
to backup withholding at a 31% rate on distributions from and redemption
proceeds paid by the Fund.

Financial Highlights

The following financial highlights for Adviser Class Shares of the Fund have
been derived from the audited financial statements of the Pacific Horizon
California Tax-Exempt Money Market Fund (the predecessor portfolio).
PricewaterhouseCoopers LLP is the independent accountant to the Pacific Horizon
California Tax-Exempt Money Market Fund. The reports of PricewaterhouseCoopers
LLP for the fiscal year ended February 28, 1998 of the Pacific Horizon
California Tax-Exempt Money Market Fund accompany the financial statements for
such periods and are incorporated in the SAI, which is available upon request.

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<PAGE>

FOR AN ADVISER CLASS SHARE OUTSTANDING THROUGHOUT EACH PERIOD

Nations California Tax-Exempt Reserves

<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
02/28/98 02/28/97 02/29/96 02/28/95 2/28/94
<S> <C> <C> <C> <C> <C>
Net asset value per share, beginning of
year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from Investment Operations:
Net investment income 0.0309 0.0291 0.0331 0.0256 0.0198
Net realized gains/(losses) on
investment transactions -- -- 0.0001 (0.0001) (0.0001)
Total income from investment
operations 0.0309 0.0291 0.0332 0.0255 0.0197
Less dividends to shareholders from
net investment income (0.0309) (0.0291) (0.0331) (0.0256) (0.0198)
Net change in net asset value per share -- -- 0.0001 (0.0001) (0.0001)
Net asset value per share, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 3.13 % 2.95 % 3.36 % 2.59 % 2.00 %
Ratios/Supplemental Data:
Net assets at end of year (millions) $ 671 $ 472 $ 203 $ 88 $ 124
Ratio of expenses to average net assets 0.50 % 0.50 % 0.55 % 0.55 % 0.53 %
Ratio of net investment income to
average net assets 3.06 % 2.92 % 3.43 % 2.50 % 1.98 %
Ratio of expenses to average net
assets** (a)(b) (b) 0.55%*** (a) 0.60 %
Ratio of net investment income to
average net assets** (a)(b) (b) 3.42 % (a) 1.91 %
</TABLE>

* Adviser Class Shares of Nations California Tax-Exempt Reserves were
formerly Horizon Service Class Shares of the Pacific Horizon California
Tax-Exempt Money Market Fund, a predecessor portfolio.

** During the year, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred,
the ratios would have been as indicated.

*** During the year ended February 29, 1996 the Portfolio received credits
from its custodian for interest earned on uninvested cash balances which
were used to offset custodian fees and expenses. If such credits had not
occurred, the expense ratio would have been as indicated. The ratio of net
investment income was not affected.
(a) There were no fee waivers or expense reimbursements during the period.
(b) Fees paid by third parties had no effect on the ratios.

15
<PAGE>

Appendix A -- Portfolio Securities

The following are summary descriptions of certain types of instruments in which
the Fund may invest. The "How Objective Is Pursued" section of this Prospectus
identifies the Fund's permissible investments, and the SAI contains more
information concerning such investments.

Asset-Backed Securities: Asset-backed securities arise through the grouping by
governmental, government-related, and private organizations of loans,
receivables, or other assets originated by various lenders. Asset-backed
securities consist of both mortgage- and non-mortgage-backed securities.
Interests in pools of these assets may differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates. Conversely,
asset-backed securities provide periodic payments which may consist of both
interest and principal payments.

Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans, the interest in which is in most cases issued and
guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself. Mortgage-backed securities include
mortgage pass-through securities, collateralized mortgage obligations ("CMOs"),
parallel pay CMOs, planned amortization class CMOs ("PAC Bonds") and stripped
mortgage-backed securities ("SMBS"), including interest-only and principal-only
SMBS. SMBS may be more volatile than other debt securities. For additional
information concerning mortgage-backed securities, see the SAI.

Non-mortgage asset-backed securities include interests in pools of receivables,
such as motor vehicle installment purchase obligations and credit card
receivables. Such securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying
pools of assets. Such securities also may be debt instruments, which are also
known as collateralized obligations and are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt.

Bank Instruments: Bank instruments consist mainly of certificates of deposit,
time deposits and bankers' acceptances.

Borrowings: When the Fund borrows money, the net asset value of a share may be
subject to greater fluctuation until the borrowing is paid off. The Fund may
borrow money from banks for temporary purposes in amounts of up to one-third of
their respective total assets, provided that borrowings in excess of 5% of the
value of the Fund's total assets must be repaid prior to the purchase of
portfolio securities. Pursuant to line of credit arrangements with BNY, the
Fund may borrow primarily for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities.

Reverse repurchase agreements may be considered to be borrowings. When the Fund
invests in a reverse repurchase agreement, it sells a portfolio security to
another party, such as a bank or broker/dealer, in return for cash, and
agrees to buy the security back at a future date and price. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests without having to sell portfolio securities, or for other temporary or
emergency purposes. In addition, the Fund may use reverse repurchase agreements
for the purpose of investing the proceeds in tri-party repurchase agreements.
Generally, the effect of such a transaction is that the Fund can recover all or
most of the cash invested in the portfolio securities involved during the term
of the reverse repurchase agreement, while it will be able to keep the interest
income associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Fund of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.

16
<PAGE>

repurchase agreements involve the risk that the market value of the securities
the Fund is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities. In addition, there is a risk of delay
in receiving collateral or securities or in repurchasing the securities covered
by the reverse repurchase agreement or even of a loss of rights in the
collateral or securities in the event the buyer of the securities under the
reverse repurchase agreement files for bankruptcy or becomes insolvent. The
Fund only enters into reverse repurchase agreements (and repurchase agreements)
with counterparties that are deemed by the Adviser to be creditworthy. Reverse
repurchase agreements are speculative techniques involving leverage, and are
subject to asset coverage requirements if the Fund does not establish and
maintain a segregated account (as described above). Under the requirements of
the 1940 Act, the Fund is required to maintain an asset coverage (including the
proceeds of the borrowings) of at least 300% of all borrowings. Depending on
market conditions, the Fund's asset coverage and other factors at the time of a
reverse repurchase, the Fund may not establish a segregated account when the
Adviser believes it is not in the best interest of the Fund to do so. In this
case, such reverse repurchase agreements will be considered borrowings subject
to the asset coverage described above.

Commercial Instruments: Commercial instruments consist of short-term U.S.
dollar-denominated obligations issued by domestic corporations or foreign
corporations and domestic and foreign commercial banks.

Investments by the Fund in commercial paper will consist of issues rated in a
manner consistent with the Fund's investment policies and objective. In
addition, the Fund may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality to rated instruments that may be acquired by the Fund. Commercial
instruments include variable-rate master demand notes, which are unsecured
instruments that permit the indebtedness thereunder to vary and provide for
periodic adjustments in the interest rate, and variable- and floating-rate
instruments.

Fixed Income Investing: The performance of the fixed income debt component of
the Fund's portfolio depends primarily on interest rate changes, the average
weighted maturity of the portfolio and the quality of the securities held. The
debt component of the Fund's portfolio will tend to decrease in value when
interest rates rise and increase when interest rates fall. The Fund's share
price and yield depend, in part, on the maturity and quality of its debt
instruments.

Foreign Securities: Foreign securities include debt obligations (dollar
denominated) of foreign corporations and banks as well as obligations of
foreign governments and their political subdivisions (which will be limited to
direct government obligations and government-guaranteed securities). Such
investments may subject the Fund to special investment risks, including future
political and economic developments, the possible imposition of withholding
taxes on income (including interest, dividends and disposition proceeds),
possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign issuers in general may
be subject to different accounting, auditing, reporting, and record keeping
standards than those applicable to domestic companies, and securities of foreign
issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers.

17
<PAGE>

Fixed commissions on foreign securities exchanges are generally higher than the
negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign securities exchanges, brokers,
and companies than in the United States. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, or diplomatic developments
that could affect investments within those countries. Because of these and
other factors, securities of foreign companies acquired by the Fund may be
subject to greater fluctuation in price than securities of domestic companies.

Futures, Options And Other Derivative Instruments: The Fund may attempt to
reduce the overall level of investment risk of particular securities and
attempt to protect the Fund against adverse market movements by investing in
futures, options and other derivative instruments. These include the purchase
and writing of options on securities (including index options) and options on
foreign currencies, and investing in futures contracts for the purchase or sale
of instruments based on financial indices, including interest rate indices or
indices of U.S. or foreign government, equity or fixed income securities
("futures contracts"), options on futures contracts, forward contracts and
swaps and swap-related products such as interest rate swaps, currency swaps,
caps, collars and floors.

The use of futures, options, forward contracts and swaps exposes the Fund to
additional investment risks and transaction costs. If the Adviser incorrectly
analyzes market conditions or does not employ the appropriate strategy with
respect to these instruments, the Fund could be left in a less favorable
position. Additional risks inherent in the use of futures, options, forward
contracts and swaps include: imperfect correlation between the price of
futures, options and forward contracts and movements in the prices of the
securities or currencies being hedged; the possible absence of a liquid
secondary market for any particular instrument at any time; and the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences. The Fund may not purchase put and call options which are traded
on a national stock exchange in an amount exceeding 5% of its net assets.
Further information on the use of futures, options and other derivative
instruments, and the associated risks, is contained in the SAI.

Guaranteed Investment Contracts: Guaranteed investment contracts, investment
contracts or funding agreements (each referred to as a "GIC") are investment
instruments issued by highly rated insurance companies. Pursuant to such
contracts, the Fund may make cash contributions to a deposit fund of the
insurance company's general or separate accounts. The insurance company then
credits to the Fund guaranteed interest. The insurance company may assess
periodic charges against a GIC for expense and service costs allocable to it,
and the charges will be deducted from the value of the deposit fund. The
purchase price paid for a GIC generally becomes part of the general assets of
the issuer, and the contract is paid from the general assets of the issuer.

The Fund will only purchase GICs from issuers that, at the time of purchase,
meet quality and credit standards established by the Adviser. Generally, GICs
are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Also, the Fund may not receive the principal amount of a GIC from the
insurance company on seven days' notice or less, at which point the GIC may be
considered to be an illiquid investment.

Illiquid Securities: Certain securities may be sold only pursuant to certain
legal restrictions, and may be difficult to sell. The Fund will not hold more
than 10% of the value of its net assets in securities that are illiquid.
Repurchase agreements, time deposits and GICs that do not provide for payment
to the Fund within seven days after notice, and illiquid restricted securities
are subject to the limitation on illiquid securities.

18
<PAGE>

lines approved and monitored by the Fund's Board of Trustees, after considering
trading activity, availability of reliable price information and other relevant
information, that an adequate trading market exists for that security. To the
extent that, for a period of time, qualified institutional or other buyers
cease purchasing such restricted securities pursuant to Rule 144A or otherwise,
the level of illiquidity of the Fund holding such securities may increase
during such period.

Interest Rate Transactions: In order to attempt to protect the value of their
portfolios from interest rate fluctuations, the Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate caps and floors. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating-rate payments for fixed-rate payments.
The Fund will enter into a swap transaction on a net basis, i.e. the payment
obligations of the Fund and the counterparty will be netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
obligations. The Fund will segregate, on a daily basis, cash or liquid high
quality debt securities with a value at least equal to the Fund's net
obligations, if any, under a swap agreement.

The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent a specified index is below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate floor. The Adviser expects to enter into these transactions on
behalf of the Fund primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Fund anticipated purchasing at a later date rather
than for speculative purposes. The Fund will not sell interest rate caps or
floors that it does not own.

Money Market Instruments: The term "money market instruments" refers to
instruments with remaining maturities of 397 days or less or obligations with
greater maturities, provided such obligations are subject to demand features or
resets which are less than 397 days. Money market instruments may include,
among other instruments, certain U.S. Treasury Obligations, U.S. Government
Obligations, bank instruments, commercial instruments, repurchase agreements
and municipal securities. Such instruments are described in this Appendix A.

Municipal Securities: The two principal classifications of municipal securities
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 the
facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.

Municipal securities may include "moral obligation" bonds, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its debt service obligations from current revenues, it
may draw on a reserve fund, the restoration of which is a moral commitment but
not a legal obligation of the state or municipality which created the issuer.

Municipal securities may include variable- or floating-rate instruments issued
by industrial development authorities and other governmental entities. While
there may not be an active secondary market with respect to a particular
instrument purchased by the Fund, the Fund may demand payment of the principal
and accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for the Fund to dispose of the instrument if
the issuer defaulted on its payment obligation or during periods the Fund is
not entitled to exercise its demand rights, and the Fund could, for these or
other reasons, suffer a loss.

19
<PAGE>

Some of these instruments may be unrated, but unrated instruments purchased by
the Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "high quality" by any major rating
service. Where necessary to ensure that an instrument is of comparable "high
quality", the Fund will require that an issuer's obligation to pay the
principal of the note may be backed by an unconditional bank letter or line of
credit, guarantee, or commitment to lend.

Municipal Securities may include participations in privately arranged loans to
municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by the
Adviser to be of comparable quality at the time of purchase to rated
instruments that may be acquired by the Fund. Frequently, privately arranged
loans have variable interest rates and may be backed by a bank letter of
credit. In other cases, they may be unsecured or may be secured by assets not
easily liquidated. Moreover, such loans in most cases are not backed by the
taxing authority of the issuers and may have limited marketability or may be
marketable only by virtue of a provision requiring repayment following demand
by the lender. Such loans made by the Fund may have a demand provision
permitting the Fund to require payment within seven days. Participations in
such loans, however, may not have such a demand provision and may not be
otherwise marketable. To the extent these securities are illiquid, they will be
subject to the Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an
obligation for full repayment of principal and payment of accrued interest
within the demand period, normally seven days or less (unless the Fund
determines that a particular loan issue, unlike most such loans, has a readily
available market). As it deems appropriate, the Adviser will establish
procedures to monitor the credit standing of each such municipal borrower,
including its ability to meet contractual payment obligations.

Municipal Securities may include units of participation in trusts holding pools
of tax-exempt leases. Municipal participation interests may be purchased from
financial institutions, and give the purchaser an undivided interest in one or
more underlying municipal security. To the extent that municipal participation
interests are considered to be "illiquid securities," such instruments are
subject to the Fund's limitation on the purchase of illiquid securities.
Municipal leases and participating interests therein which may take the form of
a lease or an installment sales contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities. Interest payments on qualifying leases are exempt from Federal
income tax.

Municipal participation interests may be purchased from financial institutions,
and give the purchaser an undivided interest in one or more underlying
Municipal Securities. To the extent that municipal participation interests are
considered to be "illiquid securities" such instruments are subject to the
Fund's limitation on the purchase of illiquid securities.

The Fund may invest in short-term securities, in commitments to purchase such
securities on a "when-issued" basis, and reserves the right to engage in "put"
transactions on a daily, weekly or monthly basis. Securities purchased on a
"when-issued" basis are subject to settlement within 45 days of the purchase
date. The interest rate realized on these securities is fixed as of the
purchase date and no interest accrues to the Fund before settlement. These
securities are subject to market fluctuation due to changes in market interest
rates. The Fund will only commit to purchase a security on a when-issued basis
with the intention of actually acquiring the security and will segregate
sufficient liquid assets to meet its purchase obligation.

A "put" feature permits the Fund to sell a security at a fixed price prior to
maturity. The underlying Municipal Securities subject to a put may be sold at
any time at the market rates. However, unless the put was an integral part of
the security as originally issued, it may not be marketable or assignable.
Therefore, the put would only have value to the Fund. In certain cases a
premium may be paid for put features. A premium paid will have the effect of
reducing the yield otherwise payable on the underlying security. The purpose of
engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions

20
<PAGE>

and remain as fully invested as possible in municipal securities. The Fund will
limit its put transactions to institutions which the Adviser believes present
minimal credit risk, pursuant to guidelines adopted by the Board of Trustees.

California, with the largest economy and largest population in the country, is
closely watched as an indicator of the overall financial health of the country.
California has recently enjoyed strong economic growth, resulting in employment
growth and budget surpluses. This economic health represents a recovery from
the national recession in the early 1990s that hit California particularly hard
because of reductions in defense spending and a decline in tourism. During this
time, and in the early 1980s, "Proposition 13" and similar constitutional and
statutory amendments restricted the ability of California's taxing entities to
increase real property tax revenues, a major source of revenue for California
governmental issuers, thereby lowering the state's historically high credit
rating. More recently, "Proposition 218" has further restricted the ability of
local governments to approve certain types of taxes and enabled voters to use
their initiative power to repeal previously-authorized taxes. For this reason,
some ratings of California cities and counties have been, and other may be,
reduced. The state, however, has had operating surpluses for its past several
fiscal years, and the 1998-1999 fiscal year budget again predicts a significant
increase in tax receipts over the 1997-1998 fiscal year. With approximately
half of California's exports being sold in Asia, problems in the region have
slightly counteracted the state's economic well-being. However, strong export
growth to Mexico has offset some of the weakness in Asia. Also, a growing,
young population, a strong higher education system and excellent ports continue
to bolster California's economic prospects. California's credit rating, while
still average, has recently improved. Recent budget surpluses plus a positive
outlook for the near future has earned California an "Aa3" rating by Moody's
and an "A-plus" rating by S&P.

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

Other Investment Companies: The Fund may invest in securities issued by other
investment companies to the extent that such investments are consistent with
the Fund's investment objective and policies and permissible under the 1940
Act. As a shareholder of another investment company, the Fund would bear, along
with other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that the Fund bears directly in connection with its
own operations. Pursuant to an exemptive order issued by the SEC, the Nations
Funds' non-money market funds may purchase shares of Nations Funds' money
market funds.

Repurchase Agreements: A repurchase agreement involves the purchase of a
security by the Fund and a simultaneous agreement (generally with a bank or
broker/dealer) to repurchase that security from the Fund at a specified price
and date or upon demand. This technique offers a method of earning income on
uninvested cash. A risk associated with repurchase agreements is the failure of
the seller to repurchase the securities as agreed, which may cause the Fund to
suffer a loss if the market value of such securities declines before they can
be liquidated on the open market. Repurchase agreements with a maturity of more
than seven days are considered illiquid securities and are subject to the limit
stated above. The Fund may enter into joint repurchase agreements jointly with
other investment portfolios of Nations Funds.

21
<PAGE>

ties fail financially. However, loans are made only to borrowers deemed by the
Adviser to be creditworthy and when, in its judgment, the income to be earned
from the loan justifies the attendant risks. The aggregate of all outstanding
loans of the Fund may not exceed 33% of the value of its total assets, which
may include cash collateral received for securities loans. Cash collateral
received by a Nations Fund may be invested in a Nations Funds' money market
fund.

Stock Index, Interest Rate And Currency Futures Contracts: The Fund may
purchase and sell futures contracts and related options with respect to
non-U.S. stock indices, non-U.S. interest rates and foreign currencies, that
have been approved by the CFTC for investment by U.S. investors, for the
purpose of hedging against changes in values of the Fund's securities or
changes in the prevailing levels of interest rates or currency exchange rates.
The contracts entail certain risks, including but not limited to the following:
no assurance that futures contracts transactions can be offset at favorable
prices; possible reduction of the Fund's total return due to the use of
hedging; possible lack of liquidity due to daily limits on price fluctuation;
imperfect correlation between the contracts and the securities or currencies
being hedged; and potential losses in excess of the amount invested in the
futures contracts themselves.

Trading on foreign commodity exchanges presents additional risks. Unlike
trading on domestic commodity exchanges, trading on foreign commodity exchanges
is not regulated by the CFTC and may be subject to greater risks than trading
on domestic exchanges. For example, some foreign exchanges are principal
markets for which no common clearing facility exists and a trader may look only
to the broker for performance of the contract. In addition, unless the Fund
hedges against fluctuations in the exchange rate between the U.S. dollar and
the currencies in which trading is done on foreign exchanges, any profits that
the Fund might realize could be eliminated by adverse changes in the exchange
rate, or the Fund could incur losses as a result of those changes.

U.S. Government Obligations: U.S. Government Obligations consist of marketable
securities and instruments issued or guaranteed by the U.S. Government or any
of its agencies, authorities or instrumentalities. Direct obligations are
issued by the U.S. Treasury and include all U.S. Treasury instruments. U.S.
Treasury Obligations differ only in their interest rates, maturities and time
of issuance. Obligations of U.S. Government agencies, authorities and
instrumentalities are issued by government-sponsored agencies and enterprises
acting under authority of Congress. Although obligations of federal agencies,
authorities and instrumentalities are not debts of the U.S. Treasury, some are
backed by the full faith and credit of the U.S. Treasury, such as direct
pass-through certificates of the Government National Mortgage Association; some
are supported by the right of the issuer to borrow from the U.S. Government,
such as obligations of Federal Home Loan Banks, and some are backed only by the
credit of the issuer itself, such as obligations of the Federal National
Mortgage Association. No assurance can be given that the U.S. Government would
provide financial support to government-sponsored instrumentalities if it is
not obligated to do so by law.

The market value of U.S. Government Obligations may fluctuate due to
fluctuations in market interest rates. As a general matter, the value of debt
instruments, including U.S. Government Obligations, declines when market
interest rates increase and rises when market interest rates decrease. Certain
types of U.S. Government Obligations are subject to fluctuations in yield or
value due to their structure or contract terms.

22
<PAGE>

When-Issued, Delayed Delivery And Forward Commitment Securities: The purchase
of new issues of securities on a "when-issued," "delayed delivery" or "forward
commitment" basis occurs when the payment for and delivery of securities takes
place at a future date. Because actual payment for and delivery of such
securities generally take place 15 to 45 days after the purchase date,
purchasers of such securities bear the risk that interest rates on debt
securities at the time of delivery may be higher or lower than those contracted
for on the security purchased.

Appendix B -- Description Of Ratings

The following summarizes the highest three ratings used by S&P for corporate
and municipal bonds:

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

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

A -- 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.

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

The following summarizes the highest three ratings used by Moody's for
corporate and municipal bonds:

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

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

A -- Bonds that are rated A possess many favorable investment attributes
and are to be considered 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.

Moody's applies numerical modifiers (1, 2 and 3) with respect to corporate
bonds rated Aa and A. The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category. With regard to municipal bonds, those
bonds in the Aa and A groups which Moody's believes possess the strongest
investment attributes are designated by the symbols Aa1 and A1, respectively.

The following summarizes the highest three ratings used by D&P for bonds:

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

AA -- Bonds that are rated AA are of high credit quality. Protection
factors are strong. Risk is modest, but may vary slightly from time to
time because of economic conditions.

23
<PAGE>

A -- Bonds that are rated A have protection factors which are average
but adequate. However, risk factors are more variable and greater in
periods of economic stress.

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

The following summarizes the highest three ratings used by Fitch for bonds:

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

AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated F1+.

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

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

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

MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the
market for refinancing.

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

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

SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.

SP-2 -- Satisfactory capacity to pay principal and interest.

The two highest rating categories of D&P for short-term debt are D-1 and D-2.
D&P employs three designations, D-1+, D-1 and D-1-, within the highest rating
category. D-1+ indicates highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is judged to be "outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations." D-1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are considered to be minor.
D-1- indicates high certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small. D-2 indicates good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.

The following summarizes the two highest rating categories used by Fitch for
short-term obligations:

F1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of
assurance for timely payment.

F1 securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in
degree than issues rated F1+.

Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely

24
<PAGE>

strong safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety
is not as high as for issues designated A-1.

D&P uses the short-term debt ratings described above for commercial paper.

Fitch uses the short-term debt ratings described above for commercial paper.

BankWatch ratings are based upon a qualitative and quantitative analysis of all
segments of the organization including, where applicable, holding company and
operating subsidiaries. BankWatch ratings do not constitute a recommendation to
buy or sell securities of any of these companies. Further, BankWatch does not
suggest specific investment criteria for individual clients.

BankWatch long-term ratings apply to specific issues of long-term debt and
preferred stock. The long-term ratings specifically assess the likelihood of
untimely payment of principal or interest over the term to maturity of the
rated instrument. The following are the three highest investment grade ratings
used by BankWatch for long-term debt:

AAA -- The highest category; indicates ability to repay principal and
interest on a timely basis is extremely high.

AA -- The second highest category; indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.

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

The BankWatch short-term ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned. The BankWatch short-term ratings specifically assess
the likelihood of an untimely payment of principal or interest.

TBW-1 -- The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.

TBW-2 -- The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1".

<PAGE>
[RED HERRING APPEARS ON LEFT SIDE OF PAGE]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

PRELIMINARY PROSPECTUS DATED FEBRUARY 12, 1999
SUBJECT TO COMPLETION

Prospectus

This prospectus describes NATIONS CALIFORNIA TAX-EXEMPT RESERVES (the "Fund")
of Nations Institutional Reserves (formerly known as The Capitol Mutual Funds)
(the "Trust"), an open-end management investment company which seeks to provide
a convenient and economical means of investing in one or more professionally
managed funds. The Fund is a non-diversified money market fund. This Prospectus
describes one class of shares of the Fund-Trust Class Shares.

The Fund's Trust Class Shares are offered to NationsBank, N.A. ("NationsBank")
and Bank of America National Trust And Savings Association ("Bank of America"),
their affiliates and correspondents, for the investment of their own funds or
funds for which they act in a fiduciary, agency or custodial capacity.

IT IS A NON-FUNDAMENTAL POLICY OF THE FUND TO USE ITS BEST EFFORTS TO MAINTAIN
A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.

This Prospectus sets forth concisely the information about the Fund that a
prospective purchaser of Trust Class Shares should consider before investing.
Investors should read this Prospectus and retain it for future reference.
Additional information about the Fund is contained in a separate Statement of
Additional Information (the "SAI"), that has been filed with the Securities and
Exchange Commission (the "SEC") and is available without charge by writing or
calling the Trust at the address or telephone number shown below. The SAI for
the Trust, dated September 1, 1998, as supplemented, is incorporated by
reference in its entirety into this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
in this Prospectus and other information regarding registrants that file
electronically with the SEC. NationsBanc Advisors, Inc. ("NBAI") is the
investment adviser to the Fund. TradeStreet Investment Associates, Inc.
("TradeStreet") is the investment sub-adviser to the Fund. As used herein the
term "Adviser" shall mean NBAI and/or TradeStreet as the context may require.
For additional information, see "How The Fund is Managed."

SHARES OF NATIONS FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, NATIONSBANK, OR BANK OF AMERICA OR ANY OF THEIR
AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.

Nations California Tax-Exempt Reserves

Trust Class Shares
May 21, 1999

For Fund information call:
1-800-626-2275

Nations Institutional Reserves
c/o Stephens Inc.
One NationsBank Plaza
33rd Floor
Charlotte, NC 28255

[NATIONS FUNDS LOGO APPEARS HERE]

TRUST 5/99
<PAGE>

Table Of Contents

About The Fund

Prospectus Summary 3
-----------------------------------------------------

Expenses Summary 4
-----------------------------------------------------

Objective 5
-----------------------------------------------------

How Objective Is Pursued 5
-----------------------------------------------------

General Investment Policies 5
-----------------------------------------------------

How Performance Is Shown 7
-----------------------------------------------------

How The Fund is Managed 7
-----------------------------------------------------

Organization And History 10
-----------------------------------------------------

About Your Investment
How To Buy Shares 10
-----------------------------------------------------

How To Redeem Shares 11
-----------------------------------------------------

How To Exchange Shares 12
-----------------------------------------------------

Shareholder Servicing Arrangements 12
-----------------------------------------------------

How The Fund Values Its Shares 13
-----------------------------------------------------

How Dividends And Distributions Are Made;

Tax Information 13
-----------------------------------------------------

Appendix A -- Portfolio Securities 14
-----------------------------------------------------

Appendix B -- Description Of Ratings 22
-----------------------------------------------------

2
<PAGE>

About The Fund

Prospectus Summary

o TYPE OF COMPANY: Open-end management investment company.
o INVESTMENT OBJECTIVE AND POLICIES:

o Nations California Tax-Exempt Reserves' investment objective is to seek
current income exempt from Federal income tax and California state
personal tax, a stable share price, and daily liquidity.

o INVESTMENT ADVISER: NationsBanc Advisors, Inc. serves as the investment
adviser to the Fund. NBAI provides investment management services to more
than 60 investment company portfolios in the Nations Funds Family.
TradeStreet Investment Associates, Inc., an affiliate of NBAI, provides
investment sub-advisory services to the Fund. For more information about
the investment adviser and investment sub-adviser to the Fund, see "How The
Fund is Managed."

o RISK FACTORS: Although NBAI, together with the sub-adviser, seek to achieve
the investment objective of the Fund, there is no assurance that they will
be able to do so. Investments in a Fund are not insured against loss of
principal. Although the Fund seeks to maintain a stable net asset value of
$1.00 per share, there is no assurance that it will be able to do so. For a
discussion of these and other factors, see "General Investment Policies --
Restraints on Investments by the Fund" and "Appendix A."

o MINIMUM PURCHASE: The minimum initial investment in Trust Class Shares is
$250,000.

3
<PAGE>

Expenses Summary

Expenses are one of several factors to consider when investing in the Fund. The
following tables summarize operating expenses for Trust Class Shares of the
Fund. There are no transaction fees imposed upon the purchase, redemption or
exchange of shares. The Example shows the cumulative expenses attributable to a
hypothetical $1,000 investment in the Fund over specified periods.

Annual Operating Expenses
(as a percentage of average net assets)

<TABLE>
<CAPTION>
Nations
California
Tax-Exempt
Reserves
<S> <C>
Management Fees (After Fee Waivers) .15%
Other Expenses (After Expense Reimbursements) .10%
Shareholder Servicing Fees .10%
Total Operating Expenses (After Fee Waivers and Expense Reimbursements) .30%
</TABLE>

Example: An investor would pay the following expenses on a $1,000 investment in
Trust Class Shares of the indicated Fund assuming (1) a 5% annual return and
(2) redemption at the end of each time period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Nations California Tax-Exempt Reserves $3 $10 $17 $38
</TABLE>

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in Trust Class Shares will bear
either directly or indirectly. The figures contained in the above table are
based on estimates. There is no assurance that any fee waivers and/or
reimbursements will continue. In particular, to the extent Other Expenses are
less than those shown, waivers and/or reimbursements of Management Fees, if
any, may decrease. Shareholders will be notified of any decrease that
materially increases Total Operating Expenses. If fee waivers and/or
reimbursements are decreased or discontinued, the amounts contained in the
"Example" above may increase. The information set forth in the foregoing table
and examples relates only to the Trust Class Shares. The Fund also offers
Capital Class, Liquidity Class, Market Class, Adviser Class, Daily Class,
Investor Class and Service Class Shares. For a more complete description of the
Fund's operating expenses, see "How The Fund is Managed."

Absent fee waivers "Management Fees," "Other Expenses" and "Total Operating
Expenses" for the Trust Class Shares of the Fund would have been .30%, % and
%, respectively.

THE FOREGOING SHOULD NOT BE CONSIDERED TO BE AN ACTUAL REPRESENTATION OF PAST
OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES AND RATES OF RETURN MAY BE
GREATER OR LESS THAN THOSE SHOWN.

4
<PAGE>

Objective

How Objective Is Pursued

Nations California Tax-Exempt Reserves

General Investment Policies

For a description of the Fund's permitted investments see "Appendix A" and for
further information about ratings see "Appendix B."

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<PAGE>

The Fund may not:

The foregoing percentages will apply at the time of the purchase of a security.

Although certain investment policies of the Fund are fundamental policies, its
investment objective is non-fundamental and may be changed without shareholder
approval. In addition, although the Fund intends to maintain a stable net asset
value of $1.00 per share, this is not a fundamental policy. There is no
assurance that the Funds will be able to maintain a constant net asset value of
$1.00 per share.

6
<PAGE>

How Performance Is Shown

From time to time the Fund may advertise the "yield", and "effective yield" and
"tax equivalent yield"of a class of shares. YIELD, EFFECTIVE YIELD AND
TAX-EQUIVALENT YIELD FIGURES ARE BASED ON HISTORICAL DATA AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE.

In addition to Trust Class Shares, the Fund offers Liquidity Class, Capital
Class, Market Class, Adviser Class, Daily Class, Investor Class and Service
Class Shares of the Fund. Each class of shares may bear different sales
charges, shareholder servicing fees and other expenses, which may cause the
performance of a class to differ from the performance of the other classes.
Performance quotations will be computed separately for each class of the Fund's
shares. The Funds annual report contains additional performance information and
is available upon request without charge from the Funds distributor or an
investor's Agent (as defined below).To obtain additional information regarding
the Funds other classes of shares which may be available to you or to obtain
the Funds annual report, call Nations Funds at the toll-free number indicated
on the cover of this Prospectus.

How The Fund Is Managed

7
<PAGE>

1994 Report of the Advisory Group on Personal Investing of the Investment
Company Institute.

NBAI, TradeStreet and the co-administrators of the Fund have voluntarily agreed
to waive their fees (and reimburse the Fund for certain expenses) in order to
limit the total annualized operating expenses of the Trust Class Shares
(exclusive of Shareholder Servicing Rule 12b-1 fees) of the Fund (as a
percentage of average daily net assets) to .20%.

NBAI, TradeStreet and the co-administrators each reserve the right, in their
sole discretion, to terminate this voluntary fee waiver at any time.
Shareholders will be notified in advance if and when the waiver is terminated.

For the fiscal period from March 1, 1997 to February 28, 1998 the Pacific
Horizon Funds paid Bank of America, under a previous investment advisory
agreement, fees computed daily and paid monthly, at the annual rate of .10% of
the Funds daily net assets.

The Tax-Exempt Money Market Management Team of TradeStreet is responsible for
the day-to-day management of the Fund.

Other Service Providers: Stephens Inc. ("Stephens"), with principal offices at
111 Center Street, Little Rock, Arkansas 72201, serves as co-administrator of
the Fund. NBAI also serves

8
<PAGE>

as co-administrator of the Fund with Stephens. Under the co-administration
arrangements, Stephens and NBAI provide various administrative, accounting and
corporate secretarial services to the Fund. Stephens and NBAI shall be entitled
to receive a combined fee at the annual rate of .10% of the Fund's average
daily net assets, as well as certain out-of-pocket expenses.

The Adviser may also pay out of its own assets amounts to Stephens and other
broker/dealers in connection with the provision of administrative and/or
distribution related services to shareholders.

BNY (the "Custodian") provides custodial services for the assets of the Fund.
In return for providing custodial services to the Nations Funds Family, the BNY
is entitled to receive, in addition to out-of-pocket expenses, fees at the rate
of (i) 3/4 of one basis point per annum on the aggregate net assets of all
Nations Funds' non-money market funds up to $10 billion; and (ii) 1/2 of one
basis point on the excess including all Nations Funds' money market funds.

PricewaterhouseCoopers LLP serves as the independent accountant of the Trust.
Their address is 160 Federal Street, Boston, Massachusetts 02110.

Expenses: The accrued expenses of the Fund are deducted from the Fund's total
accrued income before dividends are declared. These expenses include, but are
not limited to: fees paid to the Adviser, Stephens, BNY and First Data; taxes;
interest; fees (including fees paid to Nations Funds' Trustees and directors);
federal and state securities registration and qualification fees; brokerage
fees and commissions; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; charges of
the Custodian and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; costs of shareholder reports and shareholder meetings;
other expenses which are not expressly assumed by the Adviser, Stephens, BNY or
First Data under their respective agreements with Nations Funds; and any
extraordinary expenses. Trust Class Shares may bear certain class specific
expenses and also bear certain additional shareholder service and distribution
costs. Any general expenses of Nations Institutional Reserves that are not
readily identifiable as belonging to a particular investment portfolio are
allocated among all portfolios in the proportion that the assets of a portfolio
bears to the assets of Nations Institutional Reserves or in such other manner
as the Board of Trustees deems appropriate.

9
<PAGE>

Organization And History

Nations Institutional Reserves: Nations Institutional Reserves (formerly known
as The Capitol Mutual Funds), is an open-end management investment company
established as a Massachusetts business trust under an Agreement and
Declaration of Trust dated January 22, 1990. The Agreement and Declaration of
Trust permits the Trust to offer separate series of units of beneficial
interest ("shares") and different classes of each series. The Fund is a series
of the Trust. Except for differences between classes of the Fund pertaining to
distribution and shareholder servicing arrangements, each share of the Fund
represents an equal proportionate interest in the Fund. This Prospectus relates
only to the Trust Class Shares of Nations California Tax-Exempt Reserves.

To obtain additional information regarding the Fund's other classes of shares
which may be available to you, contact Nations Funds at 1-800-626-2275.

As of , 1999, NationsBank, Bank of America and their affiliates
possessed or shared power to dispose or vote with respect to more than 25% of
the outstanding shares of the Trust and therefore could be considered to be a
controlling person of the Trust for purposes of the 1940 Act. For more detailed
information concerning the percentage of each class or series of shares over
which NationsBank and its affiliates possessed or shared power to dispose or
vote as of a certain date, see the SAI.

About Your Investment

How To Buy Shares

Trust Class Shares are offered to NationsBank and Bank of America, their
affiliates and correspondents, for the investment of their own funds or funds
for which they act in a fiduciary, agency or custodial capacity. The minimum
initial investment in Trust Class Shares is $250,000.

10
<PAGE>

The purchase price is the net asset value per share next determined after
acceptance of the order by Stephens, the Transfer Agent or their respective
agents. The agents are responsible for transmitting orders for purchases of
Trust Class Shares by their customers and delivering required funds on a timely
basis. Stephens is also responsible for transmitting orders it receives to
Nations Funds.

Telephone Transactions: Shareholders may effect purchases, redemptions and
exchanges by telephone. See "How to Redeem Shares" and "How to Exchange Shares"
below. If a shareholder desires to elect the telephone transaction feature
after opening an account, a signature guarantee will be required. Shareholders
should be aware that by electing the telephone transaction feature, such
shareholders may be giving up a measure of security that they may have if they
were to authorize written requests only. A shareholder may bear the risk of any
resulting losses from a telephone transaction. Nations Funds will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine, and if Nations Funds and its service providers fail to employ such
measures, they may be liable for any losses due to unauthorized or fraudulent
instructions. Nations Funds provides written confirmation to shareholders of
each telephone share transaction. In addition, Nations Funds reserves the right
to record all telephone conversations. Shareholders should be aware that during
periods of significant economic or market change, telephone transactions may be
difficult to complete.

How To Redeem Shares

Prior to effecting a redemption of Trust Class Shares represented by
certificates, the Transfer Agent must have received such certificates at its
principal office. All such certificates must be endorsed by the redeeming
shareholder or accompanied by a signed stock power, in each instance with the
signature guaranteed by a commercial bank or a member of a major stock
exchange, unless other arrangements satisfactory to Nations Funds have
previously been made. Nations Funds may require any additional information
reasonably necessary to evidence that a redemption has been duly authorized.

11
<PAGE>

How To Exchange Shares

The exchange feature enables a shareholder of Trust Class Shares of the Fund to
acquire Trust Class Shares of another fund when that shareholder believes that
a shift between Funds is an appropriate investment decision. An exchange of
Trust Class Shares for Trust Class Shares of another fund is made on the basis
of the next calculated net asset value per share of the Fund after the exchange
order is received.

The Trust Class Shares exchanged must have a current value of at least
$250,000. Nations Funds and Stephens reserve the right to reject any exchange
request. Only shares that may legally be sold in the state of the investor's
residence may be acquired in an exchange. Only shares of a class that is
accepting investments generally may be acquired in an exchange.

Shareholder Servicing Arrangements

The Fund has adopted a Shareholder Servicing Plan (the "Servicing Plan"), which
permits the Fund to compensate (i) NBAI for providing general shareholder
liaison and other services to Institutions and their Customers who from time to
time beneficially own Trust Class Shares and (ii) Institutions directly for
providing such services to their Customers. Payments under the Servicing Plan
are calculated daily and paid monthly at a rate or rates set from time to time
by the Fund, provided that the annual rate may not exceed .10% of the average
daily net asset value of the Trust Class Shares beneficially owned by Customers
with whom the Institutions have a servicing relationship. Holders of Trust
Class Shares will bear all fees paid to NBAI and Institutions under the
Servicing Plan.

The fees payable to NBAI or Institutions under the Servicing Plan are used
primarily to compensate or reimburse them for shareholder services provided and
related expenses incurred. Such shareholder services supplement the services
provided by Stephens, NBAI (in its capacity as investment adviser and
co-administrator), BNY and the Transfer Agent to shareholders of record. The
shareholder services provided by NBAI and/or Institutions may include: (i)
responding to inquiries by Customers concerning their investment in Trust Class
Shares; (ii) preparing educational and/or training materials concerning the
Fund for use by Institutions and/or their Customers; (iii) providing other
general shareholder liaison services; and (iv) providing such other similar
services as may be reasonably requested.

Nations Funds may suspend or reduce payments under the Servicing Plan at any
time, and payments are subject to the continuation of the Ser-

12
<PAGE>

vicing Plan described above and the terms of the Servicing Agreement, as the
case may be, between NBAI and Nations Funds. See the SAI for more details on
the Servicing Plan.

Nations Funds understands that Institutions may charge fees to their Customers
who are the owners of Trust Class Shares in connection with their Customers'
accounts. These fees would be in addition to any amounts which may be received
by an Institution under its Servicing Agreement with Nations Funds. The
Servicing Agreement requires an Institution to disclose to its Customers any
compensation payable to the Institution by Nations Funds and any other
compensation payable by the Customers in connection with the investment of
their assets in Shares. Customers of Institutions should read this Prospectus
in light of the terms governing their accounts with their Institutions.

The Adviser may also put out of its own assets amounts to Stephens or other
broker/dealers in connection with the provision of administrative and/or
distribution related services to shareholders.

In addition, Stephens has established a non-cash compensation program, pursuant
to which broker/dealers or financial institutions that sell shares of the
Fund may earn additional compensation in the form of trips to sales seminars or
vacation destinations, tickets to sporting events, theater or other
entertainment, opportunities to participate in golf or other outings and gift
certificates for meals or merchandise. This non-cash compensation program may
be amended or terminated at any time by Stephens.

Conflict of interest restrictions may apply to the receipt by Institutions of
compensation from Nations Funds in connection with the investment of fiduciary
assets in Trust Class Shares. Institutions, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board, or the Federal Deposit
Insurance Corporation, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor, or state securities
commissions, are urged to consult their legal advisers before investing such
assets in Trust Class Shares.

How The Fund Values Its Shares

The net asset value of a share of each class is calculated by dividing the
total value of its respective assets, less liabilities, by the number of shares
in the class outstanding. Shares are valued as of (12:00 noon, Eastern time, on
each Business Day. Currently, the days on which the Federal Reserve Bank of New
York is closed (other than weekends) are: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Memorial Day (observed), Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.

The assets of each Fund are valued based upon the amortized cost method.
Although Nations Funds seeks to maintain the net asset value per share of the
Fund at $1.00, there can be no assurance that its net asset value per share
will not vary.

How Dividends And Distributions Are Made; Tax Information

13
<PAGE>

ten notice to the Transfer Agent at least 15 days prior to the change.

Dividends distributed from the Nations California Tax-Exempt Reserves
attributable to its net interest income from tax-exempt securities will not be
subject to Federal income tax. Dividends distributed from the Fund attributable
to its net interest income from securities issued by the State of California,
its municipalities and certain others will not be subject to California
personal income tax. Dividends distributed from the Fund attributable to income
from other investments and net short-term capital gain will be taxable (for
both Federal and state purposes) to shareholders as ordinary income. Corporate
shareholders of the a Fund will not be able to deduct a portion of their
distributions when determining their taxable income.

As long as the Fund continually maintains a $1.00 net asset value per share, a
shareholder ordinarily will not recognize taxable gain or loss on the
redemption or exchange of his or her Fund shares.

Appendix A -- Portfolio Securities

Mortgage-backed securities represent an ownership interest in a pool of
residential mortgage loans, the interest in which is in most cases issued and

14
<PAGE>

guaranteed by an agency or instrumentality of the U.S. Government, though not
necessarily by the U.S. Government itself. Mortgage-backed securities include
mortgage pass-through securities, collateralized mortgage obligations ("CMOs"),
parallel pay CMOs, planned amortization class CMOs ("PAC Bonds") and stripped
mortgage-backed securities ("SMBS"), including interest-only and principal-only
SMBS. SMBS may be more volatile than other debt securities. For additional
information concerning mortgage-backed securities, see the SAI.

Bank Instruments: Bank instruments consist mainly of certificates of deposit,
time deposits and bankers' acceptances.

Reverse repurchase agreements may be considered to be borrowings. When the Fund
invests in a reverse repurchase agreement, it sells a portfolio security to
another party, such as a bank or broker/ dealer, in return for cash, and
agrees to buy the security back at a future date and price. Reverse repurchase
agreements may be used to provide cash to satisfy unusually heavy redemption
requests without having to sell portfolio securities, or for other temporary or
emergency purposes. In addition, the Fund may use reverse repurchase agreements
for the purpose of investing the proceeds in tri-party repurchase agreements.
Generally, the effect of such a transaction is that the Fund can recover all or
most of the cash invested in the portfolio securities involved during the term
of the reverse repurchase agreement, while it will be able to keep the interest
income associated with those portfolio securities. Such transactions are only
advantageous if the interest cost to the Fund of the reverse repurchase
transaction is less than the cost of obtaining the cash otherwise.

At the time the Fund enters into a reverse repurchase agreement, it will
establish a segregated account with its custodian bank in which it will
maintain cash, U.S. Government securities ("U.S. Government Securities"), or
other liquid high grade debt obligations equal in value to its obligations in
respect of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund is obligated to
repurchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities. In addition, there is a risk of delay in receiving collateral or
securities or in repurchasing the securities covered by the reverse repurchase
agreement or even of a loss of rights in the collateral or securities in the
event the buyer of the securities under the reverse repurchase agreement files
for bankruptcy or becomes insolvent. The Fund only enters into reverse
repurchase agreements (and repurchase agreements) with counterparties that are
deemed by the Adviser to be creditworthy. Reverse repurchase agreements are
speculative techniques involving leverage, and are subject to asset coverage
requirements if the Fund does not establish and maintain a segregated account
(as described above). Under the requirements of the 1940 Act, the Fund is
required to maintain an asset coverage (including the proceeds of the
borrowings) of at least 300% of all borrowings. Depending on market conditions,
the Fund's

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<PAGE>

asset coverage and other factors at the time of a reverse repurchase, the Fund
may not establish a segregated account when the Adviser believes it is not in
the best interest of the Fund to do so. In this case, such reverse repurchase
agreements will be considered borrowings subject to the asset coverage
described above.

Commercial Instruments: Commercial instru- ments consist of short-term U.S.
dollar-denominated obligations issued by domestic corporations or foreign
corporations and domestic and foreign commercial banks.

Foreign Securities: Foreign securities include debt obligations (dollar
denominated) of foreign corporations and banks as well as obligations of
foreign governments and their political subdivisions (which will be limited to
direct government obligations and government-guaranteed securities). Such
investments may subject the Fund to special investment risks, including future
political and economic developments, the possible imposition of withholding
taxes on income (including interest, dividends and disposition proceeds),
possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign issuers in general may
be subject to different accounting, auditing, reporting, and record keeping
standards than those applicable to domestic companies, and securities of
foreign issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers.

Investments in foreign securities may present additional risks, whether made
directly or indirectly, including the political or economic instability of the
issuer or the country of issue and the difficulty of predicting international
trade patterns. In addition, there may be less publicly available information
about a foreign company than about a U.S. company. Further, foreign securities
markets are generally not as developed or efficient as those in the U.S., and
in most foreign markets volume and liquidity are less than in the United
States. Fixed commissions on foreign securities exchanges are generally higher
than the negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign securities exchanges, brokers,
and companies than in the United States. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, or diplomatic developments
that could affect investments within those countries. Because of these and
other factors, securities of foreign companies acquired by the Fund may be
subject to greater fluctuation in price than securities of domestic companies.

16
<PAGE>

swap-related products such as interest rate swaps, currency swaps, caps,
collars and floors.

If otherwise consistent with its investment objective and policies, the Fund
may purchase securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act") but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act, or which
were issued under Section 4(2) of the 1933 Act. Any such security will not be
considered illiquid so long as it is determined by the Fund's Board of Trustees
or the Adviser, acting under guidelines approved and monitored by the Fund's
Board of Trustees, after considering trading activity, availability of reliable
price information and other relevant information, that an adequate trading
market exists for that security. To the extent that, for a period of time,
qualified institutional or other buyers cease purchasing such restricted
securities pursuant to Rule 144A or otherwise, the level of illiquidity of the
Fund holding such securities may increase during such period.

Interest Rate Transactions: In order to attempt to protect the value of their
portfolios from interest rate fluctuations, the Fund may enter into various
hedging transactions, such as interest rate swaps and the purchase or sale of
interest rate caps and floors. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, E.G., an exchange of floating-rate payments for fixed-rate payments.
The Fund will enter into a swap transaction on a net basis, I.E. the payment
obligations of the Fund and the counterparty will be netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
obligations. The Fund will segregate, on a daily basis, cash or liquid high
quality debt securities with a value at least equal to the Fund's net
obligations, if any, under a swap agreement.

The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive pay-

17
<PAGE>

ments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent a specified index is below a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate floor. The Adviser expects to enter into these
transactions on behalf of the Fund primarily to preserve a return or spread on
a particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipated purchasing at a later
date rather than for speculative purposes. The Fund will not sell interest rate
caps or floors that it does not own.

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<PAGE>

not be otherwise marketable. To the extent these securities are illiquid, they
will be subject to the Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an
obligation for full repayment of principal and payment of accrued interest
within the demand period, normally seven days or less (unless the Fund
determines that a particular loan issue, unlike most such loans, has a readily
available market). As it deems appropriate, the Adviser will establish
procedures to monitor the credit standing of each such municipal borrower,
including its ability to meet contractual payment obligations.

19
<PAGE>

fiscal year. With approximately half of California's exports being sold in
Asia, problems in the region have slightly counteracted the state's economic
well-being. However, strong export growth to Mexico has offset some of the
weakness in Asia. Also, a growing, young population, a strong higher education
system and excellent ports continue to bolster California's economic prospects.
California's credit rating, while still average, has recently improved. Recent
budget surpluses plus a positive outlook for the near future has earned
California an "Aa3" rating by Moody's and an "A-plus" rating by S&P.

Securities Lending: To increase return on portfolio securities, the Fund may
lend their portfolio securities to broker/dealers and other institutional
investors pursuant to agreements requiring that the loans be continuously
secured by collateral equal at all times in value to at least the market value
of the securities loaned. There is a risk of delay in receiving collateral or
in recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be creditworthy and when, in its
judgment, the income to be earned from the loan justifies the attendant risks.
The aggregate of all outstanding loans of the Fund may not exceed 33% of the
value of its total assets, which may include cash collateral received for
securities loans. Cash collateral received by a Nations Fund may be invested in
a Nations Funds' money market fund.

Trading on foreign commodity exchanges presents additional risks. Unlike
trading on domes-

20
<PAGE>

tic commodity exchanges, trading on foreign commodity exchanges is not
regulated by the CFTC and may be subject to greater risks than trading on
domestic exchanges. For example, some foreign exchanges are principal markets
for which no common clearing facility exists and a trader may look only to the
broker for performance of the contract. In addition, unless the Fund hedges
against fluctuations in the exchange rate between the U.S. dollar and the
currencies in which trading is done on foreign exchanges, any profits that the
Fund might realize could be eliminated by adverse changes in the exchange rate,
or the Fund could incur losses as a result of those changes.