MONTGOMERY FUNDS I
485BPOS, 1997-09-30
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   As filed with the Securities and Exchange Commission on September 30, 1997
    

                           Registration Nos. 33-34841
                                    811-6011

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM N-1A


             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
   
                         Post-Effective Amendment No. 53
    
                                       and

         REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
   
                                Amendment No. 54
    
                              THE MONTGOMERY FUNDS
             (Exact Name of Registrant as Specified in its Charter)

                              101 California Street
                         San Francisco, California 94111
                     (Address of Principal Executive Office)

                                                  1-800-572-3863
              (Registrant's Telephone Number, Including Area Code)
   
                          JOHN E. PELLETIER, Secretary
                           60 State Street, Suite 1300
                          Boston, Massachusetts, 02109
                     (Name and Address of Agent for Service)
    

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

             It is proposed that this filing will become effective:


               __   immediately upon filing pursuant to Rule 485(b)
   
                X   on September 30, 1997 pursuant to Rule 485(b)
    
               __   60 days after filing pursuant to Rule 485(a)(1)

               __   75 days after filing pursuant to Rule 485(a)(2)

               __   on September 30, 1997 pursuant to Rule 485(a)

         Pursuant to Rule 24f-2 under the  Investment  Company Act of 1940,  the
Registrant  has  registered  an  indefinite   number  of  securities  under  the
Securities Act of 1933. The Rule 24f-2 Notice for the  Registrant's  fiscal year
ended June 30, 1996 was filed on August 28, 1996.

                                   ----------

                     Please Send Copy of Communications to:

                               JULIE ALLECTA, ESQ.
                              DAVID A. HEARTH, ESQ.
                      Paul, Hastings, Janofsky & Walker LLP
                              345 California Street
                         San Francisco, California 94104
                                 (415) 835-1600
           Total number of pages _____. Exhibit Index appears at _____

<PAGE>

                              THE MONTGOMERY FUNDS

                      CONTENTS OF POST-EFFECTIVE AMENDMENT

         This  post-effective  amendment  to the  registration  statement of the
Registrant contains the following documents* :

         Facing Sheet

         Contents of Post-Effective Amendment
   

         Cross-Reference  Sheet for Class R shares of Montgomery High Yield Bond
         Fund

         Part A - Class R Prospectus  for shares of  Montgomery  High Yield Bond
         Fund

         Part A - Class P Prospectus  for shares of  Montgomery  High Yield Bond
         Fund

         Part A - Class L Prospectus  for shares of  Montgomery  High Yield Bond
         Fund

         Part B - Statement of Additional  Information  for Class R, Class P and
         Class L shares of Montgomery High Yield Bond Fund
    
         Part C - Other Information

         Signature Page

         Exhibits

- --------
         * This Amendment does not relate to the following  documents:  Combined
Prospectus and Statement of Additional  Information for the Class R, P and Class
L shares for Montgomery Growth Fund,  Montgomery Equity Income Fund,  Montgomery
Small Cap Fund,  Montgomery Small Cap Opportunities  Fund,  Montgomery Micro Cap
Fund,  Montgomery Global  Opportunities Fund , Montgomery Global  Communications
Fund, Montgomery  International Small Cap Fund, Montgomery  International Growth
Fund  ,  Montgomery  Emerging  Markets  Fund,  Montgomery  Emerging  Asia  Fund,
Montgomery  Latin  America Fund,  Montgomery  Select 50 Fund,  Montgomery  Asset
Allocation  Fund,  Montgomery  Global Asset  Allocation  Fund,  Montgomery Total
Return Bond Fund,  Montgomery  Short Duration  Government Bond Fund,  Montgomery
Government  Reserve Fund,  Montgomery  Federal  Tax-Free Money Fund,  Montgomery
California  Tax-Free  Intermediate Bond Fund and Montgomery  California Tax-Free
Money Fund; and the prospectus and statement of additional  information  for the
Montgomery Japan Small Cap Fund and the Montgomery Technology Fund.

<PAGE>

                              THE MONTGOMERY FUNDS

                              CROSS REFERENCE SHEET

                                    FORM N-1A

                   Part A: Information Required in Prospectus
                   ------------------------------------------
   
                       (For Class R, P and L Prospectuses)
    

N-1A                             Location in the        
Item                             Registration Statement 
No.    Item                      by Heading
- ----   ----                      ----------

1.     Cover Page                Cover Page
                                
2.     Synopsis                 "Fees and Expenses of the Fund"
                                
3.     Condensed Financial
       Information               Not Applicable

4.     General Description      Cover Page,
       of Registrant            "The  Fund's Investment Objectives 
                                 and Policies," "Portfolio Securities,"
                                "Other Investment Practices,"
                                "Risk Considerations" and "General Information"
                                
5.     Management of            "The Fund's Investment Objectives and Policies,"
       the Fund                 "Management of the Fund" and
                                "How to Invest in the Fund"
                                
5A.    Management's Discussion  Not Applicable
       of Fund Performance      
                                
6.     Capital Stock and        "Dividends and Distributions,"
       Other Securities         "Taxation" and "General Information"
                                
7.     Purchase of Securities   "How to Invest in the Fund,"
       Being Offered            "How Net Asset Value is Determined,"
                                "General Information" and
                                "Backup Withholding Instructions"
                                
8.     Redemption or            "How to Redeem an Investment in the Fund" and
       Repurchase               "General Information"
                                
9.     Pending Legal            Not Applicable
       Proceedings              

<PAGE>


                         Part B: Information Required in
                       Statement of Additional Information
                      (Statement of Additional Information)


N-1A                            Location in the
Item                            Registration Statement
No.    Item                     by Heading
- ----   ----                     ----------
10.    Cover Page               Cover Page

11.    Table of Content         Table of Contents

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

13.    Investment Objectives    "Investment Objective and Policies of the Fund,"
                                "Risk Considerations" and
                                "Investment Restrictions"

14.    Management of the        "Trustees and Officers"
       Registrant

15.    Control Persons and      "Trustees and Officers" and
       Principal Holders of     "General Information"
       Securities

16.    Investment Advisory      "Investment Management and Other Services"
       and other Services

17.    Brokerage Allocation     "Execution of Portfolio Transactions"

18.    Capital Stock and        "The Trust" and "General Information"
       Other Securities

19.    Purchase, Redemption     "Additional Purchase and Redemption Information"
       and Pricing of            and "Determination of Net Asset Value"
       Securities Being 
       Offered

20.    Tax Status               "Distributions and Tax Information"

21.    Underwriters             "Principal Underwriter"

22.    Calculation of           "Performance Information"
       Performance Data

23.    Financial Statements     "Financial Statements"

<PAGE>

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

                                     PART A

                          PROSPECTUS FOR CLASS R SHARES

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

<PAGE>

The Montgomery Funds
101 California Street
San Francisco, California 94111 
(800) 572-FUND


Prospectus
   
September 30, 1997
    

Class R shares of the  Montgomery  High Yield Bond Fund (the "Fund") are offered
in this Prospectus.  The Fund seeks maximum total return (which consists of both
income and capital  appreciation)  by investing at least 65% of its total assets
in a broad  range of bonds  rated  below  investment  grade.  The Fund  does not
maintain  a stable net asset  value of $1.00 per  share.  As is the case for all
mutual funds, attainment of the Fund's investment objective cannot be assured.

The  Fund's  shares  are  sold  at net  asset  value  with  no  sales  load,  no
commissions,  no Rule 12b-1 fees and no exchange  fees. In general,  the minimum
initial investment in the Fund is $1,000, and subsequent  investments must be at
least $100. The Manager or the Distributor,  under any circumstances that either
deems appropriate, may waive these minimums. See "How to Invest in the Fund."

The Fund,  which is a  separate  series of The  Montgomery  Funds,  an  open-end
management  investment company,  is managed by Montgomery Asset Management,  LLC
(the   "Manager"),   and  is  distributed  by  Funds   Distributor,   Inc.  (the
"Distributor").
   
Please read this Prospectus before investing and retain it for future reference.
A Statement of  Additional  Information  dated  September  30,  1997,  as may be
revised,  has been  filed  with  the  Securities  and  Exchange  Commission,  is
incorporated by this reference and is available  without charge by calling (800)
572-FUND.  If you are viewing the electronic  version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.

The Internet address for The Montgomery Funds is www.montgomeryfunds.com.

The Securities and Exchange Commission maintains a Web Site (http://www.sec.gov)
that contains the Statement of Additional Information,  material incorporated by
reference,  and other  information  regarding the Fund. The Fund may offer other
classes of shares to  investors  eligible to purchase  those  shares.  The other
classes of shares may have  different fees and expenses than the class of shares
offered in this  Prospectus,  and those  different  fees and expenses may affect
performance.  To obtain  information  concerning the other classes of shares not
offered in this  Prospectus,  call The  Montgomery  Funds at (800)  572-FUND  or
contact  sales  representatives  or  financial  intermediaries  who offer  those
classes.
    



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.

                                       1
<PAGE>



TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Fees and Expenses of The Fund                                                  3
- --------------------------------------------------------------------------------
The Fund's Investment Objective And Policies                                   4
- --------------------------------------------------------------------------------
Portfolio Securities                                                           4
- --------------------------------------------------------------------------------
Other Investment Practices                                                     6
- --------------------------------------------------------------------------------
Risk Considerations                                                            9
- --------------------------------------------------------------------------------
Management of The Fund                                                        10
- --------------------------------------------------------------------------------
How To Contact The Fund                                                       12
- --------------------------------------------------------------------------------
How To Invest In The Fund                                                     12
- --------------------------------------------------------------------------------
How To Redeem An Investment In The Fund                                       15
- --------------------------------------------------------------------------------
Exchange Privileges And Restrictions                                          16
- --------------------------------------------------------------------------------
Brokers and Other Intermediaries                                              17
- --------------------------------------------------------------------------------
How Net Asset Value Is Determined                                             18
- --------------------------------------------------------------------------------
Dividends And Distributions                                                   18
- --------------------------------------------------------------------------------
Taxation                                                                      18
- --------------------------------------------------------------------------------
General Information                                                           19
- --------------------------------------------------------------------------------
Backup Withholding Instructions                                               20
- --------------------------------------------------------------------------------
Glossary                                                                      21
- --------------------------------------------------------------------------------
                                       2
<PAGE>

                          Fees And Expenses Of The Fund



Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following  charges when buying or redeeming  shares of
the Fund:
<CAPTION>
    Maximum Sales Load          Maximum Sales Load        Deferred Sales Load      Redemption Fees          Exchange Fees
   Imposed on Purchases        Imposed on Reinvested
                                     Dividend
- -------------------------------------------------------------------------------------------------------------------------------
<S>        <C>                         <C>                        <C>                   <C>                     <C>
           None                        None                       None                  None+                   None
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
Management Fee                                             0.80%
- --------------------------------------------------------------------------------
Other Expenses                                             0.40%
(after reimbursement)*
- --------------------------------------------------------------------------------
Total Fund Operating Expenses*                             1.20%
- --------------------------------------------------------------------------------

The previous  tables are intended to assist the  investor in  understanding  the
various direct and indirect costs and expenses of the Fund.  Operating  expenses
are paid out of the Fund's  assets and are factored into the Fund's share price.
The  Fund  estimates  that it will  have the  expenses  listed  (expressed  as a
percentage of average net assets) for the current fiscal year.

+    Shareholders effecting redemptions via wire transfer may be required to pay
     fees, including the wire fee and other fees, that will be directly deducted
     from  redemption  proceeds.  The Fund  reserves  the  right,  upon 60 days'
     advance notice to  shareholders,  to impose a redemption fee of up to 1.00%
     on  shares  redeemed  within  90 days of  purchase.  See "How to  Redeem an
     Investment in the Fund."

*    Expenses for the Fund are  estimated.  The Manager will reduce its fees and
     may  absorb  or  reimburse  the Fund for  certain  expenses  to the  extent
     necessary  to limit total annual fund  operating  expenses to the lesser of
     the amount  indicated  in the table for the Fund or the maximum  allowed by
     applicable state expense limitations. The Fund is required to reimburse the
     Manager for any  reductions  in the Manager's fee only during the two years
     following  that  reduction and only if such  reimbursement  can be achieved
     within  the  foregoing   expense  limits.   The  Manager   generally  seeks
     reimbursement  for the oldest  reductions and waivers before payment by the
     Fund for fees and  expenses  for the current  year.  Absent the  reduction,
     actual total Fund operating expenses are estimated to be 1.75% (0.95% other
     expenses).  The Manager may  terminate  these  voluntary  reductions at any
     time. See "Management of the Fund."

Example of Expenses for the Fund

Assuming,  hypothetically,  that the  Fund's  annual  return  is 5% and that its
operating  expenses are as set forth  above,  an investor  buying  $1,000 of the
Fund's shares would have paid the following  total  expenses upon redeeming such
shares:

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
1 Year                                                        $12
- --------------------------------------------------------------------------------
3 Years                                                       $38
- --------------------------------------------------------------------------------
5 Years                                                       N/A
- --------------------------------------------------------------------------------
10 Years                                                      N/A
- --------------------------------------------------------------------------------


This example is to help potential  investors  understand the effect of expenses.
Investors should  understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.

                                       3
<PAGE>

The Fund's Investment Objective And Policies

The  investment  objective  and  general  investment  policies  of the  Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices  that may be employed by the Fund are  described in "Other  Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund  are  described  in  those  sections  as well as in  "Risk  Considerations"
beginning on page 9.  Certain  Terms Used In The  Prospectus  Are Defined In The
Glossary Found At The End Of The Prospectus.
   
The  Investment  objective of the Fund is to seek to obtain maximum total return
(which consists of both income and capital  appreciation) by investing primarily
in a broad range of bonds rated below  investment  grade (commonly  called "junk
bonds")  with the goal that the Fund  achieve  higher  total  return than mutual
funds that  invest  exclusively  in other types of bonds  (i.e.  non-high  yield
bonds).  Under  normal  conditions,  the Fund  seeks to achieve  its  investment
objective by investing at least 65% of its total assets in a broad range of such
fixed income  securities  rated below  investment  grade,  including  high-yield
corporate bonds, high-yield mortgage-related securities, high-yield asset-backed
securities and U.S.-dollar or foreign currency  dominated  securities of foreign
issuers.  The Fund may also invest up to 35% of its total  assets in  investment
grade  bonds,  equity  securities,  equity  derivatives  or  hybrid  securities,
including preferred stocks,  convertible securities,  warrants, and may purchase
securities from private placements.  Investors should note that the market value
of debt  securities  that are  interest-rate  sensitive is inversely  related to
changes in  interest  rates.  That is, an  interest  rate  decline  produces  an
increase in a security's  market value and an interest rate increase  produces a
decrease in value. The longer the remaining maturity of a security,  the greater
the effect of  interest  rate  changes.  During the  two-to-three  month  period
following  the  commencement  of the  Fund's  operations,  the Fund may have its
assets invested substantially in cash and cash equivalents.

The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson. See "Management of the Fund."
    
Portfolio Securities

Equity Securities

The Fund may, within the limits described above, invest in common stocks and may
also invest in other types of equity  securities  (such as  preferred  stocks or
convertible securities) as well as equity derivative securities.

Depositary Receipts, Convertible Securities and Securities Warrants

The Fund may invest in ADRs, EDRs and GDRs and  convertible  securities that the
Manager regards as a form of equity security.  The Fund may also invest up to 5%
of its net assets in warrants.

Investment Companies

The Fund may invest up to 10% of its total assets in shares of other  investment
companies investing  exclusively in securities in which it may otherwise invest.
The Fund does not intend to invest in other investment  companies unless, in the
Manager's  judgment,  the  potential  benefits  exceed  associated  costs.  As a
shareholder in an investment  company,  the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees.

High Yield and Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade.  These are securities rated lower than Baa by Moody's Investors  Service,
Inc.,  ("Moody's")  and BBB by Standard & Poor's  Ratings Group  ("S&P"),  Fitch
Investors  Service,  L.P.  ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps").  These  securities  are  sometimes  known  as  "junk  bonds"  or "high
risk/high  yield" bonds.  These  securities  carry a high degree of risk and are
considered   speculative   by  the  credit  rating   organizations.   See  "Risk
Considerations"  below. The Statement of Additional  Information has an appendix
with a description of the ratings used by these organizations. The Fund also may
invest in other debt securities, including securities in default. In addition to
traditional  corporate,  government and supranational debt securities,  the Fund
may invest in external (i.e., to foreign lenders) debt obligations issued by the
governments, governmental entities and companies of foreign countries.

                                       4
<PAGE>

U.S. Government Securities

The Fund may invest in fixed rate and floating or variable rate U.S.  government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related  securities of the GNMA, are issued or guaranteed by
the U.S.  government.  Other securities  issued by U.S.  government  agencies or
instrumentalities   are   supported   only  by  the  credit  of  the  agency  or
instrumentality,  such as those  issued by the  Federal  Home Loan  Bank,  while
others,  such as those issued by the FNMA,  Farm Credit  System and Student Loan
Marketing Association, have an additional line of credit with the U.S.
Treasury.

Short-term U.S. government  securities  generally are considered to be among the
safest short-term  investments.  However, the U.S. government does not guarantee
the net asset  value of the  Fund's  shares.  With  respect  to U.S.  government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that  the  U.S.   government   will   provide   support  to  such   agencies  or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.

Mortgage-Related Securities and Derivative Securities

The Fund may invest in mortgage-related  securities. A mortgage-related security
is an  interest  in a pool of  mortgage  loans and is  considered  a  derivative
security. Most mortgage-related  securities are pass-through  securities,  which
means that  investors  receive  payments  consisting of a pro rata share of both
principal and interest (less  servicing and other fees),  as well as unscheduled
prepayments,  as mortgages in the  underlying  mortgage pool are paid off by the
borrowers.  Certain mortgage-related  securities are subject to high volatility.
The Fund uses these derivative  securities in an effort to enhance return and as
a means to make certain  investments  not otherwise  available to the Fund.  See
"Hedging and Risk  Management  Practices"  for a discussion of other reasons why
the Fund invests in derivative securities.

Agency Mortgage-Related Securities

Investors in the Fund should note that the  dominant  issuers or  guarantors  of
mortgage-related  securities  today are GNMA,  FNMA and the FHLMC.  GNMA creates
pass-through  securities from pools of government guaranteed or insured (Federal
Housing Authority or Veterans  Administration)  mortgages.  FNMA and FHLMC issue
pass-through  securities from pools of conventional and federally insured and/or
guaranteed   residential   mortgages.   The   principal  and  interest  on  GNMA
pass-through  securities are guaranteed by GNMA and backed by the full faith and
credit of the U.S.  government.  FNMA  guarantees full and timely payment of all
interest and  principal,  and FHLMC  guarantees  timely  payment of interest and
ultimate collection of principal of its pass-through securities. Securities from
FNMA  and  FHLMC  are not  backed  by the  full  faith  and  credit  of the U.S.
government  but are  generally  considered to offer  minimal  credit risks.  The
yields provided by these mortgage-related  securities have historically exceeded
the yields on other types of U.S. government  securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."

Adjustable  rate  mortgage  securities  ("ARMs")  are  pass-through   securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined  interest rate index and which may
be subject to certain  limits.  The  adjustment  feature of ARMs tends to lessen
their interest rate sensitivity.

The Fund considers GNMA, FNMA and FHLMC-issued pass-through  certificates,  CMOs
and other  mortgage-related  securities  to be U.S.  government  securities  for
purposes of their  investment  policies.  However,  the Fund limits its stripped
mortgage securities investments to 10% of total assets. The liquidity of IOs and
POs issued by the U.S.  government  or its  agencies and  instrumentalities  and
backed by  fixed-rate  mortgage-related  securities  will be  determined  by the
Manager  under the direct  supervision  of the  Trust's  Pricing  Committee  and
reviewed  by the Board,  and all other IOs and POs will be deemed  illiquid  for
purposes of the Fund's limitation on illiquid securities. The Fund may invest in
derivative  securities known as "floaters" and "inverse floaters," the values of
which vary in response to interest rates.  These  securities may be illiquid and
their values may be very volatile.

Privately Issued Mortgage-Related Securities/Derivatives.

The Fund may invest in  mortgage-related  securities offered by private issuers,
including pass-through securities for pools of conventional residential mortgage
loans;  mortgage  pay-through  obligations and mortgage-backed  bonds, which are
considered  to be  obligations  of the  institution  issuing  the  bonds and are
collateralized  by  mortgage  loans;  and  bonds  and  CMOs   collateralized  by
mortgage-related  securities  issued  by  GNMA,  FNMA,  FHLMC  or  by  pools  of
conventional mortgages, multi-family or commercial mortgage loans.

                                       5
<PAGE>

Private  issuer  mortgage-related  securities  generally  offer a higher rate of
interest (but greater  credit and interest rate risk) than U.S.  government  and
agency  mortgage-related  securities  because  they offer no direct or  indirect
governmental guarantees.  However, many issuers or servicers of mortgage-related
securities  guarantee or provide  insurance  for timely  payment of interest and
principal.  The Fund  may  purchase  some  mortgage-related  securities  through
private  placements  that are  restricted  as to  further  sale.  See  "Illiquid
Securities." The value of these securities may be very volatile.

Structured Notes and Indexed Securities.

The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities; the interest rate or principal of which is determined by an
unrelated  indicator.  Indexed  securities  include  structured notes as well as
securities other than debt  securities;  the interest rate or principal of which
is  determined  by an  unrelated  indicator.  Index  securities  may  include  a
multiplier  that  multiplies  the  indexed  element by a  specified  factor and,
therefore,  the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall  assessment of the effective  duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.

Zero Coupon Bonds

The Fund may invest in zero  coupon  bonds.  Zero  coupon bond prices are highly
sensitive to changes in market  interest  rates.  The original issue discount on
the zero coupon bonds must be included  ratably in the income of the Fund as the
income accrues even though payment has not been received.  The Fund nevertheless
intends to distribute an amount of cash equal to the currently  accrued original
issue discount,  and this may require liquidating securities at times they might
not otherwise do so and may result in capital loss. See "Tax Information" in the
Statement of Additional Information.

Asset-Backed Securities

The Fund may invest up to 5% of its total assets in asset-backed securities such
as  those  backed  by  credit  card  receivables  or  automobile   loans.   Like
mortgage-related  securities,  these  securities  are  subject  to the  risk  of
prepayment.

Other Investment Practices

The Fund also may engage in the investment  practices  described below,  each of
which  may  involve   certain   special  risks.   The  Statement  of  Additional
Information,  under the heading "Investment Objective and Policies of the Fund,"
contains more detailed  information about certain of these practices,  including
limitations designed to reduce risks.

Repurchase Agreements

The  Fund  may  enter  into  repurchase  agreements.  Pursuant  to a  repurchase
agreement,  the Fund  acquires a U.S.  government  security or other  high-grade
liquid debt instrument from a financial  institution that simultaneously  agrees
to repurchase  the same security at a specified  time and price.  The repurchase
price reflects an  agreed-upon  rate of return not determined by the coupon rate
on the  underlying  security.  Under  the  Investment  Company  Act,  repurchase
agreements   are  considered  to  be  loans  by  the  Fund  and  must  be  fully
collateralized by cash, letters of credit, U.S.  government  securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying  security,  the Fund may
experience  delay or  difficulty  in  exercising  its rights to realize upon the
security,  may incur a loss if the value of the security  declines and may incur
disposition costs in liquidating the security.

Borrowing

The  Fund  may  borrow  money  from  banks  and  engage  in  reverse  repurchase
transactions,  in an amount  not to exceed  one-third  of the value of its total
assets to meet  temporary  or  emergency  purposes,  and the Fund may pledge its
assets in connection with such borrowings.  The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.

Reverse Repurchase Agreements

The Fund may enter into reverse repurchase  agreements.  In a reverse repurchase
agreement,  the Fund sells to a financial  institution  a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.

                                       6
<PAGE>

Leverage

The Fund may leverage its portfolio to increase total return.  Although leverage
creates an opportunity  for increased  income and gain, it also creates  special
risk  considerations.  For example,  leveraging  may magnify  changes in the net
asset values of the Fund's  shares and in the yield on its  portfolio.  Although
the principal of such borrowings will be fixed,  the Fund's assets may change in
value while the borrowing is outstanding.  Leveraging  creates interest expenses
that can exceed the income from the assets retained.

Securities Lending

The  Fund  may  lend   securities  to  brokers,   dealers  and  other  financial
organizations.  These loans may not exceed 30% of the Fund's total assets.  Each
securities loan is  collateralized  with collateral assets in an amount at least
equal  to the  current  market  value of the  loaned  securities,  plus  accrued
interest.  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.

When-Issued and Forward Commitment Securities

The Fund may purchase  U.S.  government or other  securities on a  "when-issued"
basis and may purchase or sell securities on a "forward  commitment" or "delayed
delivery"  basis.  The price is fixed at the time the  commitment  is made,  but
delivery and payment for the securities  take place at a later date,  normally 7
to 15 days  or,  in the  case  of  certain  CMO  issues,  45 to 60  days  later.
When-issued  securities  and  forward  commitments  may  be  sold  prior  to the
settlement   date,  but  the  Fund  will  enter  into  when-issued  and  forward
commitments  only with the  intention of actually  receiving or  delivering  the
securities,  as the case may be. No income accrues on securities  that have been
purchased  pursuant to a forward  commitment or on a when-issued  basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.

At the time the Fund  enters  into a  transaction  on a  when-issued  or forward
commitment basis, it supports its obligation with collateral assets equal to the
value of the  when-issued  or  forward  commitment  securities  and  causes  the
collateral  assets  to be  marked  to  market  daily.  There is a risk  that the
securities may not be delivered and that the Fund may incur a loss.

Hedging and Risk Management Practices

In seeking to protect against the effect of adverse changes in financial markets
or against  currency  exchange rate or interest rate changes that are adverse to
the present or  prospective  positions of the Fund,  the Fund may employ certain
risk  management  practices  using  the  following  derivative   securities  and
techniques  (known  as  "derivatives"):  forward  currency  exchange  contracts,
currency options,  futures contracts and options on futures contracts on foreign
government  securities  and  currencies.  The  Board of the  Trust  has  adopted
derivative  guidelines  that  require  the  Board  to  review  each  new type of
derivative that may be used by the Fund. Markets in some countries  currently do
not have instruments  available for hedging transactions  relating to currencies
or to  securities  denominated  in such  currencies  or to securities of issuers
domiciled or principally  engaged in business in such  countries.  To the extent
that  such  markets  do not  exist,  the  Manager  may not be able to hedge  its
investment  effectively  in such  countries.  Furthermore,  the Fund  engages in
hedging activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.

Forward Currency Contracts

A forward currency  contract is individually  negotiated and privately traded by
currency  traders and their  customers  and creates an obligation to purchase or
sell a specific  currency for an  agreed-upon  price at a future date.  The Fund
normally  conducts its foreign currency exchange  transactions  either on a spot
(i.e.,  cash) basis at the spot rate in the foreign currency  exchange market at
the time of the  transaction,  or through  entering  into  forward  contracts to
purchase or sell foreign  currencies at a future date.  The Fund  generally does
not enter into forward contracts with terms greater than one year.

The Fund generally enters into forward  contracts only under two  circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign  currency,  it any desire to "lock in" the U.S.  dollar
price of the security by entering into a forward contract to buy the amount of a
foreign  currency  needed to settle  the  transaction.  Second,  if the  Manager
believes that the currency of a particular  foreign  country will  substantially
rise or fall against the U.S.  dollar,  it may enter into a forward  contract to
buy or sell the  currency  approximately  the value of some or all of the Fund's
portfolio securities  denominated in such currency. The Fund will not enter into
a forward  contract if, as a result,  it would have more than one-third of total
assets  committed  to such  contracts  (unless it owns the  currency  that it is
obligated to deliver or has caused its custodian to segregate  Segregable Assets
having a value sufficient to cover its obligations).  Although forward contracts
are used

                                       7
<PAGE>

primarily to protect the Fund from adverse currency movements,  they involve the
risk that currency movements will not be accurately predicted.

Futures and Options on Futures

To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell  interest  rate futures  contracts.  An interest  rate futures
contract  is an  agreement  to purchase or sell debt  securities,  usually  U.S.
government securities,  at a specified date and price. In addition, the Fund may
purchase  and sell put and call options on interest  rate  futures  contracts in
lieu of entering into the underlying  interest rate futures contracts.  The Fund
will  have  collateral  assets  equal to the  purchase  price  of the  portfolio
securities  represented by the underlying interest rate futures contracts it has
an obligation to purchase.

The Fund does not enter into any futures contracts or related options if the sum
of initial margin  deposits on futures  contracts,  related options and premiums
paid for any such related options would exceed 5% of its total assets.  The Fund
does not purchase  futures  contracts or related  options if, as a result,  more
than one-third of its total assets would be so invested.

Hedging Considerations

Hedging  transactions involve certain risks. While the Fund may benefit from the
use  of  hedging  transactions,  unanticipated  changes  in  interest  rates  or
securities prices may result in poorer overall  performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position  and a  portfolio  position  is not  properly  protected,  the  desired
protection  may not be obtained and the Fund may be exposed to risk of financial
loss. In addition,  the Fund pays commissions and other costs in connection with
such investments.

Illiquid Securities

The Fund may not invest more than 15% of its net assets in illiquid  securities.
The Fund treats any securities  subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are  restricted as to remittance of invested  capital or profit as
illiquid.  The Fund also treats repurchase  agreements with maturities in excess
of seven days as illiquid.  Illiquid  securities do not include  securities that
meet the  requirements  of Rule 144A under the  Securities Act of 1933 and that,
subject to the  review by the Board and  guidelines  adopted  by the Board,  the
Manager has determined to be liquid.

Defensive Investments and Portfolio Turnover

Notwithstanding its investment  objective,  the Fund may adopt up to a 100% cash
or cash equivalent  position for temporary defensive purposes to protect against
erosion of its  capital  base.  Depending  upon the  Manager's  analysis  of the
various markets and other considerations,  all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies),  such  as U.S.  government  securities  or  obligations  issued  or
guaranteed  by  the  government  of a  foreign  country  or by an  international
organization  designed or supported by multiple foreign governmental entities to
promote economic  reconstruction or development,  high-quality commercial paper,
time deposits,  savings accounts,  certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary  purposes pending  investment in other securities
and following substantial new investment in the Fund.

Portfolio  securities  are sold  whenever the Manager  believes it  appropriate,
regardless  of how long the  securities  have been held.  The Manager  therefore
changes the Fund's  investments  whenever it believes  doing so will further the
Fund's  investment  objective  or when it appears that a position of the desired
size cannot be accumulated.  Portfolio  turnover generally involves some expense
to  the  Fund,  including  brokerage  commissions,  dealer  mark-ups  and  other
transaction  costs,  and may result in the recognition of capital gains that may
be distributed to shareholders.  Generally, portfolio turnover in excess of 100%
is considered high and increases such costs. The annual  portfolio  turnover for
the Fund is expected to be  approximately  100%. Even if the portfolio  turnover
for the  Fund is in  excess  of 100%,  the Fund  would  not  consider  portfolio
turnover as a limiting factor.  Furthermore, in the case of the Fund, which is a
fixed-income  fund,  portfolio  turnover tends to have a less material effect on
the performance of the Fund and the tax consequences to its shareholders.

Investment Restrictions

The  investment  objective  of the Fund is  fundamental  and may not be  changed
without  shareholder  approval,  but unless otherwise  stated,  the Fund's other
investment  policies  may be changed  by the Board.  If there is a change in the
investment  objective  or policies  of the Fund,  shareholders  should  consider
whether  the  Fund  remains  an   appropriate   investment  in  light  of

                                       8
<PAGE>

their  then-current  financial  positions  and  needs.  The Fund is  subject  to
additional  investment  policies and restrictions  described in the Statement of
Additional Information, some of which are fundamental.

The Fund has  reserved  the right,  if approved by the Board,  to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment  objective,  policies and restrictions.
At least 30 days' prior written  notice of any such action would be given to all
shareholders  if and when such a proposal is  approved,  although no such action
has been proposed as of the date of this Prospectus.

Risk Considerations

Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade  (sometimes  called  "junk  bonds").  These debt  securities  have greater
speculative  characteristics and are regarded as having a great vulnerability to
default  although  currently  having the capacity to meet interest  payments and
principal repayments.  Securities rated immediately below investment grade (i.e.
BB by  S&P,  Fitch  or Duff &  Phelps)  are  regarded  as  having  predominantly
speculative  characteristics  and,  while such  obligations  have less near-term
vulnerability  to default  then other  speculative  grade debt,  they face major
ongoing  uncertainties  or exposure to adverse  business,  financial or economic
conditions  which could lead to inadequate  capacity to meet timely interest and
principal  payments.  Securities  rated C by  Moody's  are  regarded  as  having
extremely  poor  prospects  of ever  attaining  any  real  investment  standing.
Securities  rated D by S&P,  Fitch  and Duff &  Phelps  are in  default  and the
payment  of  interest  and/or  repayment  of  principal  is  in  arrears.   Such
securities,   though  high  yielding,  are  characterized  by  great  risk.  See
"Appendix" in the Statement of Additional  Information for a general description
of securities ratings. Adverse business,  financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay  principal.  The
ability to maintain other terms of the contract over any long period of time may
be small.
   
Junk bonds are more subject to default during  periods of economic  downturns or
increases in interest rates and their yields will fluctuate over time. It may be
more  difficult  to  dispose  of or to value junk  bonds,  especially  during an
economic  recession which could disrupt  severely the market of such securities.
One way to measure this risk is to compare default rates. According to a Moody's
report  entitled,  "Historical  Default  Rates of  Corporate  Bond  Issuers from
1920-1996"  which was published in January of 1997, the weighted  average annual
default rate from 1970 to 1996 was 3.93% for non-investment grade bonds compared
to 0.05% for investment  grade bonds.  During that time, the highest default for
any one year was 10.67% in 1991,  partly  attributed to widespread  recessionary
conditions.
    
The ratings of Moody's S&P, Fitch and Duff & Phelps  represent their opinions as
to the quality of the  obligations,  which they  undertake to rate.  Ratings are
relative and subjective  and,  although  ratings may be useful in evaluating the
safety or interest and principal payments, they do not evaluate the market value
risk of such obligations.  Even though these ratings may be an initial criterion
for  selection of portfolio  securities,  achievement  of the Fund's  investment
objective is more  dependent on the  Manager's  own credit  analysis then is the
case for a fund that invests in higher rated securities.

Foreign Securities

The Fund may invest in foreign  securities,  including debt or equity securities
denominated  in foreign  currencies.  There are certain  risks  associated  with
investments in foreign  securities.  Foreign investments involve the possibility
of expropriation,  nationalization or confiscatory taxation,  taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and  dividends)  or other taxes imposed with respect to  investments  in foreign
nations,  foreign exchange controls (which may include suspension of the ability
to transfer  currency from a given  country and  repatriation  of  investments),
default in foreign government securities, and political or social instability or
diplomatic  developments that could adversely affect  investments.  In addition,
there is often less publicly  available  information  about foreign issuers than
those in the U.S. Foreign companies are often not subject to uniform accounting,
auditing and  financial  reporting  standards.  Further,  the Fund may encounter
difficulties  in pursuing  legal  remedies or in obtaining  judgments in foreign
courts. Additional risk factors, including use of domestic and foreign custodian
banks and  depositories,  are described  elsewhere in the  Prospectus and in the
Statement of Additional Information.

Brokerage  commissions,  fees for custodial services and other costs relating to
investments  by the Fund in other  countries are  generally  greater than in the
U.S. Foreign markets,  have different  clearance and settlement  procedures from
those in the U.S., and certain markets have  experienced  times when settlements
did not keep pace with the volume of  securities  transactions  and  resulted in
settlement  difficulty.  The  inability  of the Fund to make  intended  security
purchases  due to  settlement  difficulties  could  cause it to miss  attractive
investment  opportunities.  Inability  to  sell  a  portfolio  security  due  to
settlement  problems  could  result  in loss to the  Fund  if the  value  of the
portfolio  security  declined  or result in  claims  against  the Fund if it had
entered into

                                       9
<PAGE>

a contract to sell the security. In certain countries,  there is less government
supervision and regulation of business and industry practices,  stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid, and
subject to greater price volatility than those in the U.S.

Because  the  securities  owned  by the  Fund  may  be  denominated  in  foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control  regulations,  and costs will be incurred
in connection with conversions  between  currencies.  A change in the value of a
foreign  currency  against the U.S. dollar results in a corresponding  change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and  distributions  to  shareholders.  The
Fund may be affected either  favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations,  and the Fund may
therefore  engage in  foreign  currency  hedging  strategies.  Such  strategies,
however,  involve  certain  transaction  costs and investment  risks,  including
dependence upon the Manager's ability to predict movements in exchange rates.

Some  countries  in which the Fund may  invest  may also have  fixed or  managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain  currencies  may  not be  internationally  traded.  A  number  of  these
currencies have experienced steady devaluation  relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.

Many countries in which the Fund may invest have experienced substantial, and in
some periods  extremely high,  rates of inflation for many years.  Inflation and
rapid  fluctuation  in  inflation  rates may have  negative  effects  on certain
economies and securities markets.  Moreover, the economies of some countries may
differ  favorably or unfavorably  from the U.S.  economy in such respects as the
rate  of  growth  of  gross  domestic  product,   rate  of  inflation,   capital
reinvestment, resource self-sufficiency and balance of payments.

Certain  countries also limit the amount of foreign capital that can be invested
in their markets and local  companies,  creating a "foreign  premium" on capital
investments  available to foreign investors such as the Fund. The Fund may pay a
"foreign  premium" to establish  an  investment  position  which it cannot later
recoup because of changes in that country's foreign investment laws.

Interest Rates

The  market  value  of debt  securities  that  are  interest-rate  sensitive  is
inversely  related to changes  in  interest  rates.  That is, an  interest  rate
decline  produces an increase in a security's  market value and an interest rate
increase  produces a decrease in value.  The longer the remaining  maturity of a
security,  the  greater  the effect of  interest  rate  changes.  Changes in the
ability of an issuer to make  payments  of  interest  and  principal  and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.

Prepayments  of  principal  of  mortgage-related  securities  by  mortgagors  or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's  portfolio.  Mortgage  prepayments  are  affected  by the level of
interest rates and other factors,  including general economic conditions and the
underlying  location  and age of the  mortgage.  In periods  of rising  interest
rates, the prepayment rate tends to decrease,  lengthening the average life of a
pool of mortgage-related  securities.  In periods of falling interest rates, the
prepayment  rate  tends to  increase,  shortening  the  average  life of a pool.
Because  prepayments  of  principal  generally  occur  when  interest  rates are
declining,  it is  likely  that the Fund,  to the  extent  it  retains  the same
percentage of debt securities,  may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments.  If this occurs,
the Fund's yield will correspondingly decline. Thus, mortgage-related securities
may have less potential for capital  appreciation in periods of falling interest
rates than other fixed-income  securities of comparable duration,  although they
may have a  comparable  risk of  decline  in market  value in  periods of rising
interest  rates.  To  the  extent  that  the  Fund  purchases   mortgage-related
securities at a premium, unscheduled prepayments,  which are made at par, result
in a loss equal to any unamortized  premium.  Duration is one of the fundamental
tools used by the Manager in managing  interest rate risks including  prepayment
risks. See "Duration" in the Glossary.

Management Of The Fund

The  Montgomery  Funds  has a Board of  Trustees  that  establishes  the  Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are  administered by the officers of the Trust and by the Manager  pursuant
to the terms of an investment management agreement with the Fund.

                                       10
<PAGE>

Montgomery  Asset  Management,  LLC is the  Fund's  Manager.  The  Manager  is a
Delaware limited  liability  company and is registered as an investment  adviser
with the SEC under the Investment Advisers Act of 1940, as amended.  The Manager
and its predecessor  have advised private  accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG.

Commerzbank,  the third largest  publicly held commercial  bank in Germany,  has
total assets of approximately [$268] billion. Commerzbank and its affiliates had
over [$79] billion in assets under management as of June 30, 1997. Commerzbank's
asset  management  operations  involve more than 1,000 employees in 13 countries
worldwide.

Portfolio Manager
   
The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson.
    
Mr. Stevens is a managing director and a senior portfolio  manager.  At Barclays
de Zoete Wedd Securities from 1991 to 1992, he started its CMO and  asset-backed
securities  trading.   Mr.  Stevens  traded  stripped  mortgage  securities  and
mortgage-related  interest rate swaps for the First Boston Corporation from 1990
to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was responsible
for the origination and trading of all derivative mortgage-related securities.

Mr. Wilson is a portfolio manager.  Mr. Wilson joined the Manager's fixed income
team in April,  1994.  From 1992 to 1994 he was an Associate in the Fixed income
Client  Services  Department  of BARRA in Berkeley,  California.  At BARRA,  Mr.
Wilson directed research and development teams on mortgage,  CMO and other fixed
income  projects.  Prior to that, he was an Associate in the structured  finance
department at Security  Pacific Merchant Bank as well as on the mortgage trading
desk at Chemical Bank.

Management Fees and Other Expenses

The Manager  provides  the Fund with  advice on buying and  selling  securities,
manages the Fund's investments,  including the placement of orders for portfolio
transactions,  furnishes  the Fund with office space and certain  administrative
services,  and  provides  personnel  needed  by the  Fund  with  respect  to the
Manager's  responsibilities  under the Manager's Investment Management Agreement
with the Fund.  The Manager  also  compensates  the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and  shareholder  reports  for  dissemination  to  prospective   investors.   As
compensation,  the Fund pays the Manager a monthly management fee (accrued daily
but paid when  requested  by the  Manager)  based upon the value of its  average
daily net assets, according to the following table.

                                   Average Daily Net Assets       Annual Rate
- ---------------------------------- -------------------------- -----------------
Montgomery High Yield Bond Fund    First $500 million                    0.80%
                                   Over $500 million                     0.70%
- ---------------------------------- -------------------------- -----------------

The Manager also serves as the Fund's Administrator (the  "Administrator").  The
Administrator  performs  services  with regard to various  aspects of the Fund's
administrative  operations.  As compensation,  the Fund pays the Administrator a
monthly fee at the annual rate of five  one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of daily net assets over $500 million).

The  Fund is  responsible  for its own  operating  expenses  including,  but not
limited  to:  the  Manager's  fees;  taxes,  if any;  brokerage  and  commission
expenses,   if  any;  interest  charges  on  any  borrowings;   transfer  agent,
administrator,  custodian,  legal and auditing fees;  shareholder servicing fees
including fees to third party  servicing  agents;  fees and expenses of Trustees
who are not interested  persons of the Manager;  salaries of certain  personnel;
costs and expenses of calculating its daily net asset value;  costs and expenses
of  accounting,  bookkeeping  and  recordkeeping  required  under the Investment
Company Act;  insurance  premiums;  trade association dues; fees and expenses of
registering  and  maintaining  registration of its shares for sale under federal
and applicable state  securities  laws; all costs  associated with  shareholders
meetings and the preparation and  dissemination of proxy  materials,  except for
meetings  called  solely  for the  benefit  of the  Manager  or its  affiliates;
printing and mailing  prospectuses,  statements  of additional  information  and
reports to shareholders;  and other expenses relating to the Fund's  operations,
plus any extraordinary and nonrecurring  expenses that are not expressly assumed
by the Manager.

The Manager has agreed to reduce its  management  fee if necessary to keep total
annual operating  expenses at or below one and two-tenths of one percent (1.20%)
of the Fund's  average  net  assets.  The Manager  also may  voluntarily  reduce
additional  amounts to increase the return to the Fund's investors.  The Manager
may terminate these voluntary reductions at any time. Any reductions made by the
Manager  in its  fees are  subject  to  reimbursement  by the  Fund  within  the
following two years, provided

                                       11
<PAGE>

that the Fund is able to effect such reimbursement and remain in compliance with
applicable expense  limitations.  The Manager generally seeks  reimbursement for
the  oldest  reductions  and  waivers  before  payment  by the Fund for fees and
expenses for the current year.

In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating  expense for which
the Fund is obligated to pay and the  performance  of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement,  the Manager is entitled to seek  reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the  Fund's  shares  as well as  other  service  providers  of  shareholder  and
administrative  services.  In addition,  the Manager,  out of its own funds, may
sponsor   seminars  and   educational   programs  on  the  Fund  for   financial
intermediaries and shareholders.

The  Manager  considers  a number of factors  in  determining  which  brokers or
dealers to use for the Fund's  portfolio  transactions.  While these factors are
more fully discussed in the Statement of Additional  Information,  they include,
but are not limited to,  reasonableness of commissions,  quality of services and
execution  and  availability  of  research  that the Manager  may  lawfully  and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive  prices,  the Manager also may
consider sale of the Fund's shares as a factor in selecting  broker-dealers  for
the Fund's portfolio transactions.  It is anticipated that Montgomery Securities
may act as one of the  Fund's  brokers  in the  purchase  and sale of  portfolio
securities  and, in that capacity will receive  brokerage  commissions  from the
Fund.  The Fund will use  Montgomery  Securities as its broker only when, in the
judgment  of the  Manager  and  pursuant  to  review  by the  Board,  Montgomery
Securities  will  obtain a price and  execution  at least as  favorable  as that
available   from  other   qualified   brokers.   See   "Execution  of  Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.

Investors Fiduciary Trust Company,  127 West 10th Street,  Kansas City, Missouri
64105,  serves as the master  transfer agent for the Fund (the "Master  Transfer
Agent") and performs certain recordkeeping and accounting functions.  The Master
Transfer Agent delegates certain transfer agent functions to DST Systems,  Inc.,
P.O. Box 419073,  Kansas City,  Missouri  64141-6073,  the Fund's transfer agent
(the "Transfer  Agent").  Morgan Stanley Trust Company located at One Pierrepont
Plaza,  Brooklyn,  New York 11201, serves as the Fund's principal custodian (the
"Custodian").

How To Contact The Fund

For  information  on the Fund or your  account,  call a  Montgomery  Shareholder
Service Representative at:

                                                        (800) 572-3863

Mail  your  completed   application,   any  checks,   investment  or  redemption
instructions and correspondence to:

Regular Mail                                   Express Mail or Overnight Service
The Montgomery Funds                           The Montgomery Funds
C/o DST Systems, Inc.                          c/o DST Systems, Inc.
P.O. Box 419073                                1004 Baltimore St.
Kansas City, MO  64141-6073                    Kansas City, MO  64105
                                               
                                  
Visit the Montgomery World Wide Web site at:

                           www.montgomeryfunds.com

How To Invest In The Fund

The Fund's  shares are offered  directly to the public,  with no sales load,  at
their  next-determined  net asset value after  receipt of an order with payment.
The Fund's shares are offered for sale by Funds  Distributor,  Inc.,  the Fund's
Distributor,  101 California  Street,  San Francisco,  California  94111,  (800)
572-3863, and through selected securities brokers and dealers.

                                       12
<PAGE>

If an order,  together  with payment in proper form, is received by the Transfer
Agent,  Funds  Distributor,  Inc. or certain  administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange  ("NYSE") is open for  trading,  Fund shares will be  purchased  at the
Fund's  next-determined  net asset value.  Orders for Fund shares received after
the Fund's cutoff times will be purchased at the next-determined net asset value
after receipt of the order.

The minimum initial  investment in the Fund is $1,000  (including IRAs) and $100
for subsequent investments.  The Manager or the Distributor,  in its discretion,
may waive these  minimums.  The Fund does not accept  third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on  banks  located  in the  U.S.  Purchases  may  also  be made in  certain
circumstances  by  payment  of  securities.  See  the  Statement  of  Additional
Information for further details.

Initial Investments

Minimum Initial Investment (including IRAs):                           $1,000


         Initial Investments by Check

         o   Complete the Account Application. Tell us in which Fund(s) you want
             to invest and make your check payable to The Montgomery Funds.

         o   A charge may be imposed on checks that do not clear.

         Initial Investments by Wire

         o   Call the  Transfer  Agent  to tell  them you  intend  to make  your
             initial  investment by wire.  Provide the Transfer  Agent with your
             name, dollar amount to be invested and Fund(s) in which you want to
             invest. They will provide you with further instructions to complete
             your purchase.  Complete information regarding your account must be
             included in all wire  instructions to ensure  accurate  handling of
             your investment.

         o   Request your bank to transmit  immediately  available funds by wire
             for purchase of shares in your name to the following:

                  Investors Fiduciary Trust Company
                  ABA #101003621
                  For: DST Systems, Inc.
                  Account #7526601
                  Attention: The Montgomery Funds
                  For Credit to: (shareholder(s) name)
                  Shareholder Account Number: (shareholder(s) account number)
                  Name of Fund: Montgomery High Yield Bond Fund

         o   Your bank may charge a fee for any wire transfers.

         o   The Fund and the Distributor  each reserve the right to reject any
purchase order in whole or in part.

Subsequent Investments

Minimum Subsequent Investment (including IRAs):                        $100


         Subsequent Investments by Check

         o   Make  your  check  payable  to The  Montgomery  Funds.  Enclose  an
             investment  stub with your check.  If you do not have an investment
             stub, mail your check with written instructions indicating the Fund
             name  and  account  number  to  which  your  investment  should  be
             credited.

                                       13
<PAGE>

         o   A charge may be imposed on checks that do not clear.

         Subsequent Investments by Wire

         o   You do not need to  contact  the  Transfer  Agent  prior to  making
             subsequent investments by wire. Instruct your bank to wire funds to
             the  Transfer  Agent's  affiliated  bank by  using  the  bank  wire
             information under "Initial Investments by Wire."

         Subsequent Investments by Telephone

         o   Shareholders   are   automatically   eligible  to  make   telephone
             purchases.  To make a purchase,  call the  Transfer  Agent at (800)
             572-3863  before the Fund cutoff  time.  Shares for IRAs may not be
             purchased by phone.

         o   The maximum  telephone  purchase is an amount up to five times your
             account value on the previous day.

         o   Payments  for shares  purchased  must be received  by the  Transfer
             Agent within three business days after the purchase request.  Write
             your confirmed  purchase number on your check or include it in your
             wire instructions.

         o   You should do one of the following to ensure payment is received in
             time:

            o   Transfer  funds  directly  from your bank  account  by sending a
                letter  and a  voided  check  or  deposit  slip  (for a  savings
                account) to the Transfer Agent.

            o   Send a check by overnight or 2nd day courier service.

            o   Instruct  your  bank  to  wire  funds  to the  Transfer  Agent's
                affiliated  bank by using  the bank wire  information  under the
                section titled "Initial Investments by Wire."

         Automatic Account Builder ("AAB")

         o   AAB will be established on existing  accounts only. You may not use
             an AAB  investment  to open a new  account.  The minimum  automatic
             investment amount is the Fund's subsequent investment minimum.

         o   Your bank must be a member of the Automated Clearing House.

         o   To  establish  AAB,  attach a voided  check  (checking  account) or
             preprinted deposit slip (savings account) from your bank account to
             your Montgomery account  application or your letter of instruction.
             Investments will  automatically be transferred into your Montgomery
             account from your checking or savings account.

         o   Investments may be transferred either monthly or quarterly on or up
             to two business days before the 5th or 20th day of the month. If no
             day is  specified  on your  account  application  or your letter of
             instruction, the 20th of each month will be selected.

         o   You  should  allow 20  business  days for this  service  to  become
             effective.

         o   You may  cancel  your AAB at any time by  sending  a letter  to the
             Transfer Agent. Your request will be processed upon receipt.

         Payroll Deduction

         o   Investments  through  payroll  deduction  will  be  established  on
             existing accounts only. You may not use payroll deduction to open a
             new account.  The minimum payroll  deduction amount for the Fund is
             $100 per payroll deduction period.

         o   You may automatically  deposit a designated amount of your paycheck
             directly into a Montgomery Fund account.

         o   Please call the Transfer Agent to receive instructions to establish
             this service.

                                       14
<PAGE>

Telephone Transactions

You  agree  to  reimburse  the Fund  for any  expenses  or  losses  incurred  in
connection  with  transfers  from your  accounts,  including  any caused by your
bank's  failure to act in  accordance  with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf,  any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.

Although  Fund  shares are priced at the net asset value next  determined  after
receipt  of a  purchase  request,  shares  are not  purchased  until  payment is
received.  Should payment not be received when required, the Transfer Agent will
cancel the telephone  purchase request and you may be responsible for any losses
incurred  by the Fund.  The Fund and the  Transfer  Agent will not be liable for
following  instructions  communicated  by  telephone  reasonably  believed to be
genuine.  The Fund employs  reasonable  procedures to confirm that  instructions
communicated  by  telephone  are genuine.  These  procedures  include  recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special  authorization  number or other personal  information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized  or  fraudulent  telephone  transactions  only if  such  reasonable
procedures are not followed.

Retirement Plans

Shares of the Fund are available for purchase by any retirement plan,  including
Keogh plans,  401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through  administrators  for retirement  plans.  Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing  from their  plan  administrators.  Plan  administrators  may  receive
compensation from the Fund for performing shareholder services.

Share Certificates

Share  certificates  will not be  issued  by the Fund.  All  shares  are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.

How To Redeem An Investment In The Fund

The Fund will redeem all or any portion of an investor's outstanding shares upon
request.  Redemptions  can be made on any day that the NYSE is open for trading.
The redemption  price is the net asset value per share next determined after the
shares are validly  tendered for  redemption and such request is received by the
Transfer Agent or, in the case of repurchase  orders,  Montgomery  Securities or
other  securities  dealers.  Payment of  redemption  proceeds  is made  promptly
regardless  of when  redemption  occurs  and  normally  within  three days after
receipt of all documents in proper form,  including a written  redemption  order
with  appropriate  signature  guarantee.  Redemption  proceeds will be mailed or
wired in accordance with the  shareholder's  instructions.  The Fund may suspend
the right of redemption under certain extraordinary  circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been  notified  that the  monies  used for the  purchase  have been
collected,  which may take up to 15 days from the purchase date. Shares tendered
for redemptions  through brokers or dealers (other than the  Distributor) may be
subject  to a  service  charge  by  such  brokers  or  dealers.  Procedures  for
requesting redemption are set forth below.

         Redeeming by Written Instruction

         o   Write a letter giving your name,  account  number,  the name of the
             Fund from which you wish to redeem and the dollar  amount or number
             of shares you wish to redeem.

         o   Signature guarantee your letter if you want the redemption proceeds
             to  go  to  a  party   other  than  the  account   owner(s),   your
             predesignated   bank  account  or  if  the  dollar  amount  of  the
             redemption exceeds $50,000. Signature guarantees may be provided by
             an eligible guarantor institution such as a commercial bank, a NASD
             member  firm  such  as a  stockbroker,  a  savings  association  or
             national securities  exchange.  Contact the Transfer Agent for more
             information.

         o   If you do not have a  predesignated  bank  account and want to wire
             your  redemption  proceeds,  include a voided check or deposit slip
             with your  letter.  The  minimum  amount  that may be wired is $500
             (wire charges, if any, will be deducted from redemption  proceeds).
             The Fund  reserves the right to permit  lesser wire amounts or fees
             in the Manager's discretion.

                                       15
<PAGE>

         Redeeming By Telephone

         o   Unless you have declined  telephone  redemption  privileges on your
             account application, you may redeem shares up to $50,000 by calling
             the Transfer Agent before the Fund cutoff time.

         o   If you included bank wire  information on your account  application
             or  made   subsequent   arrangements   to  accommodate   bank  wire
             redemptions,  you may  request  that the  Transfer  Agent wire your
             redemption  proceeds  to your  bank  account.  Allow at  least  two
             business days for  redemption  proceeds to be credited to your bank
             account.  If you want to wire your redemption proceeds to arrive at
             your bank on the same business day (subject to bank cutoff  times),
             there is a $10 fee.

         o   Telephone redemption  privileges will be suspended 30 days after an
             address change. All redemption  requests during this period must be
             in writing with a guaranteed signature.

         o   Telephone  redemption  privileges may be cancelled after an account
             is  opened by  instructing  the  Transfer  Agent in  writing.  Your
             request  will  be  processed  upon  receipt.  This  service  is not
             available for IRA accounts.

By establishing  telephone redemption  privileges,  a shareholder authorizes the
Fund and the Transfer Agent to act upon the  instruction  of the  shareholder or
his or her  designee  by  telephone  to redeem  from the  account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization.  When a shareholder  appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone  redemption  instructions  given by the  shareholder's
designee.  The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to  shareholders.  The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See  discussion of Fund  telephone  procedures  and liability  under  "Telephone
Transactions."

Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.  During periods of volatile economic
or market conditions,  shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.

Systematic Withdrawal Plan

Under a Systematic  Withdrawal  Plan,  a  shareholder  with an account  value of
$1,000 or more in the Fund may receive (or have sent to a third party)  periodic
payments (by check or wire).  The minimum  payment  amount is $100 from the Fund
account.  Payments  may be made either  monthly or  quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the  redemption  proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.

Small Accounts

Due to the relatively high cost of maintaining  smaller accounts,  the Fund will
redeem  shares from any account if at any time,  because of  redemptions  by the
shareholder,  the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary  redemption,  the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional  investment to bring the
value of that  account at least to the  minimum  investment  required to open an
account before the Fund takes any action.

Exchange Privileges And Restrictions

You may exchange  shares from another fund in the  Montgomery  Funds family with
the same registration,  taxpayer  identification number and address. An exchange
may  result  in a  recognized  gain or loss for  income  tax  purposes.  See the
discussion of Fund  telephone  procedures  and  limitations  of liability  under
"Telephone Transactions."

         Purchasing and Redeeming Shares by Exchange

         o   You are  automatically  eligible to make  telephone  exchanges with
             your Montgomery account.

         o   Exchange  purchases  and  redemptions  will be processed  using the
             next-determined  net asset value (with no sales  charge or exchange
             fee) after your request is received. Your request is subject to the
             Fund's cut-off times.

                                       16
<PAGE>

         o   Exchange purchases must meet the minimum investment requirements of
             the fund you intend to purchase.

         o   You may  exchange  for  shares of a fund only in states  where that
             Montgomery  fund's shares are qualified for sale and only after you
             have reviewed a prospectus of that fund.

         o   You may not exchange  for shares of a  Montgomery  fund that is not
             open to new  shareholders  unless you have an existing account with
             that fund.

         o   Because  excessive  exchanges  can harm a fund's  performance,  the
             Trust reserves the right to terminate  your exchange  privileges if
             you make  more  than four  exchanges  out of any one fund  during a
             twelve-month  period.  The Fund may also refuse an exchange  into a
             fund from which you have  redeemed  shares  within the  previous 90
             days  (accounts  under common  control and  accounts  with the same
             taxpayer   identification  number  will  be  counted  together).  A
             shareholder's  exchanges  may be  restricted or refused if the Fund
             receives, or the Manager anticipates, simultaneous orders affecting
             significant  portions of the Fund's  assets and, in  particular,  a
             pattern of exchanges  coinciding with a "market  timing"  strategy.
             The Trust  reserves the right to refuse  exchanges by any person or
             group  if, in the  Manager's  judgment,  a fund  would be unable to
             effectively  invest  the money in  accordance  with its  investment
             objective and policies, or would otherwise be potentially adversely
             affected.  Although the Trust  attempts to provide  prior notice to
             affected  shareholders  when it is  reasonable  to do so,  they may
             impose these  restrictions  at any time.  The exchange limit may be
             modified for accounts in certain institutional  retirement plans to
             conform  to plan  exchange  limits  and  U.S.  Department  of Labor
             regulations  (for  those  limits,  see plan  materials).  The Trust
             reserves the right to  terminate or modify the exchange  privileges
             of Fund shareholders in the future.

Automatic Transfer Service ("ATS")

You may elect systematic  exchanges out of the fixed income funds (which include
the Montgomery  Short  Government Bond Fund, the Montgomery  Government  Reserve
Fund, the Montgomery  Total Return Bond Fund,  the Montgomery  Federal  Tax-Free
Money Fund, the Montgomery  California  Tax-Free  Intermediate Bond Fund and the
California  Tax-Free  Money Fund) into the Fund.  The minimum  exchange is $100.
Periodically investing a set dollar amount into the Fund is also referred to, as
dollar-cost averaging because the number of shares purchased will vary depending
on the price per  share.  Your  account  with the Fund must meet the  applicable
minimum of $1,000.  Exchanges  out of the fixed income funds are exempt from the
four exchanges limit policy.

Brokers and Other Intermediaries

Investing through Securities Brokers, Dealers and Financial Intermediaries

Investors  may  purchase  shares  of the Fund  from  other  selected  securities
brokers,  dealers  or through  financial  intermediaries  such as  benefit  plan
administrators.  Investors  should contact these agents directly for appropriate
instructions,  as well as information  pertaining to accounts and any service or
transaction  fees that may be charged by these agents.  Purchase  orders through
securities brokers,  dealers and other financial  intermediaries are effected at
the  next-determined  net asset value after  receipt of the order by such agent,
provided the agent  transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares. Orders received after that time will be purchased at the next-determined
net asset value.  To the extent that these agents perform  shareholder-servicing
activities for the Fund, they may receive fees from the Fund for such services.

Redemption Orders Through Brokerage Accounts

Shareholders  also may sell shares back to the Fund by wire or telephone through
selected  securities  brokers or  dealers.  Shareholders  should  contact  their
securities  broker or dealer for  appropriate  instructions  and for information
concerning  any  transaction or service fee that may be imposed by the broker or
dealer.  Shareholders  are entitled to the net asset value next determined after
receipt of a redemption order by such broker-dealer,  provided the broker-dealer
transmits  such  order on a timely  basis  to the  Transfer  Agent so that it is
received by 4:00 p.m.,  New York time,  on a day that the Fund  redeems  shares.
Orders  received  after  that  time are  entitled  to the net asset  value  next
determined after receipt.

                                       17
<PAGE>

How Net Asset Value Is Determined

The net asset value of the Fund is  determined  once daily as of 4:00 p.m.,  New
York  time,  on each day that the  NYSE is open  for  trading  (except  for bank
holidays).  Per-share net asset value is calculated by dividing the value of the
Fund's  total  net  assets  by the  total  number  of  the  Fund's  shares  then
outstanding.

As more fully  described in the Statement of Additional  Information,  portfolio
securities are valued using current market valuations:  either the last reported
sales price or, in the case of  securities  for which there is no reported  last
sale and fixed  income  securities,  the mean  between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as  determined  in good faith under
the  supervision  of the  Trust's  officers,  and by the manager and the Pricing
Committee  of the  Board  respectively,  in  accordance  with  methods  that are
specifically  authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.

The value of securities  denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major  bank or,  if no such  quotation  is  available,  at the rate of  exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation  to the U.S.  dollar may affect the net asset value of Fund shares even
if there has not been any change in the  foreign-currency  denominated values of
such securities.

Because  foreign  securities  markets  may  close  prior  to the  time  the Fund
determines  its net  asset  values,  events  affecting  the  value of  portfolio
securities  occurring  between the time prices are  determined  and the time the
Fund  calculates  its net  asset  values  may  not be  reflected  in the  Fund's
calculation  of net asset values unless the Manager,  under  supervision  of the
Board, determines that a particular event would materially affect the Fund's net
asset values.

Dividends And Distributions

The Fund  distributes  substantially  all of its net  investment  income and net
capital gains to shareholders  each year.  Dividends are declared daily and paid
monthly  on or about the last  business  day of each  month.  Capital  gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary,  may be made  following the Fund's fiscal year end (June 30) in order
to avoid the  imposition  of tax on the Fund.  The amount and  frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.

Unless investors  request cash  distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other distributions will be reinvested automatically in additional shares of the
Fund and credited to the shareholder's account at the closing net asset value on
the reinvestment date.

Taxation

The Fund  intends to qualify  and elect as soon as  possible  to be treated as a
regulated  investment  company under  Subchapter M of the Code, by  distributing
substantially  all of its net  investment  income and net  capital  gains to its
shareholders and meeting other  requirements of the Code relating to the sources
of its income and  diversification  of assets.  Accordingly,  the Fund generally
will not be liable  for  federal  income  tax or excise  tax based on net income
except to the extent its earnings are not  distributed  or are  distributed in a
manner that does not  satisfy the  requirements  of the Code  pertaining  to the
timing of distributions.  If the Fund is unable to meet certain  requirements of
the Code,  it may be subject to  taxation  as a  corporation.  The Fund may also
incur tax  liability  to the extent it invests in  "passive  foreign  investment
companies." See the Statement of Additional Information.

For federal  income tax  purposes,  any  dividends  derived from net  investment
income and any excess of net short-term  capital gain over net long-term capital
loss that investors (other than certain  tax-exempt  organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered  ordinary
income.  Part of the  distributions  paid by the  Fund may be  eligible  for the
dividends-received  deduction allowed to corporate  shareholders under the Code.
Distributions  of the excess of net long-term  capital gain over net  short-term
capital  loss from  transactions  of the Fund are  treated  by  shareholders  as
long-term  capital gains regardless of the length of time the Fund's shares have
been owned.  Distributions  of income and capital  gains are taxed in the manner
described above,  whether they are taken in cash or are reinvested in additional
shares of the Fund.

                                       18
<PAGE>

The Fund  will  inform  its  investors  of the  source  of their  dividends  and
distributions  at the time they are paid,  and will promptly  after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund.  Additional  information  on tax matters
relating  to the Fund and its  shareholders  is  included  in the  Statement  of
Additional Information.

General Information

The Trust

The Fund is a series of The  Montgomery  Funds, a  Massachusetts  business trust
organized on May 10, 1990 (the "Trust").  The Trust's  Agreement and Declaration
of Trust permits the Board to issue an unlimited  number of full and  fractional
shares of  beneficial  interest,  $.01 par value,  in any number of series.  The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.

This  Prospectus  relates  only to the Class R shares of the Fund.  The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.

Shareholder Rights

Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each  whole  share  is  entitled  to one  vote as to any  matter  on which it is
entitled  to vote  and each  fractional  share is  entitled  to a  proportionate
fractional  vote.  Shareholders  have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution.  The Fund, as a separate series of the Trust,  votes
separately on matters affecting only the Fund (e.g.,  approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting  all  series  of the  Trust  jointly  or the  Trust as a whole  (e.g.,
election or removal of Trustees).  Voting rights are not cumulative, so that the
holders of more than 50% of the shares  voting in any election of Trustees  can,
if they so choose,  elect all of the Trustees.  Except as set forth herein,  all
classes  of shares  issued by the Fund shall have  identical  voting,  dividend,
liquidation and other rights,  preferences,  and terms and conditions.  The only
differences  among the various classes of shares relate solely to the following:
(a) each class may be subject to different  class  expenses;  (b) each class may
bear a  different  identifying  designation;  (c) each class may have  exclusive
voting  rights with respect to matters  solely  affecting  such class;  (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic  conversion of that class into another  class.  While the Trust is
not required and does not intend to hold annual meetings of  shareholders,  such
meetings  may be called by the Board at its  discretion,  or upon  demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing  or  removing   Trustees.   Shareholders  may  receive   assistance  in
communicating with other shareholders in connection with the election or removal
of  Trustees  pursuant  to the  provisions  of Section  16(c) of the  Investment
Company Act.

Performance Information

From  time  to  time,  the  Fund  may  publish  its  total  return,  such  as in
advertisements  and  communications  to  investors.   Total  return  information
generally will include the Fund's average annual  compounded rate of return over
the most  recent  four  calendar  quarters  and over the period  from the Fund's
inception of operations. The Fund may also advertise aggregate and average total
return  information  over  different  periods of time. The Fund's average annual
compounded  rate of return is determined by reference to a  hypothetical  $1,000
investment that includes  capital  appreciation  and depreciation for the stated
period according to a specific formula.  Aggregate total return is calculated in
a similar  manner,  except  that the results are not  annualized.  Total  return
figures will reflect all recurring charges against the Fund's income.

Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's  total  return for any prior  period  should not be  considered  as a
representation of what an investor's total return or current yield may be in any
future period.

Legal Opinion

The  validity of shares  offered by this  Prospectus  will be passed on by Paul,
Hastings,   Janofsky  &  Walker  LLP,  345  California  Street,  San  Francisco,
California 94104.

                                       19
<PAGE>

Shareholder Reports and Inquiries

Unless otherwise  requested,  only one copy of each shareholder  report or other
material sent to  shareholders  will be mailed to each  household  with accounts
under  common  ownership  and the  same  address  regardless  of the  number  of
shareholders or accounts at that household or address. A confirmation  statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter  account statement will
be a year-end statement,  listing all transaction  activity for the entire year.
Retain this statement for your tax records.

In  general,  shareholders  who  redeemed  shares from a  qualifying  Montgomery
account  should  expect to receive an Average Cost  Statement in February of the
following  year.  Your  statement  will  calculate  your  average cost using the
average cost single-category method.

Any  questions  should  be  directed  to The  Montgomery  Funds at  800-572-FUND
(800-572-3863).

Backup Withholding Instructions

Shareholders  are required by law to provide the Fund with their correct  Social
Security or other Taxpayer Identification Number ("TIN"),  regardless of whether
they file tax returns.  Failure to do so may subject a shareholder to penalties.
Failure  to  provide a  correct  TIN or to check  the  appropriate  boxes in the
Account  Application and to sign the  shareholder's  name could result in backup
withholding  by the Fund of an  amount  of  federal  income  tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account.  Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.

A  shareholder  who does not have a TIN  should  apply  for one  immediately  by
contacting the local office of the Social  Security  Administration  or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting  receipt  of a TIN.  Special  rules  apply for  certain  entities.  For
example,  for an account  established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished.  If a shareholder has been notified by the
IRS that he or she is subject to backup withholding  because he or she failed to
report  all  interest  and  dividend  income  on his or her tax  return  and the
shareholder has not been notified by the IRS that such  withholding  will cease,
the  shareholder   should  cross  out  the  appropriate   item  in  the  Account
Application.  Dividends paid to a foreign  shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.

A shareholder  that is an exempt  recipient  should  furnish a TIN and check the
appropriate  box.  Exempt  recipients  include  certain  corporations,   certain
tax-exempt entities,  tax-exempt pension plans and IRAs,  governmental agencies,
financial  institutions,  registered  securities  and  commodities  dealers  and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.

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

This  Prospectus is not an offering of the  securities  herein  described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is  authorized to give any  information  or make any  representation  other than
those contained in this Prospectus, the Statement of Additional Information,  or
in the Fund's official sales literature.

                                       20
<PAGE>


                                    Glossary


o   Asset backed securities.  Asset backed securities are secured by and payable
    from, pools of assets,  such as motor vehicle  installment  sales contracts,
    installment  loan  contracts,  leases of various  types of real and personal
    property  and  receivables  from  revolving   credit  (e.g.,   credit  card)
    agreements.

o   Below  Investment  Grade  Debt  Securities.   Debt  securities  rated  below
    "investment grade."

o   Cash  Equivalents.   Cash  equivalents  are  short-term,   interest  bearing
    instruments  or deposits and may include,  for  example,  commercial  paper,
    certificates of deposit, repurchase agreements,  bankers' acceptances,  U.S.
    Treasury bills, bank money market deposit accounts,  master demand notes and
    money market mutual funds.  These consist of high-quality  debt obligations,
    certificates of deposit and bankers'  acceptances  rated at least A-1 by S&P
    or  Prime-1 by  Moody's,  or the  issuer  has an  outstanding  issue of debt
    securities rated at least A by S&P or Moody's,  or are of comparable quality
    in the opinion of the Manager.

o   Collateralized  Mortgage  Obligations  (CMOs).  Derivative  mortgage-related
    securities  that  separate the cash flows of mortgage  pools into  different
    classes or tranches.  Stripped  mortgage  securities  are CMOs that allocate
    different  proportions  of  interest  and  principal  payments  on a pool of
    mortgages.  One class may receive all of the interest  (the interest only or
    "IO" class) while another may receive all of the principal  (principal  only
    or "PO"  class).  The yield to maturity  on any IO or PO class is  extremely
    sensitive  not only to  changes  in  interest  rates but also to the rate of
    principal  payments and  prepayments  on underlying  mortgages.  In the most
    extreme cases, an IO class may become worthless.

o   Convertible  security.  A fixed-income  security (a bond or preferred stock)
    that may be converted  at a stated  price within a specified  period of time
    into a  certain  quantity  of the  common  stock of the same or a  different
    issuer. Convertible securities are senior to common stock in a corporation's
    capital  structure but are usually  subordinated to similar  non-convertible
    securities.  The price of a convertible security is influenced by the market
    value of the underlying common stock.

o   Covered  call  option.  A call  option  is  "covered"  if the Fund  owns the
    underlying  securities,  has the right to acquire  such  securities  without
    additional  consideration,  has  collateral  assets  sufficient  to meet its
    obligations under the option, or owns an offsetting call option.

o   Covered put option.  A put option is  "covered"  if the Fund has  collateral
    assets with a value not less than the exercise  price of the option or holds
    a put option on the underlying security.

o   Depositary receipts include American Depositary Receipts ("ADRs"),  European
    Depositary Receipts ("EDRs"),  Global Depositary Receipts ("GDRs") and other
    similar  instruments.  Depositary  receipts are receipts typically issued in
    connection  with a U.S.  or  foreign  bank or  trust  company  and  evidence
    ownership of underlying securities issued by a foreign corporation.

o   Derivatives include forward currency exchange  contracts,  currency options,
    futures contracts, swaps and options on futures contracts on U.S. government
    and foreign government securities and currencies.

o   Duff & Phelps.  Duff & Phelps  Credit  Rating Co., a  nationally  recognized
    statistical rating organization.

o   Duration.  Traditionally, a debt security's "term to maturity" characterizes
    a security's  sensitivity to changes in interest  rates.  However,  "term to
    maturity"  measures only the time until a debt  security  provides its final
    payment,  taking no account of pre-maturity  payments.  Most debt securities
    provide interest  ("coupon") payments in addition to a final ("par") payment
    at maturity, and some securities have call provisions allowing the issuer to
    repay the instrument in full before  maturity date, each of which affect the
    security's  response to interest  rate  changes.  "Duration" is considered a
    more  precise  measure  of  interest  rate  risk  than  "term to  maturity."
    Determining  duration may involve the Manager's estimates of future economic
    parameters,   which  may  vary  from  actual  future  values.   Fixed-income
    securities  with effective  durations of three years are more  responsive to
    interest rate fluctuations than those with effective  durations of one year.
    For example, if interest rates rise by 1%, the value of securities having an
    effective  duration of three years will generally  decrease by approximately
    3%.

o   FHLMC. The Federal Home Loan Mortgage Corporation.

o   FNMA. The Federal National Mortgage Association.

o   Equity derivative securities include,  among other things, options on equity
    securities, warrants and future contracts on equity securities.

o   Fitch. Fitch Investors Service,  L.P., a nationally  recognized  statistical
    rating organization.

o   Forward  currency  contracts.  A forward  currency  contract  is a  contract
    individually  negotiated and privately  traded by currency traders and their
    customers and creates an obligation to purchase or sell a specific  currency
    for an agreed-upon price at a future date. The Fund generally does not enter
    into forward  contracts with terms greater than one year. The Fund generally
    enters into forward  contracts only under two  circumstances.  First, if the
    Fund  enters  into a  contract  for  the  purchase  or  sale  of a  security
    denominated  in a  foreign  currency,  it may  desire  to "lock in" the U.S.
    dollar price of the security by entering into a forward  contract to buy the
    amount of a foreign  currency needed to settle the transaction.  Second,  if
    the Manager believes that the currency of a particular  foreign country will
    substantially  rise or fall  against  the U.S.  dollar,  it may enter into a
    forward contract to buy or sell the currency approximating the value of some
    or all of the Fund's portfolio securities  denominated in such currency. The
    Fund will not enter into a forward  contract if, as a result,  it would have
    more than one-third of total assets  committed to such contracts  (unless it
    owns the currency that it is obligated to deliver or has

                                       21
<PAGE>

    collateral  assets  sufficient to cover its  obligations).  Although forward
    contracts  are used  primarily  to protect  the Fund from  adverse  currency
    movements,  they  involve  the  risk  that  currency  movements  will not be
    accurately predicted.

o   Futures and options on futures.  An  interest  rate  futures  contract is an
    agreement  to  purchase or sell debt  securities,  usually  U.S.  government
    securities,  at a specified date and price.  For example,  the Fund may sell
    interest rate futures contracts (i.e., enter into a futures contract to sell
    the underlying  debt security) in an attempt to hedge against an anticipated
    increase in interest rates and a corresponding decline in debt securities it
    owns.  The Fund will have  collateral  assets equal to the purchase price of
    the portfolio securities represented by the underlying interest rate futures
    contracts it has an obligation to purchase.

o   GNMA. The Government National Mortgage Association.

o   Illiquid securities.  The Fund treats any securities subject to restrictions
    on repatriation for more than seven days and securities issued in connection
    with foreign debt  conversion  programs that are restricted as to remittance
    of invested capital or profit as illiquid.  The Fund also treats  repurchase
    agreements  with  maturities  in excess of seven days as illiquid.  Illiquid
    securities do not include  securities  that are  restricted  from trading on
    formal  markets  for some  period of time but for  which an active  informal
    market exists,  or securities that meet the  requirements of Rule 144A under
    the Securities Act of 1933 and that,  subject to the review by the Board and
    guidelines adopted by the Board, the Manager has determined to be liquid.

o   Investment  grade.  Investment  grade debt securities are those rated within
    the four  highest  grades by S&P (at least  BBB),  Moody's (at least Baa) or
    Fitch  (at  least  Baa)  or  in  unrated  debt  securities  deemed  to be of
    comparable quality by the Manager using guidelines  approved by the Board of
    Trustees.

o   Leverage.  Some  Funds may use  leverage  in an effort to  increase  return.
    Although  leverage  creates an opportunity for increased income and gain, it
    also creates special risk  considerations.  Leveraging also creates interest
    expenses that can exceed the income from the assets retained.

o   Moody's.   Moody's  Investors   Service,   Inc.,  a  nationally   recognized
    statistical rating organization.

o   Repurchase agreement.  With a repurchase  agreement,  a Fund acquires a U.S.
    government  security or other  high-grade  liquid debt  instrument  (for the
    Money Market Funds,  the instrument must be rated in the highest grade) from
    a financial  institution that  simultaneously  agrees to repurchase the same
    security at a specified time and price.

o   Reverse  dollar roll  transactions.  When a Fund engages in a reverse dollar
    roll, it purchases a security from a financial  institution and concurrently
    agrees to resell a similar  security to that  institution at a later date at
    an agreed-upon price.

o   Reverse  repurchase  agreement.  In a reverse repurchase  agreement,  a Fund
    sells to a  financial  institution  a  security  that it holds and agrees to
    repurchase the same security at an agreed-upon price and date.

o   S&P.  Standard & Poor's Ratings Group, a nationally  recognized  statistical
    rating organization.

o   Securities lending. A fund may lend securities to brokers, dealers and other
    financial  organizations.   Each  securities  loan  is  collateralized  with
    collateral assets in an amount at least equal to the current market value of
    the loaned  securities,  plus accrued interest.  There is a risk of delay in
    receiving  collateral or in recovering the securities  loaned or even a loss
    of rights in collateral should the borrower fail financially.

o   U.S.  government  securities  include U.S. Treasury bills,  notes, bonds and
    other obligations issued or guaranteed by the U.S. government,  its agencies
    or instrumentalities.

o   A warrant  typically is a long-term  option that permits the holder to buy a
    specified  number of shares of the  issuer's  underlying  common  stock at a
    specified  exercise  price by a  particular  expiration  date. A warrant not
    exercised or disposed of by its expiration date expires worthless.

o   When-issued and forward  commitment  securities.  The Fund may purchase U.S.
    government or other securities on a "when-issued"  basis and may purchase or
    sell securities on a "forward  commitment" or "delayed  delivery" basis. The
    price is fixed at the time the  commitment is made, but delivery and payment
    for the securities  take place at a later date.  When-issued  securities and
    forward  commitments  may be sold prior to the  settlement  date, but a Fund
    will enter into when-issued and forward  commitments only with the intention
    of actually  receiving or delivering  the  securities.  No income accrues on
    securities that have been purchased pursuant to a forward commitment or on a
    when-issued  basis prior to  delivery  to a Fund.  At the time a Fund enters
    into a transaction on a when-issued or forward commitment basis, it supports
    its obligation with collateral  assets equal to the value of the when-issued
    or forward  commitment  securities  and causes the  collateral  assets to be
    marked  to market  daily.  There is a risk  that the  securities  may not be
    delivered and that the Fund may incur a loss.

o   Zero coupon bonds.  Zero coupon bonds are debt  obligations  that do not pay
    current interest and are consequently issued at a significant  discount from
    face value.  The  discount  approximates  the total  interest the bonds will
    accrue   and   compound   over  the   period  to   maturity   or  the  first
    interest-payment  date at a rate of interest  reflecting  the market rate of
    interest at the time of issuance.

                                       22
<PAGE>

   

                               Investment Manager
                       Montgomery Asset Management, LLC
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-FUND
    
                                   Distributor
                             Funds Distributor, Inc.
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-3863

                                    Custodian
                          Morgan Stanley Trust Company
                              One Pierrepont Plaza
                            Brooklyn, New York 11201

                                 Transfer Agent
                                DST Systems, Inc.
                                 P.O. Box 419073
                        Kansas City, Missouri 64141-6073
                                 1-800-447-4210

                                  Legal Counsel
                      Paul, Hastings, Janofsky & Walker LLP
                              345 California Street
                         San Francisco, California 94104

                                       23

<PAGE>

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

                                     PART A

                          PROSPECTUS FOR CLASS P SHARES

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

<PAGE>

The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND


Prospectus
   
September 30, 1997
    


Class P shares of the  Montgomery  High Yield Bond Fund (the "Fund") are offered
in this Prospectus.  The Fund seeks maximum total return (which consists of both
income and capital  appreciation)  by investing at least 65% of its total assets
in a broad  range of bonds  rated  below  investment  grade.  The Fund  does not
maintain  a stable net asset  value of $1.00 per  share.  As is the case for all
mutual funds, attainment of the Fund's investment objective cannot be assured.

The Fund's Class P shares are only sold  through  financial  intermediaries  and
financial professional at net asset value with no sales load, no commissions and
no exchange  fees.  The Class P shares are subject to a Rule 12b-1  distribution
fee as described in this Prospectus.  In general, the minimum initial investment
in the Fund is $1,000,  and  subsequent  investments  must be at least $100. The
Manager  or  the  Distributor,   under  any  circumstances   that  either  deems
appropriate, may waive these minimums. See "How to Invest in the Fund."

The Fund,  which is a  separate  series of The  Montgomery  Funds,  an  open-end
management  investment company,  is managed by Montgomery Asset Management,  LLC
(the   "Manager"),   and  is  distributed  by  Funds   Distributor,   Inc.  (the
"Distributor").
   
Please read this Prospectus before investing and retain it for future reference.
A Statement of  Additional  Information  dated  September  30,  1997,  as may be
revised,  has been  filed  with  the  Securities  and  Exchange  Commission,  is
incorporated by this reference and is available  without charge by calling (800)
572-FUND.  If you are viewing the electronic  version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.

The Internet address for The Montgomery Funds is www.montgomeryfunds.com.

The Securities and Exchange Commission maintains a Web Site (http://www.sec.gov)
that contains the Statement of Additional Information,  material incorporated by
reference,  and other  information  regarding the Fund. The Fund may offer other
classes of shares to  investors  eligible to purchase  those  shares.  The other
classes of shares may have  different fees and expenses than the class of shares
offered in this  Prospectus,  and those  different  fees and expenses may affect
performance.  To obtain  information  concerning the other classes of shares not
offered in this  Prospectus,  call The  Montgomery  Funds at (800)  572-FUND  or
contact  sales  representatives  or  financial  intermediaries  who offer  those
classes.
    


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.

                                       1
<PAGE>

TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Fees and Expenses of The Fund                                                  3
- --------------------------------------------------------------------------------
The Fund's Investment Objective And Policies                                   4
- --------------------------------------------------------------------------------
Portfolio Securities                                                           4
- --------------------------------------------------------------------------------
Other Investment Practices                                                     6
- --------------------------------------------------------------------------------
Risk Considerations                                                            9
- --------------------------------------------------------------------------------
Management of The Fund                                                        10
- --------------------------------------------------------------------------------
How To Contact The Fund                                                       13
- --------------------------------------------------------------------------------
How To Invest In The Fund                                                     13
- --------------------------------------------------------------------------------
How To Redeem An Investment In The Fund                                       16
- --------------------------------------------------------------------------------
Exchange Privileges And Restrictions                                          17
- --------------------------------------------------------------------------------
Brokers and Other Intermediaries                                              18
- --------------------------------------------------------------------------------
How Net Asset Value Is Determined                                             18
- --------------------------------------------------------------------------------
Dividends And Distributions                                                   19
- --------------------------------------------------------------------------------
Taxation                                                                      19
- --------------------------------------------------------------------------------
General Information                                                           20
- --------------------------------------------------------------------------------
Backup Withholding Instructions                                               21
- --------------------------------------------------------------------------------
Glossary                                                                      22
- --------------------------------------------------------------------------------
                                       2
<PAGE>

                          Fees And Expenses Of The Fund


Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following  charges when buying or redeeming  shares of
the Fund:
<CAPTION>
    Maximum Sales Load          Maximum Sales Load        Deferred Sales Load      Redemption Fees          Exchange Fees
   Imposed on Purchases        Imposed on Reinvested
                                     Dividends
- -------------------------------------------------------------------------------------------------------------------------------
<S>        <C>                         <C>                        <C>                   <C>                     <C>
           None                        None                       None                  None+                   None
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
Management Fee                                                0.80%
- --------------------------------------------------------------------------------
Other Expenses                                                0.40%
(after reimbursement)*
- --------------------------------------------------------------------------------
12b-1 Fee                                                     0.25%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses*                                1.45%
- --------------------------------------------------------------------------------

The previous  tables are intended to assist the  investor in  understanding  the
various direct and indirect costs and expenses of the Fund.  Operating  expenses
are paid out of the Fund's  assets and are factored into the Fund's share price.
The  Fund  estimates  that it will  have the  expenses  listed  (expressed  as a
percentage  of average net assets) for the current  fiscal  year.  Because  Rule
12b-1 distribution  charges are accounted for on a class-level basis (and not on
an individual  shareholder-level  basis),  individual long-term investors in the
Class P shares of the Fund may over time pay more than the  economic  equivalent
of the maximum  front-end sales charge permitted by the National  Association of
Securities Dealers, Inc. ("NASD"), even though all shareholders of that Class in
the aggregate will not. This is recognized and permitted by the NASD.

+    Shareholders effecting redemptions via wire transfer may be required to pay
     fees, including the wire fee and other fees, that will be directly deducted
     from  redemption  proceeds.  The Fund  reserves  the  right,  upon 60 days'
     advance notice to  shareholders,  to impose a redemption fee of up to 1.00%
     on  shares  redeemed  within  90 days of  purchase.  See "How to  Redeem an
     Investment in the Fund."

*    Expenses for the Fund are  estimated.  The Manager will reduce its fees and
     may  absorb  or  reimburse  the Fund for  certain  expenses  to the  extent
     necessary  to limit total annual fund  operating  expenses to the lesser of
     the amount  indicated  in the table for the Fund or the maximum  allowed by
     applicable state expense limitations. The Fund is required to reimburse the
     Manager for any  reductions  in the Manager's fee only during the two years
     following  that  reduction and only if such  reimbursement  can be achieved
     within  the  foregoing   expense  limits.   The  Manager   generally  seeks
     reimbursement  for the oldest  reductions and waivers before payment by the
     Fund for fees and  expenses  for the current  year.  Absent the  reduction,
     actual total Fund operating expenses are estimated to be 2.00% (0.95% other
     expenses).  The Manager may  terminate  these  voluntary  reductions at any
     time. See "Management of the Fund."

Example of Expenses for the Fund

Assuming,  hypothetically,  that the  Fund's  annual  return  is 5% and that its
operating  expenses are as set forth  above,  an investor  buying  $1,000 of the
Fund's shares would have paid the following  total  expenses upon redeeming such
shares:

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
1 Year                                                        $15
- --------------------------------------------------------------------------------
3 Years                                                       $46
- --------------------------------------------------------------------------------
5 Years                                                       N/A
- --------------------------------------------------------------------------------
10 Years                                                      N/A
- --------------------------------------------------------------------------------

                                       3
<PAGE>

This example is to help potential  investors  understand the effect of expenses.
Investors should  understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.

The Fund's Investment Objective And Policies

The  investment  objective  and  general  investment  policies  of the  Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices  that may be employed by the Fund are  described in "Other  Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund  are  described  in  those  sections  as well as in  "Risk  Considerations"
beginning on page 9.  Certain  Terms Used In The  Prospectus  Are Defined In The
Glossary Found At The End Of The Prospectus.
   
The  Investment  objective of the Fund is to seek to obtain maximum total return
(which consists of both income and capital  appreciation) by investing primarily
in a broad range of bonds rated below  investment  grade (commonly  called "junk
bonds")  with the goal that the Fund  achieve  higher  total  return than mutual
funds that  invest  exclusively  in other types of bonds  (i.e.  non-high  yield
bonds).  Under  normal  conditions,  the Fund  seeks to achieve  its  investment
objective by investing at least 65% of its total assets in a broad range of such
fixed income  securities  rated below  investment  grade,  including  high-yield
corporate bonds, high-yield mortgage-related securities, high-yield asset-backed
securities and U.S.-dollar or foreign currency  dominated  securities of foreign
issuers.  The Fund may also invest up to 35% of its total  assets in  investment
grade  bonds,  equity  securities,  equity  derivatives  or  hybrid  securities,
including preferred stocks,  convertible securities,  warrants, and may purchase
securities from private placements.  Investors should note that the market value
of debt  securities  that are  interest-rate  sensitive is inversely  related to
changes in  interest  rates.  That is, an  interest  rate  decline  produces  an
increase in a security's  market value and an interest rate increase  produces a
decrease in value. The longer the remaining maturity of a security,  the greater
the effect of  interest  rate  changes.  During the  two-to-three  month  period
following  the  commencement  of the  Fund's  operations,  the Fund may have its
assets invested substantially in cash and cash equivalents.

The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson. See "Management of the Fund."
    
Portfolio Securities

Equity Securities

The Fund may, within the limits described above, invest in common stocks and may
also invest in other types of equity  securities  (such as  preferred  stocks or
convertible securities) as well as equity derivative securities.

Depositary Receipts, Convertible Securities and Securities Warrants

The Fund may invest in ADRs, EDRs and GDRs and  convertible  securities that the
Manager regards as a form of equity security.  The Fund may also invest up to 5%
of its net assets in warrants.

Investment Companies

The Fund may invest up to 10% of its total assets in shares of other  investment
companies investing  exclusively in securities in which it may otherwise invest.
The Fund does not intend to invest in other investment  companies unless, in the
Manager's  judgment,  the  potential  benefits  exceed  associated  costs.  As a
shareholder in an investment  company,  the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees.

High Yield and Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade.  These are securities rated lower than Baa by Moody's Investors  Service,
Inc.,  ("Moody's")  and BBB by Standard & Poor's  Ratings Group  ("S&P"),  Fitch
Investors  Service,  L.P.  ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps").  These  securities  are  sometimes  known  as  "junk  bonds"  or "high
risk/high  yield" bonds.  These  securities  carry a high degree of risk and are
considered   speculative   by  the  credit  rating   organizations.   See  "Risk
Considerations"  below. The Statement of Additional  Information has an appendix
with a description of the ratings used by these organizations. The Fund also may
invest in other debt securities, including securities in default. In addition to
traditional  corporate,  government and supranational debt securities,  the Fund
may invest in external (i.e., to foreign lenders) debt obligations issued by the
governments, governmental entities and companies of foreign countries.

                                       4
<PAGE>

U.S. Government Securities

The Fund may invest in fixed rate and floating or variable rate U.S.  government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related  securities of the GNMA, are issued or guaranteed by
the U.S.  government.  Other securities  issued by U.S.  government  agencies or
instrumentalities   are   supported   only  by  the  credit  of  the  agency  or
instrumentality,  such as those  issued by the  Federal  Home Loan  Bank,  while
others,  such as those issued by the FNMA,  Farm Credit  System and Student Loan
Marketing Association, have an additional line of credit with the U.S.
Treasury.

Short-term U.S. government  securities  generally are considered to be among the
safest short-term  investments.  However, the U.S. government does not guarantee
the net asset  value of the  Fund's  shares.  With  respect  to U.S.  government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that  the  U.S.   government   will   provide   support  to  such   agencies  or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.

Mortgage-Related Securities and Derivative Securities

The Fund may invest in mortgage-related  securities. A mortgage-related security
is an  interest  in a pool of  mortgage  loans and is  considered  a  derivative
security. Most mortgage-related  securities are pass-through  securities,  which
means that  investors  receive  payments  consisting of a pro rata share of both
principal and interest (less  servicing and other fees),  as well as unscheduled
prepayments,  as mortgages in the  underlying  mortgage pool are paid off by the
borrowers.  Certain mortgage-related  securities are subject to high volatility.
The Fund uses these derivative  securities in an effort to enhance return and as
a means to make certain  investments  not otherwise  available to the Fund.  See
"Hedging and Risk  Management  Practices"  for a discussion of other reasons why
the Fund invests in derivative securities.

Agency Mortgage-Related Securities

Investors in the Fund should note that the  dominant  issuers or  guarantors  of
mortgage-related  securities  today are GNMA,  FNMA and the FHLMC.  GNMA creates
pass-through  securities from pools of government guaranteed or insured (Federal
Housing Authority or Veterans  Administration)  mortgages.  FNMA and FHLMC issue
pass-through  securities from pools of conventional and federally insured and/or
guaranteed   residential   mortgages.   The   principal  and  interest  on  GNMA
pass-through  securities are guaranteed by GNMA and backed by the full faith and
credit of the U.S.  government.  FNMA  guarantees full and timely payment of all
interest and  principal,  and FHLMC  guarantees  timely  payment of interest and
ultimate collection of principal of its pass-through securities. Securities from
FNMA  and  FHLMC  are not  backed  by the  full  faith  and  credit  of the U.S.
government  but are  generally  considered to offer  minimal  credit risks.  The
yields provided by these mortgage-related  securities have historically exceeded
the yields on other types of U.S. government  securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."

Adjustable  rate  mortgage  securities  ("ARMs")  are  pass-through   securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined  interest rate index and which may
be subject to certain  limits.  The  adjustment  feature of ARMs tends to lessen
their interest rate sensitivity.

The Fund considers GNMA, FNMA and FHLMC-issued pass-through  certificates,  CMOs
and other  mortgage-related  securities  to be U.S.  government  securities  for
purposes of their  investment  policies.  However,  the Fund limits its stripped
mortgage securities investments to 10% of total assets. The liquidity of IOs and
POs issued by the U.S.  government  or its  agencies and  instrumentalities  and
backed by  fixed-rate  mortgage-related  securities  will be  determined  by the
Manager  under the direct  supervision  of the  Trust's  Pricing  Committee  and
reviewed  by the Board,  and all other IOs and POs will be deemed  illiquid  for
purposes of the Fund's limitation on illiquid securities. The Fund may invest in
derivative  securities known as "floaters" and "inverse floaters," the values of
which vary in response to interest rates.  These  securities may be illiquid and
their values may be very volatile.

Privately Issued Mortgage-Related Securities/Derivatives.

The Fund may invest in  mortgage-related  securities offered by private issuers,
including pass-through securities for pools of conventional residential mortgage
loans;  mortgage  pay-through  obligations and mortgage-backed  bonds, which are
considered  to be  obligations  of the  institution  issuing  the  bonds and are
collateralized  by  mortgage  loans;  and  bonds  and  CMOs   collateralized  by
mortgage-related  securities  issued  by  GNMA,  FNMA,  FHLMC  or  by  pools  of
conventional mortgages, multi-family or commercial mortgage loans.

                                       5
<PAGE>

Private  issuer  mortgage-related  securities  generally  offer a higher rate of
interest (but greater  credit and interest rate risk) than U.S.  government  and
agency  mortgage-related  securities  because  they offer no direct or  indirect
governmental guarantees.  However, many issuers or servicers of mortgage-related
securities  guarantee or provide  insurance  for timely  payment of interest and
principal.  The Fund  may  purchase  some  mortgage-related  securities  through
private  placements  that are  restricted  as to  further  sale.  See  "Illiquid
Securities." The value of these securities may be very volatile.

Structured Notes and Indexed Securities.

The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities; the interest rate or principal of which is determined by an
unrelated  indicator.  Indexed  securities  include  structured notes as well as
securities other than debt  securities;  the interest rate or principal of which
is  determined  by an  unrelated  indicator.  Index  securities  may  include  a
multiplier  that  multiplies  the  indexed  element by a  specified  factor and,
therefore,  the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall  assessment of the effective  duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.

Zero Coupon Bonds

The Fund may invest in zero  coupon  bonds.  Zero  coupon bond prices are highly
sensitive to changes in market  interest  rates.  The original issue discount on
the zero coupon bonds must be included  ratably in the income of the Fund as the
income accrues even though payment has not been received.  The Fund nevertheless
intends to distribute an amount of cash equal to the currently  accrued original
issue discount,  and this may require liquidating securities at times they might
not otherwise do so and may result in capital loss. See "Tax Information" in the
Statement of Additional Information.

Asset-Backed Securities

The Fund may invest up to 5% of its total assets in asset-backed securities such
as  those  backed  by  credit  card  receivables  or  automobile   loans.   Like
mortgage-related  securities,  these  securities  are  subject  to the  risk  of
prepayment.

Other Investment Practices

The Fund also may engage in the investment  practices  described below,  each of
which  may  involve   certain   special  risks.   The  Statement  of  Additional
Information,  under the heading "Investment Objective and Policies of the Fund,"
contains more detailed  information about certain of these practices,  including
limitations designed to reduce risks.

Repurchase Agreements

The  Fund  may  enter  into  repurchase  agreements.  Pursuant  to a  repurchase
agreement,  the Fund  acquires a U.S.  government  security or other  high-grade
liquid debt instrument from a financial  institution that simultaneously  agrees
to repurchase  the same security at a specified  time and price.  The repurchase
price reflects an  agreed-upon  rate of return not determined by the coupon rate
on the  underlying  security.  Under  the  Investment  Company  Act,  repurchase
agreements   are  considered  to  be  loans  by  the  Fund  and  must  be  fully
collateralized by cash, letters of credit, U.S.  government  securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying  security,  the Fund may
experience  delay or  difficulty  in  exercising  its rights to realize upon the
security,  may incur a loss if the value of the security  declines and may incur
disposition costs in liquidating the security.

Borrowing

The  Fund  may  borrow  money  from  banks  and  engage  in  reverse  repurchase
transactions,  in an amount  not to exceed  one-third  of the value of its total
assets to meet  temporary  or  emergency  purposes,  and the Fund may pledge its
assets in connection with such borrowings.  The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.

Reverse Repurchase Agreements

The Fund may enter into reverse repurchase  agreements.  In a reverse repurchase
agreement,  the Fund sells to a financial  institution  a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.

                                       6
<PAGE>

Leverage

The Fund may leverage its portfolio to increase total return.  Although leverage
creates an opportunity  for increased  income and gain, it also creates  special
risk  considerations.  For example,  leveraging  may magnify  changes in the net
asset values of the Fund's  shares and in the yield on its  portfolio.  Although
the principal of such borrowings will be fixed,  the Fund's assets may change in
value while the borrowing is outstanding.  Leveraging  creates interest expenses
that can exceed the income from the assets retained.

Securities Lending

The  Fund  may  lend   securities  to  brokers,   dealers  and  other  financial
organizations.  These loans may not exceed 30% of the Fund's total assets.  Each
securities loan is  collateralized  with collateral assets in an amount at least
equal  to the  current  market  value of the  loaned  securities,  plus  accrued
interest.  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.

When-Issued and Forward Commitment Securities

The Fund may purchase  U.S.  government or other  securities on a  "when-issued"
basis and may purchase or sell securities on a "forward  commitment" or "delayed
delivery"  basis.  The price is fixed at the time the  commitment  is made,  but
delivery and payment for the securities  take place at a later date,  normally 7
to 15 days  or,  in the  case  of  certain  CMO  issues,  45 to 60  days  later.
When-issued  securities  and  forward  commitments  may  be  sold  prior  to the
settlement   date,  but  the  Fund  will  enter  into  when-issued  and  forward
commitments  only with the  intention of actually  receiving or  delivering  the
securities,  as the case may be. No income accrues on securities  that have been
purchased  pursuant to a forward  commitment or on a when-issued  basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.

At the time the Fund  enters  into a  transaction  on a  when-issued  or forward
commitment basis, it supports its obligation with collateral assets equal to the
value of the  when-issued  or  forward  commitment  securities  and  causes  the
collateral  assets  to be  marked  to  market  daily.  There is a risk  that the
securities may not be delivered and that the Fund may incur a loss.

Hedging and Risk Management Practices

In seeking to protect against the effect of adverse changes in financial markets
or against  currency  exchange rate or interest rate changes that are adverse to
the present or  prospective  positions of the Fund,  the Fund may employ certain
risk  management  practices  using  the  following  derivative   securities  and
techniques  (known  as  "derivatives"):  forward  currency  exchange  contracts,
currency options,  futures contracts and options on futures contracts on foreign
government  securities  and  currencies.  The  Board of the  Trust  has  adopted
derivative  guidelines  that  require  the  Board  to  review  each  new type of
derivative that may be used by the Fund. Markets in some countries  currently do
not have instruments  available for hedging transactions  relating to currencies
or to  securities  denominated  in such  currencies  or to securities of issuers
domiciled or principally  engaged in business in such  countries.  To the extent
that  such  markets  do not  exist,  the  Manager  may not be able to hedge  its
investment  effectively  in such  countries.  Furthermore,  the Fund  engages in
hedging activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.

Forward Currency Contracts

A forward currency  contract is individually  negotiated and privately traded by
currency  traders and their  customers  and creates an obligation to purchase or
sell a specific  currency for an  agreed-upon  price at a future date.  The Fund
normally  conducts its foreign currency exchange  transactions  either on a spot
(i.e.,  cash) basis at the spot rate in the foreign currency  exchange market at
the time of the  transaction,  or through  entering  into  forward  contracts to
purchase or sell foreign  currencies at a future date.  The Fund  generally does
not enter into forward contracts with terms greater than one year.

The Fund generally enters into forward  contracts only under two  circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign  currency,  it any desire to "lock in" the U.S.  dollar
price of the security by entering into a forward contract to buy the amount of a
foreign  currency  needed to settle  the  transaction.  Second,  if the  Manager
believes that the currency of a particular  foreign  country will  substantially
rise or fall against the U.S.  dollar,  it may enter into a forward  contract to
buy or sell the  currency  approximately  the value of some or all of the Fund's
portfolio securities  denominated in such currency. The Fund will not enter into
a forward  contract if, as a result,  it would have more than one-third of total
assets  committed  to such  contracts  (unless it owns the  currency  that it is
obligated to deliver or has caused its custodian to segregate  Segregable Assets
having a value sufficient to cover its obligations).  Although forward contracts
are used

                                       7
<PAGE>

primarily to protect the Fund from adverse currency movements,  they involve the
risk that currency movements will not be accurately predicted.

Futures and Options on Futures

To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell  interest  rate futures  contracts.  An interest  rate futures
contract  is an  agreement  to purchase or sell debt  securities,  usually  U.S.
government securities,  at a specified date and price. In addition, the Fund may
purchase  and sell put and call options on interest  rate  futures  contracts in
lieu of entering into the underlying  interest rate futures contracts.  The Fund
will  have  collateral  assets  equal to the  purchase  price  of the  portfolio
securities  represented by the underlying interest rate futures contracts it has
an obligation to purchase.

The Fund does not enter into any futures contracts or related options if the sum
of initial margin  deposits on futures  contracts,  related options and premiums
paid for any such related options would exceed 5% of its total assets.  The Fund
does not purchase  futures  contracts or related  options if, as a result,  more
than one-third of its total assets would be so invested.

Hedging Considerations

Hedging  transactions involve certain risks. While the Fund may benefit from the
use  of  hedging  transactions,  unanticipated  changes  in  interest  rates  or
securities prices may result in poorer overall  performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position  and a  portfolio  position  is not  properly  protected,  the  desired
protection  may not be obtained and the Fund may be exposed to risk of financial
loss. In addition,  the Fund pays commissions and other costs in connection with
such investments.

Illiquid Securities

The Fund may not invest more than 15% of its net assets in illiquid  securities.
The Fund treats any securities  subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are  restricted as to remittance of invested  capital or profit as
illiquid.  The Fund also treats repurchase  agreements with maturities in excess
of seven days as illiquid.  Illiquid  securities do not include  securities that
meet the  requirements  of Rule 144A under the  Securities Act of 1933 and that,
subject to the  review by the Board and  guidelines  adopted  by the Board,  the
Manager has determined to be liquid.

Defensive Investments and Portfolio Turnover

Notwithstanding its investment  objective,  the Fund may adopt up to a 100% cash
or cash equivalent  position for temporary defensive purposes to protect against
erosion of its  capital  base.  Depending  upon the  Manager's  analysis  of the
various markets and other considerations,  all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies),  such  as U.S.  government  securities  or  obligations  issued  or
guaranteed  by  the  government  of a  foreign  country  or by an  international
organization  designed or supported by multiple foreign governmental entities to
promote economic  reconstruction or development,  high-quality commercial paper,
time deposits,  savings accounts,  certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary  purposes pending  investment in other securities
and following substantial new investment in the Fund.

Portfolio  securities  are sold  whenever the Manager  believes it  appropriate,
regardless  of how long the  securities  have been held.  The Manager  therefore
changes the Fund's  investments  whenever it believes  doing so will further the
Fund's  investment  objective  or when it appears that a position of the desired
size cannot be accumulated.  Portfolio  turnover generally involves some expense
to  the  Fund,  including  brokerage  commissions,  dealer  mark-ups  and  other
transaction  costs,  and may result in the recognition of capital gains that may
be distributed to shareholders.  Generally, portfolio turnover in excess of 100%
is considered high and increases such costs. The annual  portfolio  turnover for
the Fund is expected to be  approximately  100%. Even if the portfolio  turnover
for the  Fund is in  excess  of 100%,  the Fund  would  not  consider  portfolio
turnover as a limiting factor.  Furthermore, in the case of the Fund, which is a
fixed-income  fund,  portfolio  turnover tends to have a less material effect on
the performance of the Fund and the tax consequences to its shareholders.

Investment Restrictions

The  investment  objective  of the Fund is  fundamental  and may not be  changed
without  shareholder  approval,  but unless otherwise  stated,  the Fund's other
investment  policies  may be changed  by the Board.  If there is a change in the
investment  objective  or policies  of the Fund,  shareholders  should  consider
whether  the  Fund  remains  an   appropriate   investment  in  light

                                       8
<PAGE>

of their  then-current  financial  positions  and needs.  The Fund is subject to
additional  investment  policies and restrictions  described in the Statement of
Additional Information, some of which are fundamental.

The Fund has  reserved  the right,  if approved by the Board,  to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment  objective,  policies and restrictions.
At least 30 days' prior written  notice of any such action would be given to all
shareholders  if and when such a proposal is  approved,  although no such action
has been proposed as of the date of this Prospectus.

Risk Considerations

Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade  (sometimes  called  "junk  bonds").  These debt  securities  have greater
speculative  characteristics and are regarded as having a great vulnerability to
default  although  currently  having the capacity to meet interest  payments and
principal repayments.  Securities rated immediately below investment grade (i.e.
BB by  S&P,  Fitch  or Duff &  Phelps)  are  regarded  as  having  predominantly
speculative  characteristics  and,  while such  obligations  have less near-term
vulnerability  to default  then other  speculative  grade debt,  they face major
ongoing  uncertainties  or exposure to adverse  business,  financial or economic
conditions  which could lead to inadequate  capacity to meet timely interest and
principal  payments.  Securities  rated C by  Moody's  are  regarded  as  having
extremely  poor  prospects  of ever  attaining  any  real  investment  standing.
Securities  rated D by S&P,  Fitch  and Duff &  Phelps  are in  default  and the
payment  of  interest  and/or  repayment  of  principal  is  in  arrears.   Such
securities,   though  high  yielding,  are  characterized  by  great  risk.  See
"Appendix" in the Statement of Additional  Information for a general description
of securities ratings. Adverse business,  financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay  principal.  The
ability to maintain other terms of the contract over any long period of time may
be small.
   
Junk bonds are more subject to default during  periods of economic  downturns or
increases in interest rates and their yields will fluctuate over time. It may be
more  difficult  to  dispose  of or to value junk  bonds,  especially  during an
economic  recession which could disrupt  severely the market of such securities.
One way to measure this risk is to compare default rates. According to a Moody's
report  entitled,  "Historical  Default  Rates of  Corporate  Bond  Issuers from
1920-1996"  which was published in January of 1997, the weighted  average annual
default rate from 1970 to 1996 was 3.93% for non-investment grade bonds compared
to 0.05% for investment  grade bonds.  During that time, the highest default for
any one year was 10.67% in 1991,  partly  attributed to widespread  recessionary
conditions.
    
The ratings of Moody's S&P, Fitch and Duff & Phelps  represent their opinions as
to the quality of the  obligations,  which they  undertake to rate.  Ratings are
relative and subjective  and,  although  ratings may be useful in evaluating the
safety or interest and principal payments, they do not evaluate the market value
risk of such obligations.  Even though these ratings may be an initial criterion
for  selection of portfolio  securities,  achievement  of the Fund's  investment
objective is more  dependent on the  Manager's  own credit  analysis then is the
case for a fund that invests in higher rated securities.

Foreign Securities

The Fund may invest in foreign  securities,  including debt or equity securities
denominated  in foreign  currencies.  There are certain  risks  associated  with
investments in foreign  securities.  Foreign investments involve the possibility
of expropriation,  nationalization or confiscatory taxation,  taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and  dividends)  or other taxes imposed with respect to  investments  in foreign
nations,  foreign exchange controls (which may include suspension of the ability
to transfer  currency from a given  country and  repatriation  of  investments),
default in foreign government securities, and political or social instability or
diplomatic  developments that could adversely affect  investments.  In addition,
there is often less publicly  available  information  about foreign issuers than
those in the U.S. Foreign companies are often not subject to uniform accounting,
auditing and  financial  reporting  standards.  Further,  the Fund may encounter
difficulties  in pursuing  legal  remedies or in obtaining  judgments in foreign
courts. Additional risk factors, including use of domestic and foreign custodian
banks and  depositories,  are described  elsewhere in the  Prospectus and in the
Statement of Additional Information.

Brokerage  commissions,  fees for custodial services and other costs relating to
investments  by the Fund in other  countries are  generally  greater than in the
U.S. Foreign markets,  have different  clearance and settlement  procedures from
those in the U.S., and certain markets have  experienced  times when settlements
did not keep pace with the volume of  securities  transactions  and  resulted in
settlement  difficulty.  The  inability  of the Fund to make  intended  security
purchases  due to  settlement  difficulties  could  cause it to miss  attractive
investment  opportunities.  Inability  to  sell  a  portfolio  security  due  to
settlement  problems  could  result  in loss to the  Fund  if the  value  of the
portfolio  security  declined  or result in  claims  against  the Fund if it had
entered into

                                       9
<PAGE>

a contract to sell the security. In certain countries,  there is less government
supervision and regulation of business and industry practices,  stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid, and
subject to greater price volatility than those in the U.S.

Because  the  securities  owned  by the  Fund  may  be  denominated  in  foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control  regulations,  and costs will be incurred
in connection with conversions  between  currencies.  A change in the value of a
foreign  currency  against the U.S. dollar results in a corresponding  change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and  distributions  to  shareholders.  The
Fund may be affected either  favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations,  and the Fund may
therefore  engage in  foreign  currency  hedging  strategies.  Such  strategies,
however,  involve  certain  transaction  costs and investment  risks,  including
dependence upon the Manager's ability to predict movements in exchange rates.

Some  countries  in which the Fund may  invest  may also have  fixed or  managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain  currencies  may  not be  internationally  traded.  A  number  of  these
currencies have experienced steady devaluation  relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.

Many countries in which the Fund may invest have experienced substantial, and in
some periods  extremely high,  rates of inflation for many years.  Inflation and
rapid  fluctuation  in  inflation  rates may have  negative  effects  on certain
economies and securities markets.  Moreover, the economies of some countries may
differ  favorably or unfavorably  from the U.S.  economy in such respects as the
rate  of  growth  of  gross  domestic  product,   rate  of  inflation,   capital
reinvestment, resource self-sufficiency and balance of payments.

Certain  countries also limit the amount of foreign capital that can be invested
in their markets and local  companies,  creating a "foreign  premium" on capital
investments  available to foreign investors such as the Fund. The Fund may pay a
"foreign  premium" to establish  an  investment  position  which it cannot later
recoup because of changes in that country's foreign investment laws.

Interest Rates

The  market  value  of debt  securities  that  are  interest-rate  sensitive  is
inversely  related to changes  in  interest  rates.  That is, an  interest  rate
decline  produces an increase in a security's  market value and an interest rate
increase  produces a decrease in value.  The longer the remaining  maturity of a
security,  the  greater  the effect of  interest  rate  changes.  Changes in the
ability of an issuer to make  payments  of  interest  and  principal  and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.

Prepayments  of  principal  of  mortgage-related  securities  by  mortgagors  or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's  portfolio.  Mortgage  prepayments  are  affected  by the level of
interest rates and other factors,  including general economic conditions and the
underlying  location  and age of the  mortgage.  In periods  of rising  interest
rates, the prepayment rate tends to decrease,  lengthening the average life of a
pool of mortgage-related  securities.  In periods of falling interest rates, the
prepayment  rate  tends to  increase,  shortening  the  average  life of a pool.
Because  prepayments  of  principal  generally  occur  when  interest  rates are
declining,  it is  likely  that the Fund,  to the  extent  it  retains  the same
percentage of debt securities,  may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments.  If this occurs,
the Fund's yield will correspondingly decline. Thus, mortgage-related securities
may have less potential for capital  appreciation in periods of falling interest
rates than other fixed-income  securities of comparable duration,  although they
may have a  comparable  risk of  decline  in market  value in  periods of rising
interest  rates.  To  the  extent  that  the  Fund  purchases   mortgage-related
securities at a premium, unscheduled prepayments,  which are made at par, result
in a loss equal to any unamortized  premium.  Duration is one of the fundamental
tools used by the Manager in managing  interest rate risks including  prepayment
risks. See "Duration" in the Glossary.

Management Of The Fund

The  Montgomery  Funds  has a Board of  Trustees  that  establishes  the  Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are  administered by the officers of the Trust and by the Manager  pursuant
to the terms of an investment management agreement with the Fund.

                                       10
<PAGE>

Montgomery  Asset  Management,  LLC is the  Fund's  Manager.  The  Manager  is a
Delaware limited  liability  company and is registered as an investment  adviser
with the SEC under the Investment Advisers Act of 1940, as amended.  The Manager
and its predecessor  have advised private  accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG.

Commerzbank,  the third largest  publicly held commercial  bank in Germany,  has
total assets of approximately [$268] billion. Commerzbank and its affiliates had
over [$79] billion in assets under management as of June 30, 1997. Commerzbank's
asset  management  operations  involve more than 1,000 employees in 13 countries
worldwide.


Portfolio Manager
   
The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson.
    
Mr. Stevens is a managing director and a senior portfolio  manager.  At Barclays
de Zoete Wedd Securities from 1991 to 1992, he started its CMO and  asset-backed
securities  trading.   Mr.  Stevens  traded  stripped  mortgage  securities  and
mortgage-related  interest rate swaps for the First Boston Corporation from 1990
to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was responsible
for the origination and trading of all derivative mortgage-related securities.

Mr. Wilson is a portfolio manager.  Mr. Wilson joined the Manager's fixed income
team in April,  1994.  From 1992 to 1994 he was an Associate in the Fixed income
Client  Services  Department  of BARRA in Berkeley,  California.  At BARRA,  Mr.
Wilson directed research and development teams on mortgage,  CMO and other fixed
income  projects.  Prior to that, he was an Associate in the structured  finance
department at Security  Pacific Merchant Bank as well as on the mortgage trading
desk at Chemical Bank.

Management Fees and Other Expenses

The Manager  provides  the Fund with  advice on buying and  selling  securities,
manages the Fund's investments,  including the placement of orders for portfolio
transactions,  furnishes  the Fund with office space and certain  administrative
services,  and  provides  personnel  needed  by the  Fund  with  respect  to the
Manager's  responsibilities  under the Manager's Investment Management Agreement
with the Fund.  The Manager  also  compensates  the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and  shareholder  reports  for  dissemination  to  prospective   investors.   As
compensation,  the Fund pays the Manager a monthly management fee (accrued daily
but paid when  requested  by the  Manager)  based upon the value of its  average
daily net assets, according to the following table.

                                   Average Daily Net Assets        Annual Rate
- --------------------------------- -------------------------- -------------------
Montgomery High Yield Bond Fund     First $500 million                    0.80%
                                    Over $500 million                     0.70%
- --------------------------------- -------------------------- -------------------

The Manager also serves as the Fund's Administrator (the  "Administrator").  The
Administrator  performs  services  with regard to various  aspects of the Fund's
administrative  operations.  As compensation,  the Fund pays the Administrator a
monthly fee at the annual rate of five  one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of daily net assets over $500 million).

The  Fund is  responsible  for its own  operating  expenses  including,  but not
limited  to:  the  Manager's  fees;  taxes,  if any;  brokerage  and  commission
expenses,   if  any;  interest  charges  on  any  borrowings;   transfer  agent,
administrator,  custodian,  legal and auditing fees;  shareholder servicing fees
including fees to third party  servicing  agents;  fees and expenses of Trustees
who are not interested  persons of the Manager;  salaries of certain  personnel;
costs and expenses of calculating its daily net asset value;  costs and expenses
of  accounting,  bookkeeping  and  recordkeeping  required  under the Investment
Company Act;  insurance  premiums;  trade association dues; fees and expenses of
registering  and  maintaining  registration of its shares for sale under federal
and applicable state  securities  laws; all costs  associated with  shareholders
meetings and the preparation and  dissemination of proxy  materials,  except for
meetings  called  solely  for the  benefit  of the  Manager  or its  affiliates;
printing and mailing  prospectuses,  statements  of additional  information  and
reports to shareholders;  and other expenses relating to the Fund's  operations,
plus any extraordinary and nonrecurring  expenses that are not expressly assumed
by the Manager.

Rule 12b-1 adopted by the Securities and Exchange  Commission  (the "SEC") under
the Investment  Company Act permits an investment company directly or indirectly
to pay expenses  associated with the  distribution of its shares  ("distribution
expenses") in accordance  with a plan adopted by the investment  company's Board
of Trustees and approved by its

                                       11
<PAGE>

shareholders.  Pursuant  to that Rule,  the Trust's  Board of  Trustees  and the
initial  shareholder  of the Class P shares of the Fund have  approved,  and the
Fund has entered into, a Share Marketing Plan (the "Plan") with the Manager,  as
the distribution  coordinator,  for the Class P shares. Under the Plan, the Fund
will pay  distribution  fees to the  Manager  at an annual  rate of 0.25% of the
Fund's aggregate average daily net assets attributable to its Class P shares, to
reimburse the Manager for its distribution costs with respect to that Class.

The Plan provides that the Manager may use the  distribution  fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited  to (i)  incentive  compensation  paid to the  directors,  officers  and
employees  of,  agents  for  and  consultants  to,  the  Manager  or  any  other
broker-dealer or financial  institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers,  financial institutions or other
persons  for  providing  distribution  assistance  with  respect to that  Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including,  but not limited to, direct mail  promotions and  television,  radio,
newspaper,  magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses,  statements of additional information
and reports of the Fund to  prospective  investors  in that  Class;  (iii) costs
involved in preparing,  printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and  promotional  activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class.  Distribution  fees are accrued daily and paid  monthly,  and are
charged as expenses of the Class P shares as accrued.

In  adopting  the  Plan,  the  Board of  Trustees  determined  that  there was a
reasonable  likelihood that the Plan would benefit the Fund and the shareholders
of Class P  shares.  Information  with  respect  to  distribution  revenues  and
expenses is presented to the Board of Trustees  quarterly for its  consideration
in connection with its  deliberations  as to the continuance of the Plan. In its
review of the Plan,  the Board of Trustees  is asked to take into  consideration
expenses  incurred in connection  with the separate  distribution of the Class P
shares.

The Class P shares  are not  obligated  under  the Plan to pay any  distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued,  no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.

The distribution fee attributable to the Class P shares is designed to permit an
investor  to  purchase  Class  P  shares  through   broker-dealers  without  the
assessment  of a  front-end  sales  charge  and at the same time to  permit  the
Manager to compensate  broker-dealers on an ongoing basis in connection with the
sale of the Class P shares.

The Plan  provides  that it shall  continue in effect from year to year provided
that a majority of the Board of  Trustees of the Trust,  including a majority of
the  Trustees who are not  "interested  persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"),  vote  annually to continue the Plan.  The Plan may be terminated at
any time by vote of a majority of the  Independent  Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class P
shares.

All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.

The Manager has agreed to reduce its  management  fee if necessary to keep total
annual  operating  expenses  (excluding  the Rule 12b-1 fee) at or below one and
two-tenths of one percent (1.20%) of the Fund's average net assets.  The Manager
also may  voluntarily  reduce  additional  amounts to increase the return to the
Fund's  investors.  The Manager may terminate these voluntary  reductions at any
time.  Any  reductions   made  by  the  Manager  in  its  fees  are  subject  to
reimbursement by the Fund within the following two years, provided that the Fund
is able to effect such  reimbursement  and remain in compliance  with applicable
expense  limitations.  The Manager generally seeks  reimbursement for the oldest
reductions  and waivers before payment by the Fund for fees and expenses for the
current year.

In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating  expense for which
the Fund is obligated to pay and the  performance  of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement,  the Manager is entitled to seek  reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the  Fund's  shares  as well as  other  service  providers  of  shareholder  and
administrative  services.  In addition,  the Manager,  out of its own funds, may
sponsor   seminars  and   educational   programs  on  the  Fund  for   financial
intermediaries and shareholders.

                                       12
<PAGE>

The  Manager  considers  a number of factors  in  determining  which  brokers or
dealers to use for the Fund's  portfolio  transactions.  While these factors are
more fully discussed in the Statement of Additional  Information,  they include,
but are not limited to,  reasonableness of commissions,  quality of services and
execution  and  availability  of  research  that the Manager  may  lawfully  and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive  prices,  the Manager also may
consider sale of the Fund's shares as a factor in selecting  broker-dealers  for
the Fund's portfolio transactions.  It is anticipated that Montgomery Securities
may act as one of the  Fund's  brokers  in the  purchase  and sale of  portfolio
securities  and, in that capacity will receive  brokerage  commissions  from the
Fund.  The Fund will use  Montgomery  Securities as its broker only when, in the
judgment  of the  Manager  and  pursuant  to  review  by the  Board,  Montgomery
Securities  will  obtain a price and  execution  at least as  favorable  as that
available   from  other   qualified   brokers.   See   "Execution  of  Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.

Investors Fiduciary Trust Company,  127 West 10th Street,  Kansas City, Missouri
64105,  serves as the master  transfer agent for the Fund (the "Master  Transfer
Agent") and performs certain recordkeeping and accounting functions.  The Master
Transfer Agent delegates certain transfer agent functions to DST Systems,  Inc.,
P.O. Box 419073,  Kansas City,  Missouri  64141-6073,  the Fund's transfer agent
(the "Transfer  Agent").  Morgan Stanley Trust Company located at One Pierrepont
Plaza,  Brooklyn,  New York 11201, serves as the Fund's principal custodian (the
"Custodian").

How To Contact The Fund

For  information  on the Fund or your  account,  call a  Montgomery  Shareholder
Service Representative at:

                                 (800) 572-3863

Mail  your  completed   application,   any  checks,   investment  or  redemption
instructions and correspondence to:

Regular Mail                                   Express Mail or Overnight Service
The Montgomery Funds                           The Montgomery Funds
C/o DST Systems, Inc.                          c/o DST Systems, Inc.
P.O. Box 419073                                1004 Baltimore St.
Kansas City, MO  64141-6073                    Kansas City, MO  64105


Visit the Montgomery World Wide Web site at:

                           www.montgomeryfunds.com



How To Invest In The Fund

The  Fund's  shares  are  offered  only  through  financial  intermediaries  and
financial professionals,  with no sales load, at their next-determined net asset
value after receipt of an order with payment.  The Fund's shares are offered for
sale by Funds Distributor,  Inc., the Fund's Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.

If an order,  together  with payment in proper form, is received by the Transfer
Agent,  Funds  Distributor,  Inc. or certain  administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange  ("NYSE") is open for  trading,  Fund shares will be  purchased  at the
Fund's  next-determined  net asset value.  Orders for Fund shares received after
the Fund's cutoff times will be purchased at the next-determined net asset value
after receipt of the order.

The minimum initial  investment in the Fund is $1,000  (including IRAs) and $100
for subsequent investments.  The Manager or the Distributor,  in its discretion,
may waive these  minimums.  The Fund does not accept  third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on  banks  located  in the  U.S.  Purchases  may  also  be made in  certain
circumstances  by  payment  of  securities.  See  the  Statement  of  Additional
Information for further details.

                                       13
<PAGE>

Initial Investments

Minimum Initial Investment (including IRAs):                           $1,000


         Initial Investments by Check

         o   Complete the Account Application. Tell us in which Fund(s) you want
             to invest and make your check payable to The Montgomery Funds.

         o   A charge may be imposed on checks that do not clear.

         Initial Investments by Wire

         o   Call the  Transfer  Agent  to tell  them you  intend  to make  your
             initial  investment by wire.  Provide the Transfer  Agent with your
             name, dollar amount to be invested and Fund(s) in which you want to
             invest. They will provide you with further instructions to complete
             your purchase.  Complete information regarding your account must be
             included in all wire  instructions to ensure  accurate  handling of
             your investment.

         o   Request your bank to transmit  immediately  available funds by wire
             for purchase of shares in your name to the following:

                  Investors Fiduciary Trust Company
                  ABA #101003621
                  For: DST Systems, Inc.
                  Account #7526601
                  Attention: The Montgomery Funds
                  For Credit to: (shareholder(s) name)
                  Shareholder Account Number: (shareholder(s) account number)
                  Name of Fund: Montgomery High Yield Bond Fund

         o   Your bank may charge a fee for any wire transfers.

         o   The Fund and the  Distributor  each reserve the right to reject any
             purchase order in whole or in part.

Subsequent Investments

Minimum Subsequent Investment (including IRAs):                        $100


         Subsequent Investments by Check

         o   Make  your  check  payable  to The  Montgomery  Funds.  Enclose  an
             investment  stub with your check.  If you do not have an investment
             stub, mail your check with written instructions indicating the Fund
             name  and  account  number  to  which  your  investment  should  be
             credited.

         o   A charge may be imposed on checks that do not clear.

         Subsequent Investments by Wire

         o   You do not need to  contact  the  Transfer  Agent  prior to  making
             subsequent investments by wire. Instruct your bank to wire funds to
             the  Transfer  Agent's  affiliated  bank by  using  the  bank  wire
             information under "Initial Investments by Wire."

                                       14
<PAGE>

         Subsequent Investments by Telephone

         o   Shareholders   are   automatically   eligible  to  make   telephone
             purchases.  To make a purchase,  call the  Transfer  Agent at (800)
             572-3863  before the Fund cutoff  time.  Shares for IRAs may not be
             purchased by phone.

         o   The maximum  telephone  purchase is an amount up to five times your
             account value on the previous day.

         o   Payments  for shares  purchased  must be received  by the  Transfer
             Agent within three business days after the purchase request.  Write
             your confirmed  purchase number on your check or include it in your
             wire instructions.

         o   You should do one of the following to ensure payment is received in
             time:

            o   Transfer  funds  directly  from your bank  account  by sending a
                letter  and a  voided  check  or  deposit  slip  (for a  savings
                account) to the Transfer Agent.

            o   Send a check by overnight or 2nd day courier service.

            o   Instruct  your  bank  to  wire  funds  to the  Transfer  Agent's
                affiliated  bank by using  the bank wire  information  under the
                section titled "Initial Investments by Wire."

         Automatic Account Builder ("AAB")

         o   AAB will be established on existing  accounts only. You may not use
             an AAB  investment  to open a new  account.  The minimum  automatic
             investment amount is the Fund's subsequent investment minimum.

         o   Your bank must be a member of the Automated Clearing House.

         o   To  establish  AAB,  attach a voided  check  (checking  account) or
             preprinted deposit slip (savings account) from your bank account to
             your Montgomery account  application or your letter of instruction.
             Investments will  automatically be transferred into your Montgomery
             account from your checking or savings account.

         o   Investments may be transferred either monthly or quarterly on or up
             to two business days before the 5th or 20th day of the month. If no
             day is  specified  on your  account  application  or your letter of
             instruction, the 20th of each month will be selected.

         o   You  should  allow 20  business  days for this  service  to  become
             effective.

         o   You may  cancel  your AAB at any time by  sending  a letter  to the
             Transfer Agent. Your request will be processed upon receipt.

         Payroll Deduction

         o   Investments  through  payroll  deduction  will  be  established  on
             existing accounts only. You may not use payroll deduction to open a
             new account.  The minimum payroll  deduction amount for the Fund is
             $100 per payroll deduction period.

         o   You may automatically  deposit a designated amount of your paycheck
             directly into a Montgomery Fund account.

         o   Please call the Transfer Agent to receive instructions to establish
             this service.

Telephone Transactions

You  agree  to  reimburse  the Fund  for any  expenses  or  losses  incurred  in
connection  with  transfers  from your  accounts,  including  any caused by your
bank's  failure to act in  accordance  with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf,  any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.

                                       15
<PAGE>

Although  Fund  shares are priced at the net asset value next  determined  after
receipt  of a  purchase  request,  shares  are not  purchased  until  payment is
received.  Should payment not be received when required, the Transfer Agent will
cancel the telephone  purchase request and you may be responsible for any losses
incurred  by the Fund.  The Fund and the  Transfer  Agent will not be liable for
following  instructions  communicated  by  telephone  reasonably  believed to be
genuine.  The Fund employs  reasonable  procedures to confirm that  instructions
communicated  by  telephone  are genuine.  These  procedures  include  recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special  authorization  number or other personal  information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized  or  fraudulent  telephone  transactions  only if  such  reasonable
procedures are not followed.

Retirement Plans

Shares of the Fund are available for purchase by any retirement plan,  including
Keogh plans,  401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through  administrators  for retirement  plans.  Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing  from their  plan  administrators.  Plan  administrators  may  receive
compensation from the Fund for performing shareholder services.

Share Certificates

Share  certificates  will not be  issued  by the Fund.  All  shares  are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.

How To Redeem An Investment In The Fund

The Fund will redeem all or any portion of an investor's outstanding shares upon
request.  Redemptions  can be made on any day that the NYSE is open for trading.
The redemption  price is the net asset value per share next determined after the
shares are validly  tendered for  redemption and such request is received by the
Transfer Agent or, in the case of repurchase  orders,  Montgomery  Securities or
other  securities  dealers.  Payment of  redemption  proceeds  is made  promptly
regardless  of when  redemption  occurs  and  normally  within  three days after
receipt of all documents in proper form,  including a written  redemption  order
with  appropriate  signature  guarantee.  Redemption  proceeds will be mailed or
wired in accordance with the  shareholder's  instructions.  The Fund may suspend
the right of redemption under certain extraordinary  circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been  notified  that the  monies  used for the  purchase  have been
collected,  which may take up to 15 days from the purchase date. Shares tendered
for redemptions  through brokers or dealers (other than the  Distributor) may be
subject  to a  service  charge  by  such  brokers  or  dealers.  Procedures  for
requesting redemption are set forth below.

         Redeeming by Written Instruction

         o   Write a letter giving your name,  account  number,  the name of the
             Fund from which you wish to redeem and the dollar  amount or number
             of shares you wish to redeem.

         o   Signature guarantee your letter if you want the redemption proceeds
             to  go  to  a  party   other  than  the  account   owner(s),   your
             predesignated   bank  account  or  if  the  dollar  amount  of  the
             redemption exceeds $50,000. Signature guarantees may be provided by
             an eligible guarantor institution such as a commercial bank, a NASD
             member  firm  such  as a  stockbroker,  a  savings  association  or
             national securities  exchange.  Contact the Transfer Agent for more
             information.

         o   If you do not have a  predesignated  bank  account and want to wire
             your  redemption  proceeds,  include a voided check or deposit slip
             with your  letter.  The  minimum  amount  that may be wired is $500
             (wire charges, if any, will be deducted from redemption  proceeds).
             The Fund  reserves the right to permit  lesser wire amounts or fees
             in the Manager's discretion.

         Redeeming By Telephone

         o   Unless you have declined  telephone  redemption  privileges on your
             account application, you may redeem shares up to $50,000 by calling
             the Transfer Agent before the Fund cutoff time.

         o   If you included bank wire  information on your account  application
             or  made   subsequent   arrangements   to  accommodate   bank  wire
             redemptions,  you may  request  that the  Transfer  Agent wire your
             redemption  proceeds  to

                                       16
<PAGE>

             your bank account.  Allow at least two business days for redemption
             proceeds to be credited to your bank  account.  If you want to wire
             your  redemption  proceeds  to  arrive  at your  bank  on the  same
             business day (subject to bank cutoff times), there is a $10 fee.

         o   Telephone redemption  privileges will be suspended 30 days after an
             address change. All redemption  requests during this period must be
             in writing with a guaranteed signature.

         o   Telephone  redemption  privileges may be cancelled after an account
             is  opened by  instructing  the  Transfer  Agent in  writing.  Your
             request  will  be  processed  upon  receipt.  This  service  is not
             available for IRA accounts.

By establishing  telephone redemption  privileges,  a shareholder authorizes the
Fund and the Transfer Agent to act upon the  instruction  of the  shareholder or
his or her  designee  by  telephone  to redeem  from the  account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization.  When a shareholder  appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone  redemption  instructions  given by the  shareholder's
designee.  The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to  shareholders.  The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See  discussion of Fund  telephone  procedures  and liability  under  "Telephone
Transactions."

Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.  During periods of volatile economic
or market conditions,  shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.

Systematic Withdrawal Plan

Under a Systematic  Withdrawal  Plan,  a  shareholder  with an account  value of
$1,000 or more in the Fund may receive (or have sent to a third party)  periodic
payments (by check or wire).  The minimum  payment  amount is $100 from the Fund
account.  Payments  may be made either  monthly or  quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the  redemption  proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.

Small Accounts

Due to the relatively high cost of maintaining  smaller accounts,  the Fund will
redeem  shares from any account if at any time,  because of  redemptions  by the
shareholder,  the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary  redemption,  the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional  investment to bring the
value of that  account at least to the  minimum  investment  required to open an
account before the Fund takes any action.

Exchange Privileges And Restrictions

You may exchange  shares from another fund in the  Montgomery  Funds family with
the same registration,  taxpayer  identification number and address. An exchange
may  result  in a  recognized  gain or loss for  income  tax  purposes.  See the
discussion of Fund  telephone  procedures  and  limitations  of liability  under
"Telephone Transactions."

         Purchasing and Redeeming Shares by Exchange

         o   You are  automatically  eligible to make  telephone  exchanges with
             your Montgomery account.

         o   Exchange  purchases  and  redemptions  will be processed  using the
             next-determined  net asset value (with no sales  charge or exchange
             fee) after your request is received. Your request is subject to the
             Fund's cut-off times.

         o   Exchange purchases must meet the minimum investment requirements of
             the fund you intend to purchase.

         o   You may  exchange  for  shares of a fund only in states  where that
             Montgomery  fund's shares are qualified for sale and only after you
             have reviewed a prospectus of that fund.

                                       17
<PAGE>

         o   You may not exchange  for shares of a  Montgomery  fund that is not
             open to new  shareholders  unless you have an existing account with
             that fund.

         o   Because  excessive  exchanges  can harm a fund's  performance,  the
             Trust reserves the right to terminate  your exchange  privileges if
             you make  more  than four  exchanges  out of any one fund  during a
             twelve-month  period.  The Fund may also refuse an exchange  into a
             fund from which you have  redeemed  shares  within the  previous 90
             days  (accounts  under common  control and  accounts  with the same
             taxpayer   identification  number  will  be  counted  together).  A
             shareholder's  exchanges  may be  restricted or refused if the Fund
             receives, or the Manager anticipates, simultaneous orders affecting
             significant  portions of the Fund's  assets and, in  particular,  a
             pattern of exchanges  coinciding with a "market  timing"  strategy.
             The Trust  reserves the right to refuse  exchanges by any person or
             group  if, in the  Manager's  judgment,  a fund  would be unable to
             effectively  invest  the money in  accordance  with its  investment
             objective and policies, or would otherwise be potentially adversely
             affected.  Although the Trust  attempts to provide  prior notice to
             affected  shareholders  when it is  reasonable  to do so,  they may
             impose these  restrictions  at any time.  The exchange limit may be
             modified for accounts in certain institutional  retirement plans to
             conform  to plan  exchange  limits  and  U.S.  Department  of Labor
             regulations  (for  those  limits,  see plan  materials).  The Trust
             reserves the right to  terminate or modify the exchange  privileges
             of Fund shareholders in the future.

Automatic Transfer Service ("ATS")

You may elect systematic  exchanges out of the fixed income funds (which include
the Montgomery  Short  Government Bond Fund, the Montgomery  Government  Reserve
Fund, the Montgomery  Total Return Bond Fund,  the Montgomery  Federal  Tax-Free
Money Fund, the Montgomery  California  Tax-Free  Intermediate Bond Fund and the
California  Tax-Free  Money Fund) into the Fund.  The minimum  exchange is $100.
Periodically investing a set dollar amount into the Fund is also referred to, as
dollar-cost averaging because the number of shares purchased will vary depending
on the price per  share.  Your  account  with the Fund must meet the  applicable
minimum of $1,000.  Exchanges  out of the fixed income funds are exempt from the
four exchanges limit policy.

Brokers and Other Intermediaries

Investing through Securities Brokers, Dealers and Financial Intermediaries

Investors  may  purchase  shares  of the Fund  from  other  selected  securities
brokers,  dealers  or through  financial  intermediaries  such as  benefit  plan
administrators.  Investors  should contact these agents directly for appropriate
instructions,  as well as information  pertaining to accounts and any service or
transaction  fees that may be charged by these agents.  Purchase  orders through
securities brokers,  dealers and other financial  intermediaries are effected at
the  next-determined  net asset value after  receipt of the order by such agent,
provided the agent  transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares.  Orders  received  after  that time  will be  purchased.  Investors  may
purchase shares of the Fund from other selected securities  brokers,  dealers or
through financial  intermediaries at the next-determined net asset value. To the
extent that these agents perform shareholder-servicing  activities for the Fund,
they may receive fees from the Fund for such services.

Redemption Orders Through Brokerage Accounts

Shareholders  also may sell shares back to the Fund by wire or telephone through
selected  securities  brokers or  dealers.  Shareholders  should  contact  their
securities  broker or dealer for  appropriate  instructions  and for information
concerning  any  transaction or service fee that may be imposed by the broker or
dealer.  Shareholders  are entitled to the net asset value next determined after
receipt of a redemption order by such broker-dealer,  provided the broker-dealer
transmits  such  order on a timely  basis  to the  Transfer  Agent so that it is
received by 4:00 p.m.,  New York time,  on a day that the Fund  redeems  shares.
Orders  received  after  that  time are  entitled  to the net asset  value  next
determined after receipt.

How Net Asset Value Is Determined

The net asset value of the Fund is  determined  once daily as of 4:00 p.m.,  New
York  time,  on each day that the  NYSE is open  for  trading  (except  for bank
holidays).  Per-share net asset value is calculated by dividing the value of the
Fund's  total  net  assets  by the  total  number  of  the  Fund's  shares  then
outstanding.

                                       18
<PAGE>

As more fully  described in the Statement of Additional  Information,  portfolio
securities are valued using current market valuations:  either the last reported
sales price or, in the case of  securities  for which there is no reported  last
sale and fixed  income  securities,  the mean  between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as  determined  in good faith under
the  supervision  of the  Trust's  officers,  and by the manager and the Pricing
Committee  of the  Board  respectively,  in  accordance  with  methods  that are
specifically  authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.

The value of securities  denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major  bank or,  if no such  quotation  is  available,  at the rate of  exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation  to the U.S.  dollar may affect the net asset value of Fund shares even
if there has not been any change in the  foreign-currency  denominated values of
such securities.

Because  foreign  securities  markets  may  close  prior  to the  time  the Fund
determines  its net  asset  values,  events  affecting  the  value of  portfolio
securities  occurring  between the time prices are  determined  and the time the
Fund  calculates  its net  asset  values  may  not be  reflected  in the  Fund's
calculation  of net asset values unless the Manager,  under  supervision  of the
Board, determines that a particular event would materially affect the Fund's net
asset values.

Dividends And Distributions

The Fund  distributes  substantially  all of its net  investment  income and net
capital gains to shareholders  each year.  Dividends are declared daily and paid
monthly  on or about the last  business  day of each  month.  Capital  gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary,  may be made  following the Fund's fiscal year end (June 30) in order
to avoid the  imposition  of tax on the Fund.  The amount and  frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.

Unless investors  request cash  distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other  distributions  will be reinvested  automatically  in  additional  Class P
shares of the Fund and credited to the shareholder's  account at the closing net
asset value on the reinvestment date.

Taxation

The Fund  intends to qualify  and elect as soon as  possible  to be treated as a
regulated  investment  company under  Subchapter M of the Code, by  distributing
substantially  all of its net  investment  income and net  capital  gains to its
shareholders and meeting other  requirements of the Code relating to the sources
of its income and  diversification  of assets.  Accordingly,  the Fund generally
will not be liable  for  federal  income  tax or excise  tax based on net income
except to the extent its earnings are not  distributed  or are  distributed in a
manner that does not  satisfy the  requirements  of the Code  pertaining  to the
timing of distributions.  If the Fund is unable to meet certain  requirements of
the Code,  it may be subject to  taxation  as a  corporation.  The Fund may also
incur tax  liability  to the extent it invests in  "passive  foreign  investment
companies." See the Statement of Additional Information.

For federal  income tax  purposes,  any  dividends  derived from net  investment
income and any excess of net short-term  capital gain over net long-term capital
loss that investors (other than certain  tax-exempt  organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered  ordinary
income.  Part of the  distributions  paid by the  Fund may be  eligible  for the
dividends-received  deduction allowed to corporate  shareholders under the Code.
Distributions  of the excess of net long-term  capital gain over net  short-term
capital  loss from  transactions  of the Fund are  treated  by  shareholders  as
long-term  capital gains regardless of the length of time the Fund's shares have
been owned.  Distributions  of income and capital  gains are taxed in the manner
described above,  whether they are taken in cash or are reinvested in additional
shares of the Fund.

The Fund  will  inform  its  investors  of the  source  of their  dividends  and
distributions  at the time they are paid,  and will promptly  after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund.  Additional  information  on tax matters
relating  to the Fund and its  shareholders  is  included  in the  Statement  of
Additional Information.

                                       19
<PAGE>

General Information

The Trust

The Fund is a series of The  Montgomery  Funds, a  Massachusetts  business trust
organized on May 10, 1990 (the "Trust").  The Trust's  Agreement and Declaration
of Trust permits the Board to issue an unlimited  number of full and  fractional
shares of  beneficial  interest,  $.01 par value,  in any number of series.  The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.

This  Prospectus  relates  only to the Class P shares of the Fund.  The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.

Shareholder Rights

Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each  whole  share  is  entitled  to one  vote as to any  matter  on which it is
entitled  to vote  and each  fractional  share is  entitled  to a  proportionate
fractional  vote.  Shareholders  have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution.  The Fund, as a separate series of the Trust,  votes
separately on matters affecting only the Fund (e.g.,  approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting  all  series  of the  Trust  jointly  or the  Trust as a whole  (e.g.,
election or removal of Trustees).  Voting rights are not cumulative, so that the
holders of more than 50% of the shares  voting in any election of Trustees  can,
if they so choose,  elect all of the Trustees.  Except as set forth herein,  all
classes  of shares  issued by the Fund shall have  identical  voting,  dividend,
liquidation and other rights,  preferences,  and terms and conditions.  The only
differences  among the various classes of shares relate solely to the following:
(a) each class may be subject to different  class  expenses;  (b) each class may
bear a  different  identifying  designation;  (c) each class may have  exclusive
voting  rights with respect to matters  solely  affecting  such class;  (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic  conversion of that class into another  class.  While the Trust is
not required and does not intend to hold annual meetings of  shareholders,  such
meetings  may be called by the Board at its  discretion,  or upon  demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing  or  removing   Trustees.   Shareholders  may  receive   assistance  in
communicating with other shareholders in connection with the election or removal
of  Trustees  pursuant  to the  provisions  of Section  16(c) of the  Investment
Company Act.

Performance Information

From  time  to  time,  the  Fund  may  publish  its  total  return,  such  as in
advertisements and  communications to investors.  Performance data may be quoted
separately  for the  Class P  shares  as for the  other  classes.  Total  return
information  generally will include the Fund's average annual compounded rate of
return over the most recent four calendar  quarters and over the period from the
Fund's  inception  of  operations.  The Fund may also  advertise  aggregate  and
average total return  information  over  different  periods of time.  The Fund's
average  annual  compounded  rate of  return is  determined  by  reference  to a
hypothetical   $1,000   investment  that  includes   capital   appreciation  and
depreciation  for the stated period according to a specific  formula.  Aggregate
total return is calculated in a similar manner,  except that the results are not
annualized.Total  return figures will reflect all recurring  charges against the
Fund's income.

Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's  total  return for any prior  period  should not be  considered  as a
representation of what an investor's total return or current yield may be in any
future period.

Legal Opinion

The  validity of shares  offered by this  Prospectus  will be passed on by Paul,
Hastings,   Janofsky  &  Walker  LLP,  345  California  Street,  San  Francisco,
California 94104.

Shareholder Reports and Inquiries

Unless otherwise  requested,  only one copy of each shareholder  report or other
material sent to  shareholders  will be mailed to each  household  with accounts
under  common  ownership  and the  same  address  regardless  of the  number  of
shareholders or accounts at that household or address. A confirmation  statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter  account

                                       20
<PAGE>

statement will be a year-end statement, listing all transaction activity for the
entire year. Retain this statement for your tax records.

In  general,  shareholders  who  redeemed  shares from a  qualifying  Montgomery
account  should  expect to receive an Average Cost  Statement in February of the
following  year.  Your  statement  will  calculate  your  average cost using the
average cost single-category method.

Any  questions  should  be  directed  to The  Montgomery  Funds at  800-572-FUND
(800-572-3863).

Backup Withholding Instructions

Shareholders  are required by law to provide the Fund with their correct  Social
Security or other Taxpayer Identification Number ("TIN"),  regardless of whether
they file tax returns.  Failure to do so may subject a shareholder to penalties.
Failure  to  provide a  correct  TIN or to check  the  appropriate  boxes in the
Account  Application and to sign the  shareholder's  name could result in backup
withholding  by the Fund of an  amount  of  federal  income  tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account.  Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.

A  shareholder  who does not have a TIN  should  apply  for one  immediately  by
contacting the local office of the Social  Security  Administration  or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting  receipt  of a TIN.  Special  rules  apply for  certain  entities.  For
example,  for an account  established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished.  If a shareholder has been notified by the
IRS that he or she is subject to backup withholding  because he or she failed to
report  all  interest  and  dividend  income  on his or her tax  return  and the
shareholder has not been notified by the IRS that such  withholding  will cease,
the  shareholder   should  cross  out  the  appropriate   item  in  the  Account
Application.  Dividends paid to a foreign  shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.

A shareholder  that is an exempt  recipient  should  furnish a TIN and check the
appropriate  box.  Exempt  recipients  include  certain  corporations,   certain
tax-exempt entities,  tax-exempt pension plans and IRAs,  governmental agencies,
financial  institutions,  registered  securities  and  commodities  dealers  and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.

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

This  Prospectus is not an offering of the  securities  herein  described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is  authorized to give any  information  or make any  representation  other than
those contained in this Prospectus, the Statement of Additional Information,  or
in the Fund's official sales literature.

                                       21
<PAGE>

                                    Glossary

o   Asset backed securities.  Asset backed securities are secured by and payable
    from, pools of assets,  such as motor vehicle  installment  sales contracts,
    installment  loan  contracts,  leases of various  types of real and personal
    property  and  receivables  from  revolving   credit  (e.g.,   credit  card)
    agreements.

o   Below  Investment  Grade  Debt  Securities.   Debt  securities  rated  below
    "investment grade."

o   Cash  Equivalents.   Cash  equivalents  are  short-term,   interest  bearing
    instruments  or deposits and may include,  for  example,  commercial  paper,
    certificates of deposit, repurchase agreements,  bankers' acceptances,  U.S.
    Treasury bills, bank money market deposit accounts,  master demand notes and
    money market mutual funds.  These consist of high-quality  debt obligations,
    certificates of deposit and bankers'  acceptances  rated at least A-1 by S&P
    or  Prime-1 by  Moody's,  or the  issuer  has an  outstanding  issue of debt
    securities rated at least A by S&P or Moody's,  or are of comparable quality
    in the opinion of the Manager.

o   Collateralized  Mortgage  Obligations  (CMOs).  Derivative  mortgage-related
    securities  that  separate the cash flows of mortgage  pools into  different
    classes or tranches.  Stripped  mortgage  securities  are CMOs that allocate
    different  proportions  of  interest  and  principal  payments  on a pool of
    mortgages.  One class may receive all of the interest  (the interest only or
    "IO" class) while another may receive all of the principal  (principal  only
    or "PO"  class).  The yield to maturity  on any IO or PO class is  extremely
    sensitive  not only to  changes  in  interest  rates but also to the rate of
    principal  payments and  prepayments  on underlying  mortgages.  In the most
    extreme cases, an IO class may become worthless.

o   Convertible  security.  A fixed-income  security (a bond or preferred stock)
    that may be converted  at a stated  price within a specified  period of time
    into a  certain  quantity  of the  common  stock of the same or a  different
    issuer. Convertible securities are senior to common stock in a corporation's
    capital  structure but are usually  subordinated to similar  non-convertible
    securities.  The price of a convertible security is influenced by the market
    value of the underlying common stock.

o   Covered  call  option.  A call  option  is  "covered"  if the Fund  owns the
    underlying  securities,  has the right to acquire  such  securities  without
    additional  consideration,  has  collateral  assets  sufficient  to meet its
    obligations under the option, or owns an offsetting call option.

o   Covered put option.  A put option is  "covered"  if the Fund has  collateral
    assets with a value not less than the exercise  price of the option or holds
    a put option on the underlying security.

o   Depositary receipts include American Depositary Receipts ("ADRs"),  European
    Depositary Receipts ("EDRs"),  Global Depositary Receipts ("GDRs") and other
    similar  instruments.  Depositary  receipts are receipts typically issued in
    connection  with a U.S.  or  foreign  bank or  trust  company  and  evidence
    ownership of underlying securities issued by a foreign corporation.

o   Derivatives include forward currency exchange  contracts,  currency options,
    futures contracts, swaps and options on futures contracts on U.S. government
    and foreign government securities and currencies.

o   Duff & Phelps.  Duff & Phelps  Credit  Rating Co., a  nationally  recognized
    statistical rating organization.

o   Duration.  Traditionally, a debt security's "term to maturity" characterizes
    a security's  sensitivity to changes in interest  rates.  However,  "term to
    maturity"  measures only the time until a debt  security  provides its final
    payment,  taking no account of pre-maturity  payments.  Most debt securities
    provide interest  ("coupon") payments in addition to a final ("par") payment
    at maturity, and some securities have call provisions allowing the issuer to
    repay the instrument in full before  maturity date, each of which affect the
    security's  response to interest  rate  changes.  "Duration" is considered a
    more  precise  measure  of  interest  rate  risk  than  "term to  maturity."
    Determining  duration may involve the Manager's estimates of future economic
    parameters,   which  may  vary  from  actual  future  values.   Fixed-income
    securities  with effective  durations of three years are more  responsive to
    interest rate fluctuations than those with effective  durations of one year.
    For example, if interest rates rise by 1%, the value of securities having an
    effective  duration of three years will generally  decrease by approximately
    3%.

o   FHLMC. The Federal Home Loan Mortgage Corporation.

o   FNMA. The Federal National Mortgage Association.

o   Equity derivative securities include,  among other things, options on equity
    securities, warrants and future contracts on equity securities.

o   Fitch. Fitch Investors Service,  L.P., a nationally  recognized  statistical
    rating organization.

o   Forward  currency  contracts.  A forward  currency  contract  is a  contract
    individually  negotiated and privately  traded by currency traders and their
    customers and creates an obligation to purchase or sell a specific  currency
    for an agreed-upon price at a future date. The Fund generally does not enter
    into forward  contracts with terms greater than one year. The Fund generally
    enters into forward  contracts only under two  circumstances.  First, if the
    Fund  enters  into a  contract  for  the  purchase  or  sale  of a  security
    denominated  in a  foreign  currency,  it may  desire  to "lock in" the U.S.
    dollar price of the security by entering into a forward  contract to buy the
    amount of a foreign  currency needed to settle the transaction.  Second,  if
    the Manager believes that the currency of a particular  foreign country will
    substantially  rise or fall  against  the U.S.  dollar,  it may enter into a
    forward contract to buy or sell the currency approximating the value of some
    or all of the Fund's portfolio securities  denominated in such currency. The
    Fund will not enter into a forward  contract if, as a result,  it would have
    more than one-third of total assets  committed to such contracts  (unless it
    owns the currency that it is obligated to deliver or has

                                       22
<PAGE>

    collateral  assets  sufficient to cover its  obligations).  Although forward
    contracts  are used  primarily  to protect  the Fund from  adverse  currency
    movements,  they  involve  the  risk  that  currency  movements  will not be
    accurately predicted.

o   Futures and options on futures.  An  interest  rate  futures  contract is an
    agreement  to  purchase or sell debt  securities,  usually  U.S.  government
    securities,  at a specified date and price.  For example,  the Fund may sell
    interest rate futures contracts (i.e., enter into a futures contract to sell
    the underlying  debt security) in an attempt to hedge against an anticipated
    increase in interest rates and a corresponding decline in debt securities it
    owns.  The Fund will have  collateral  assets equal to the purchase price of
    the portfolio securities represented by the underlying interest rate futures
    contracts it has an obligation to purchase.

o   GNMA. The Government National Mortgage Association.

o   Illiquid securities.  The Fund treats any securities subject to restrictions
    on repatriation for more than seven days and securities issued in connection
    with foreign debt  conversion  programs that are restricted as to remittance
    of invested capital or profit as illiquid.  The Fund also treats  repurchase
    agreements  with  maturities  in excess of seven days as illiquid.  Illiquid
    securities do not include  securities  that are  restricted  from trading on
    formal  markets  for some  period of time but for  which an active  informal
    market exists,  or securities that meet the  requirements of Rule 144A under
    the Securities Act of 1933 and that,  subject to the review by the Board and
    guidelines adopted by the Board, the Manager has determined to be liquid.

o   Investment  grade.  Investment  grade debt securities are those rated within
    the four  highest  grades by S&P (at least  BBB),  Moody's (at least Baa) or
    Fitch  (at  least  Baa)  or  in  unrated  debt  securities  deemed  to be of
    comparable quality by the Manager using guidelines  approved by the Board of
    Trustees.

o   Leverage.  Some  Funds may use  leverage  in an effort to  increase  return.
    Although  leverage  creates an opportunity for increased income and gain, it
    also creates special risk  considerations.  Leveraging also creates interest
    expenses that can exceed the income from the assets retained.

o   Moody's.   Moody's  Investors   Service,   Inc.,  a  nationally   recognized
    statistical rating organization.

o   Repurchase agreement.  With a repurchase  agreement,  a Fund acquires a U.S.
    government  security or other  high-grade  liquid debt  instrument  (for the
    Money Market Funds,  the instrument must be rated in the highest grade) from
    a financial  institution that  simultaneously  agrees to repurchase the same
    security at a specified time and price.

o   Reverse  dollar roll  transactions.  When a Fund engages in a reverse dollar
    roll, it purchases a security from a financial  institution and concurrently
    agrees to resell a similar  security to that  institution at a later date at
    an agreed-upon price.

o   Reverse  repurchase  agreement.  In a reverse repurchase  agreement,  a Fund
    sells to a  financial  institution  a  security  that it holds and agrees to
    repurchase the same security at an agreed-upon price and date.

o   S&P.  Standard & Poor's Ratings Group, a nationally  recognized  statistical
    rating organization.

o   Securities lending. A fund may lend securities to brokers, dealers and other
    financial  organizations.   Each  securities  loan  is  collateralized  with
    collateral assets in an amount at least equal to the current market value of
    the loaned  securities,  plus accrued interest.  There is a risk of delay in
    receiving  collateral or in recovering the securities  loaned or even a loss
    of rights in collateral should the borrower fail financially.

o   U.S.  government  securities  include U.S. Treasury bills,  notes, bonds and
    other obligations issued or guaranteed by the U.S. government,  its agencies
    or instrumentalities.

o   A warrant  typically is a long-term  option that permits the holder to buy a
    specified  number of shares of the  issuer's  underlying  common  stock at a
    specified  exercise  price by a  particular  expiration  date. A warrant not
    exercised or disposed of by its expiration date expires worthless.

o   When-issued and forward  commitment  securities.  The Fund may purchase U.S.
    government or other securities on a "when-issued"  basis and may purchase or
    sell securities on a "forward  commitment" or "delayed  delivery" basis. The
    price is fixed at the time the  commitment is made, but delivery and payment
    for the securities  take place at a later date.  When-issued  securities and
    forward  commitments  may be sold prior to the  settlement  date, but a Fund
    will enter into when-issued and forward  commitments only with the intention
    of actually  receiving or delivering  the  securities.  No income accrues on
    securities that have been purchased pursuant to a forward commitment or on a
    when-issued  basis prior to  delivery  to a Fund.  At the time a Fund enters
    into a transaction on a when-issued or forward commitment basis, it supports
    its obligation with collateral  assets equal to the value of the when-issued
    or forward  commitment  securities  and causes the  collateral  assets to be
    marked  to market  daily.  There is a risk  that the  securities  may not be
    delivered and that the Fund may incur a loss.

o   Zero coupon bonds.  Zero coupon bonds are debt  obligations  that do not pay
    current interest and are consequently issued at a significant  discount from
    face value.  The  discount  approximates  the total  interest the bonds will
    accrue   and   compound   over  the   period  to   maturity   or  the  first
    interest-payment  date at a rate of interest  reflecting  the market rate of
    interest at the time of issuance.

                                       23
<PAGE>
   

                               Investment Manager
                       Montgomery Asset Management, LLC
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-FUND
    

                                   Distributor
                             Funds Distributor, Inc.
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-3863

                                    Custodian
                          Morgan Stanley Trust Company
                              One Pierrepont Plaza
                            Brooklyn, New York 11201

                                 Transfer Agent
                                DST Systems, Inc.
                                 P.O. Box 419073
                        Kansas City, Missouri 64141-6073
                                 1-800-447-4210

                                  Legal Counsel
                      Paul, Hastings, Janofsky & Walker LLP
                              345 California Street
                         San Francisco, California 94104

<PAGE>

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

                                     PART A

                          PROSPECTUS FOR CLASS L SHARES

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

<PAGE>
The Montgomery Funds
101 California Street
San Francisco, California 94111
(800) 572-FUND


Prospectus
   
September 30, 1997
    

Class L shares of the  Montgomery  High Yield Bond Fund (the "Fund") are offered
in this Prospectus.  The Fund seeks maximum total return (which consists of both
income and capital  appreciation)  by investing at least 65% of its total assets
in a broad  range of bonds  rated  below  investment  grade.  The Fund  does not
maintain  a stable net asset  value of $1.00 per  share.  As is the case for all
mutual funds, attainment of the Fund's investment objective cannot be assured.

The Fund's Class L shares are only sold  through  financial  intermediaries  and
financial professional at net asset value with no sales load, no commissions and
no exchange  fees.  The Class L shares are subject to a Rule 12b-1  distribution
fee as described in this Prospectus.  In general, the minimum initial investment
in the Fund is $1,000,  and  subsequent  investments  must be at least $100. The
Manager  or  the  Distributor,   under  any  circumstances   that  either  deems
appropriate, may waive these minimums. See "How to Invest in the Fund."

The Fund,  which is a  separate  series of The  Montgomery  Funds,  an  open-end
management  investment company,  is managed by Montgomery Asset Management,  LLC
(the   "Manager"),   and  is  distributed  by  Funds   Distributor,   Inc.  (the
"Distributor").
   
Please read this Prospectus before investing and retain it for future reference.
A Statement of  Additional  Information  dated  September  30,  1997,  as may be
revised,  has been  filed  with  the  Securities  and  Exchange  Commission,  is
incorporated by this reference and is available  without charge by calling (800)
572-FUND.  If you are viewing the electronic  version of this prospectus through
an on-line computer service, you may request a printed version free of charge by
calling (800) 572-FUND.

The Internet address for The Montgomery Funds is www.montgomeryfunds.com.

The Securities and Exchange Commission maintains a Web Site (http://www.sec.gov)
that contains the Statement of Additional Information,  material incorporated by
reference,  and other  information  regarding the Fund. The Fund may offer other
classes of shares to  investors  eligible to purchase  those  shares.  The other
classes of shares may have  different fees and expenses than the class of shares
offered in this  Prospectus,  and those  different  fees and expenses may affect
performance.  To obtain  information  concerning the other classes of shares not
offered in this  Prospectus,  call The  Montgomery  Funds at (800)  572-FUND  or
contact  sales  representatives  or  financial  intermediaries  who offer  those
classes.
    
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.

                                       1
<PAGE>

TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Fees and Expenses of The Fund                                                  3
- --------------------------------------------------------------------------------
The Fund's Investment Objective And Policies                                   4
- --------------------------------------------------------------------------------
Portfolio Securities                                                           4
- --------------------------------------------------------------------------------
Other Investment Practices                                                     6
- --------------------------------------------------------------------------------
Risk Considerations                                                            9
- --------------------------------------------------------------------------------
Management of The Fund                                                         0
- --------------------------------------------------------------------------------
How To Contact The Fund                                                        3
- --------------------------------------------------------------------------------
How To Invest In The Fund                                                      3
- --------------------------------------------------------------------------------
How To Redeem An Investment In The Fund                                        6
- --------------------------------------------------------------------------------
Exchange Privileges And Restrictions                                           7
- --------------------------------------------------------------------------------
Brokers and Other Intermediaries                                               8
- --------------------------------------------------------------------------------
How Net Asset Value Is Determined                                              8
- --------------------------------------------------------------------------------
Dividends And Distributions                                                   19
- --------------------------------------------------------------------------------
Taxation                                                                      19
- --------------------------------------------------------------------------------
General Information                                                           20
- --------------------------------------------------------------------------------
Backup Withholding Instructions                                               21
- --------------------------------------------------------------------------------
Glossary                                                                      22
- --------------------------------------------------------------------------------

                                       2
<PAGE>

                          Fees And Expenses Of The Fund



Shareholder Transaction Expenses for the Fund
<TABLE>
An investor would pay the following  charges when buying or redeeming  shares of
the Fund:
<CAPTION>
    Maximum Sales Load          Maximum Sales Load        Deferred Sales Load      Redemption Fees          Exchange Fees
   Imposed on Purchases        Imposed on Reinvested
                                     Dividends
- -------------------------------------------------------------------------------------------------------------------------------
<S>        <C>                         <C>                        <C>                   <C>                     <C>
           None                        None                       None                  None+                   None
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Estimated Annual Operating Expenses (as a percentage of average net assets)

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
Management Fee                                                0.80%
- --------------------------------------------------------------------------------
Other Expenses                                                0.40%
(after reimbursement)*
- --------------------------------------------------------------------------------
12b-1 Fee                                                     0.75%
- --------------------------------------------------------------------------------
Total Fund Operating Expenses*                                1.95%
- --------------------------------------------------------------------------------

The previous  tables are intended to assist the  investor in  understanding  the
various direct and indirect costs and expenses of the Fund.  Operating  expenses
are paid out of the Fund's  assets and are factored into the Fund's share price.
The  Fund  estimates  that it will  have the  expenses  listed  (expressed  as a
percentage  of average net assets) for the current  fiscal  year.  Because  Rule
12b-1 distribution  charges are accounted for on a class-level basis (and not on
an individual  shareholder-level  basis),  individual long-term investors in the
Class L shares of the Fund may over time pay more than the  economic  equivalent
of the maximum  front-end sales charge permitted by the National  Association of
Securities Dealers, Inc. ("NASD"), even though all shareholders of that Class in
the aggregate will not. This is recognized and permitted by the NASD.

+    Shareholders effecting redemptions via wire transfer may be required to pay
     fees, including the wire fee and other fees, that will be directly deducted
     from  redemption  proceeds.  The Fund  reserves  the  right,  upon 60 days'
     advance notice to  shareholders,  to impose a redemption fee of up to 1.00%
     on  shares  redeemed  within  90 days of  purchase.  See "How to  Redeem an
     Investment in the Fund."

*    Expenses for the Fund are  estimated.  The Manager will reduce its fees and
     may  absorb  or  reimburse  the Fund for  certain  expenses  to the  extent
     necessary  to limit total annual fund  operating  expenses to the lesser of
     the amount  indicated  in the table for the Fund or the maximum  allowed by
     applicable state expense limitations. The Fund is required to reimburse the
     Manager for any  reductions  in the Manager's fee only during the two years
     following  that  reduction and only if such  reimbursement  can be achieved
     within  the  foregoing   expense  limits.   The  Manager   generally  seeks
     reimbursement  for the oldest  reductions and waivers before payment by the
     Fund for fees and  expenses  for the current  year.  Absent the  reduction,
     actual total Fund operating expenses are estimated to be 2.00% (0.95% other
     expenses).  The Manager may  terminate  these  voluntary  reductions at any
     time. See "Management of the Fund."

Example of Expenses for the Fund

Assuming,  hypothetically,  that the  Fund's  annual  return  is 5% and that its
operating  expenses are as set forth  above,  an investor  buying  $1,000 of the
Fund's shares would have paid the following  total  expenses upon redeeming such
shares:

                                                 Montgomery High Yield Bond Fund
- --------------------------------------------------------------------------------
1 Year                                                        $20
- --------------------------------------------------------------------------------
3 Years                                                       $61
- --------------------------------------------------------------------------------
5 Years                                                       N/A
- --------------------------------------------------------------------------------
10 Years                                                      N/A
- --------------------------------------------------------------------------------

                                       3
<PAGE>

This example is to help potential  investors  understand the effect of expenses.
Investors should  understand that this example does not represent past or future
expenses or returns and that actual expenses and returns may vary.

The Fund's Investment Objective And Policies

The  investment  objective  and  general  investment  policies  of the  Fund are
described below. Specific portfolio securities that may be purchased by the Fund
are described in "Portfolio Securities" beginning on page 4. Specific investment
practices  that may be employed by the Fund are  described in "Other  Investment
Practices" beginning on page 6. Certain risks associated with investments in the
Fund  are  described  in  those  sections  as well as in  "Risk  Considerations"
beginning on page 9.  Certain  Terms Used In The  Prospectus  Are Defined In The
Glossary Found At The End Of The Prospectus.
   
The  Investment  objective of the Fund is to seek to obtain maximum total return
(which consists of both income and capital  appreciation) by investing primarily
in a broad range of bonds rated below  investment  grade (commonly  called "junk
bonds")  with the goal that the Fund  achieve  higher  total  return than mutual
funds that  invest  exclusively  in other types of bonds  (i.e.  non-high  yield
bonds).  Under  normal  conditions,  the Fund  seeks to achieve  its  investment
objective by investing at least 65% of its total assets in a broad range of such
fixed income  securities  rated below  investment  grade,  including  high-yield
corporate bonds, high-yield mortgage-related securities, high-yield asset-backed
securities and U.S.-dollar or foreign currency  dominated  securities of foreign
issuers.  The Fund may also invest up to 35% of its total  assets in  investment
grade  bonds,  equity  securities,  equity  derivatives  or  hybrid  securities,
including preferred stocks,  convertible securities,  warrants, and may purchase
securities from private placements.  Investors should note that the market value
of debt  securities  that are  interest-rate  sensitive is inversely  related to
changes in  interest  rates.  That is, an  interest  rate  decline  produces  an
increase in a security's  market value and an interest rate increase  produces a
decrease in value. The longer the remaining maturity of a security,  the greater
the effect of  interest  rate  changes.  During the  two-to-three  month  period
following  the  commencement  of the  Fund's  operations,  the Fund may have its
assets invested substantially in cash and cash equivalents.

The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson. See "Management of the Fund."
    
Portfolio Securities

Equity Securities

The Fund may, within the limits described above, invest in common stocks and may
also invest in other types of equity  securities  (such as  preferred  stocks or
convertible securities) as well as equity derivative securities.

Depositary Receipts, Convertible Securities and Securities Warrants

The Fund may invest in ADRs, EDRs and GDRs and  convertible  securities that the
Manager regards as a form of equity security.  The Fund may also invest up to 5%
of its net assets in warrants.

Investment Companies

The Fund may invest up to 10% of its total assets in shares of other  investment
companies investing  exclusively in securities in which it may otherwise invest.
The Fund does not intend to invest in other investment  companies unless, in the
Manager's  judgment,  the  potential  benefits  exceed  associated  costs.  As a
shareholder in an investment  company,  the Fund bears its ratable share of that
investment company's expenses, including advisory and administration fees.

High Yield and Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade.  These are securities rated lower than Baa by Moody's Investors  Service,
Inc.,  ("Moody's")  and BBB by Standard & Poor's  Ratings Group  ("S&P"),  Fitch
Investors  Service,  L.P.  ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps").  These  securities  are  sometimes  known  as  "junk  bonds"  or "high
risk/high  yield" bonds.  These  securities  carry a high degree of risk and are
considered   speculative   by  the  credit  rating   organizations.   See  "Risk
Considerations"  below. The Statement of Additional  Information has an appendix
with a description of the ratings used by these organizations. The Fund also may
invest in other debt securities, including securities in default. In addition to
traditional  corporate,  government and supranational debt securities,  the Fund
may invest in external (i.e., to foreign lenders) debt obligations issued by the
governments, governmental entities and companies of foreign countries.

                                       4
<PAGE>

U.S. Government Securities

The Fund may invest in fixed rate and floating or variable rate U.S.  government
securities. Certain of the obligations, including U.S. Treasury bills, notes and
bonds, and mortgage-related  securities of the GNMA, are issued or guaranteed by
the U.S.  government.  Other securities  issued by U.S.  government  agencies or
instrumentalities   are   supported   only  by  the  credit  of  the  agency  or
instrumentality,  such as those  issued by the  Federal  Home Loan  Bank,  while
others,  such as those issued by the FNMA,  Farm Credit  System and Student Loan
Marketing Association, have an additional line of credit with the U.S.
Treasury.

Short-term U.S. government  securities  generally are considered to be among the
safest short-term  investments.  However, the U.S. government does not guarantee
the net asset  value of the  Fund's  shares.  With  respect  to U.S.  government
securities supported only by the credit of the issuing agency or instrumentality
or by an additional line of credit with the U.S. Treasury, there is no guarantee
that  the  U.S.   government   will   provide   support  to  such   agencies  or
instrumentalities. Accordingly, such U.S. government securities may involve risk
of loss of principal and interest.

Mortgage-Related Securities and Derivative Securities

The Fund may invest in mortgage-related  securities. A mortgage-related security
is an  interest  in a pool of  mortgage  loans and is  considered  a  derivative
security. Most mortgage-related  securities are pass-through  securities,  which
means that  investors  receive  payments  consisting of a pro rata share of both
principal and interest (less  servicing and other fees),  as well as unscheduled
prepayments,  as mortgages in the  underlying  mortgage pool are paid off by the
borrowers.  Certain mortgage-related  securities are subject to high volatility.
The Fund uses these derivative  securities in an effort to enhance return and as
a means to make certain  investments  not otherwise  available to the Fund.  See
"Hedging and Risk  Management  Practices"  for a discussion of other reasons why
the Fund invests in derivative securities.

Agency Mortgage-Related Securities

Investors in the Fund should note that the  dominant  issuers or  guarantors  of
mortgage-related  securities  today are GNMA,  FNMA and the FHLMC.  GNMA creates
pass-through  securities from pools of government guaranteed or insured (Federal
Housing Authority or Veterans  Administration)  mortgages.  FNMA and FHLMC issue
pass-through  securities from pools of conventional and federally insured and/or
guaranteed   residential   mortgages.   The   principal  and  interest  on  GNMA
pass-through  securities are guaranteed by GNMA and backed by the full faith and
credit of the U.S.  government.  FNMA  guarantees full and timely payment of all
interest and  principal,  and FHLMC  guarantees  timely  payment of interest and
ultimate collection of principal of its pass-through securities. Securities from
FNMA  and  FHLMC  are not  backed  by the  full  faith  and  credit  of the U.S.
government  but are  generally  considered to offer  minimal  credit risks.  The
yields provided by these mortgage-related  securities have historically exceeded
the yields on other types of U.S. government  securities with comparable "lives"
largely due to the risks associated with prepayment. See "Risk Considerations."

Adjustable  rate  mortgage  securities  ("ARMs")  are  pass-through   securities
representing interests in pools of mortgage loans with adjustable interest rates
determined in accordance with a predetermined  interest rate index and which may
be subject to certain  limits.  The  adjustment  feature of ARMs tends to lessen
their interest rate sensitivity.

The Fund considers GNMA, FNMA and FHLMC-issued pass-through  certificates,  CMOs
and other  mortgage-related  securities  to be U.S.  government  securities  for
purposes of their  investment  policies.  However,  the Fund limits its stripped
mortgage securities investments to 10% of total assets. The liquidity of IOs and
POs issued by the U.S.  government  or its  agencies and  instrumentalities  and
backed by  fixed-rate  mortgage-related  securities  will be  determined  by the
Manager  under the direct  supervision  of the  Trust's  Pricing  Committee  and
reviewed  by the Board,  and all other IOs and POs will be deemed  illiquid  for
purposes of the Fund's limitation on illiquid securities. The Fund may invest in
derivative  securities known as "floaters" and "inverse floaters," the values of
which vary in response to interest rates.  These  securities may be illiquid and
their values may be very volatile.

Privately Issued Mortgage-Related Securities/Derivatives.

The Fund may invest in  mortgage-related  securities offered by private issuers,
including pass-through securities for pools of conventional residential mortgage
loans;  mortgage  pay-through  obligations and mortgage-backed  bonds, which are
considered  to be  obligations  of the  institution  issuing  the  bonds and are
collateralized  by  mortgage  loans;  and  bonds  and  CMOs   collateralized  by
mortgage-related  securities  issued  by  GNMA,  FNMA,  FHLMC  or  by  pools  of
conventional mortgages, multi-family or commercial mortgage loans.

                                       5
<PAGE>

Private  issuer  mortgage-related  securities  generally  offer a higher rate of
interest (but greater  credit and interest rate risk) than U.S.  government  and
agency  mortgage-related  securities  because  they offer no direct or  indirect
governmental guarantees.  However, many issuers or servicers of mortgage-related
securities  guarantee or provide  insurance  for timely  payment of interest and
principal.  The Fund  may  purchase  some  mortgage-related  securities  through
private  placements  that are  restricted  as to  further  sale.  See  "Illiquid
Securities." The value of these securities may be very volatile.

Structured Notes and Indexed Securities.

The Fund may invest in structured notes and indexed securities. Structured notes
are debt securities; the interest rate or principal of which is determined by an
unrelated  indicator.  Indexed  securities  include  structured notes as well as
securities other than debt  securities;  the interest rate or principal of which
is  determined  by an  unrelated  indicator.  Index  securities  may  include  a
multiplier  that  multiplies  the  indexed  element by a  specified  factor and,
therefore,  the value of such securities may be very volatile. To the extent the
Fund invests in these securities, however, the Manager analyzes these securities
in its overall  assessment of the effective  duration of the Fund's portfolio in
an effort to monitor the Fund's interest rate risk.

Zero Coupon Bonds

The Fund may invest in zero  coupon  bonds.  Zero  coupon bond prices are highly
sensitive to changes in market  interest  rates.  The original issue discount on
the zero coupon bonds must be included  ratably in the income of the Fund as the
income accrues even though payment has not been received.  The Fund nevertheless
intends to distribute an amount of cash equal to the currently  accrued original
issue discount,  and this may require liquidating securities at times they might
not otherwise do so and may result in capital loss. See "Tax Information" in the
Statement of Additional Information.

Asset-Backed Securities

The Fund may invest up to 5% of its total assets in asset-backed securities such
as  those  backed  by  credit  card  receivables  or  automobile   loans.   Like
mortgage-related  securities,  these  securities  are  subject  to the  risk  of
prepayment.

Other Investment Practices

The Fund also may engage in the investment  practices  described below,  each of
which  may  involve   certain   special  risks.   The  Statement  of  Additional
Information,  under the heading "Investment Objective and Policies of the Fund,"
contains more detailed  information about certain of these practices,  including
limitations designed to reduce risks.

Repurchase Agreements

The  Fund  may  enter  into  repurchase  agreements.  Pursuant  to a  repurchase
agreement,  the Fund  acquires a U.S.  government  security or other  high-grade
liquid debt instrument from a financial  institution that simultaneously  agrees
to repurchase  the same security at a specified  time and price.  The repurchase
price reflects an  agreed-upon  rate of return not determined by the coupon rate
on the  underlying  security.  Under  the  Investment  Company  Act,  repurchase
agreements   are  considered  to  be  loans  by  the  Fund  and  must  be  fully
collateralized by cash, letters of credit, U.S.  government  securities or other
high-grade liquid debt or equity securities ("collateral assets"). If the seller
defaults on its obligation to repurchase the underlying  security,  the Fund may
experience  delay or  difficulty  in  exercising  its rights to realize upon the
security,  may incur a loss if the value of the security  declines and may incur
disposition costs in liquidating the security.

Borrowing

The  Fund  may  borrow  money  from  banks  and  engage  in  reverse  repurchase
transactions,  in an amount  not to exceed  one-third  of the value of its total
assets to meet  temporary  or  emergency  purposes,  and the Fund may pledge its
assets in connection with such borrowings.  The Fund may not purchase securities
if such borrowings exceed 10% of its total assets.

Reverse Repurchase Agreements

The Fund may enter into reverse repurchase  agreements.  In a reverse repurchase
agreement,  the Fund sells to a financial  institution  a security that it holds
and agrees to repurchase the same security at an agreed-upon price and date.

                                       6
<PAGE>

Leverage

The Fund may leverage its portfolio to increase total return.  Although leverage
creates an opportunity  for increased  income and gain, it also creates  special
risk  considerations.  For example,  leveraging  may magnify  changes in the net
asset values of the Fund's  shares and in the yield on its  portfolio.  Although
the principal of such borrowings will be fixed,  the Fund's assets may change in
value while the borrowing is outstanding.  Leveraging  creates interest expenses
that can exceed the income from the assets retained.

Securities Lending

The  Fund  may  lend   securities  to  brokers,   dealers  and  other  financial
organizations.  These loans may not exceed 30% of the Fund's total assets.  Each
securities loan is  collateralized  with collateral assets in an amount at least
equal  to the  current  market  value of the  loaned  securities,  plus  accrued
interest.  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.

When-Issued and Forward Commitment Securities

The Fund may purchase  U.S.  government or other  securities on a  "when-issued"
basis and may purchase or sell securities on a "forward  commitment" or "delayed
delivery"  basis.  The price is fixed at the time the  commitment  is made,  but
delivery and payment for the securities  take place at a later date,  normally 7
to 15 days  or,  in the  case  of  certain  CMO  issues,  45 to 60  days  later.
When-issued  securities  and  forward  commitments  may  be  sold  prior  to the
settlement   date,  but  the  Fund  will  enter  into  when-issued  and  forward
commitments  only with the  intention of actually  receiving or  delivering  the
securities,  as the case may be. No income accrues on securities  that have been
purchased  pursuant to a forward  commitment or on a when-issued  basis prior to
delivery to the Fund. If the Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or receive
against a forward commitment, it may incur a gain or loss.

At the time the Fund  enters  into a  transaction  on a  when-issued  or forward
commitment basis, it supports its obligation with collateral assets equal to the
value of the  when-issued  or  forward  commitment  securities  and  causes  the
collateral  assets  to be  marked  to  market  daily.  There is a risk  that the
securities may not be delivered and that the Fund may incur a loss.

Hedging and Risk Management Practices

In seeking to protect against the effect of adverse changes in financial markets
or against  currency  exchange rate or interest rate changes that are adverse to
the present or  prospective  positions of the Fund,  the Fund may employ certain
risk  management  practices  using  the  following  derivative   securities  and
techniques  (known  as  "derivatives"):  forward  currency  exchange  contracts,
currency options,  futures contracts and options on futures contracts on foreign
government  securities  and  currencies.  The  Board of the  Trust  has  adopted
derivative  guidelines  that  require  the  Board  to  review  each  new type of
derivative that may be used by the Fund. Markets in some countries  currently do
not have instruments  available for hedging transactions  relating to currencies
or to  securities  denominated  in such  currencies  or to securities of issuers
domiciled or principally  engaged in business in such  countries.  To the extent
that  such  markets  do not  exist,  the  Manager  may not be able to hedge  its
investment  effectively  in such  countries.  Furthermore,  the Fund  engages in
hedging activities only when the Manager deems it to be appropriate and does not
necessarily engage in hedging transactions with respect to each investment.

Forward Currency Contracts

A forward currency  contract is individually  negotiated and privately traded by
currency  traders and their  customers  and creates an obligation to purchase or
sell a specific  currency for an  agreed-upon  price at a future date.  The Fund
normally  conducts its foreign currency exchange  transactions  either on a spot
(i.e.,  cash) basis at the spot rate in the foreign currency  exchange market at
the time of the  transaction,  or through  entering  into  forward  contracts to
purchase or sell foreign  currencies at a future date.  The Fund  generally does
not enter into forward contracts with terms greater than one year.

The Fund generally enters into forward  contracts only under two  circumstances.
First, if the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign  currency,  it any desire to "lock in" the U.S.  dollar
price of the security by entering into a forward contract to buy the amount of a
foreign  currency  needed to settle  the  transaction.  Second,  if the  Manager
believes that the currency of a particular  foreign  country will  substantially
rise or fall against the U.S.  dollar,  it may enter into a forward  contract to
buy or sell the  currency  approximately  the value of some or all of the Fund's
portfolio securities  denominated in such currency. The Fund will not enter into
a forward  contract if, as a result,  it would have more than one-third of total
assets  committed  to such  contracts  (unless it owns the  currency  that it is
obligated to deliver or has caused its custodian to segregate  Segregable Assets
having a value sufficient to cover its obligations).  Although forward contracts
are used

                                       7
<PAGE>

primarily to protect the Fund from adverse currency movements,  they involve the
risk that currency movements will not be accurately predicted.

Futures and Options on Futures

To protect against the effect of adverse changes in interest rates, the Fund may
purchase and sell  interest  rate futures  contracts.  An interest  rate futures
contract  is an  agreement  to purchase or sell debt  securities,  usually  U.S.
government securities,  at a specified date and price. In addition, the Fund may
purchase  and sell put and call options on interest  rate  futures  contracts in
lieu of entering into the underlying  interest rate futures contracts.  The Fund
will  have  collateral  assets  equal to the  purchase  price  of the  portfolio
securities  represented by the underlying interest rate futures contracts it has
an obligation to purchase.

The Fund does not enter into any futures contracts or related options if the sum
of initial margin  deposits on futures  contracts,  related options and premiums
paid for any such related options would exceed 5% of its total assets.  The Fund
does not purchase  futures  contracts or related  options if, as a result,  more
than one-third of its total assets would be so invested.

Hedging Considerations

Hedging  transactions involve certain risks. While the Fund may benefit from the
use  of  hedging  transactions,  unanticipated  changes  in  interest  rates  or
securities prices may result in poorer overall  performance for the Fund than if
it had not entered into a hedging position. If the correlation between a hedging
position  and a  portfolio  position  is not  properly  protected,  the  desired
protection  may not be obtained and the Fund may be exposed to risk of financial
loss. In addition,  the Fund pays commissions and other costs in connection with
such investments.

Illiquid Securities

The Fund may not invest more than 15% of its net assets in illiquid  securities.
The Fund treats any securities  subject to restrictions on repatriation for more
than seven days and securities issued in connection with foreign debt conversion
programs that are  restricted as to remittance of invested  capital or profit as
illiquid.  The Fund also treats repurchase  agreements with maturities in excess
of seven days as illiquid.  Illiquid  securities do not include  securities that
meet the  requirements  of Rule 144A under the  Securities Act of 1933 and that,
subject to the  review by the Board and  guidelines  adopted  by the Board,  the
Manager has determined to be liquid.

Defensive Investments and Portfolio Turnover

Notwithstanding its investment  objective,  the Fund may adopt up to a 100% cash
or cash equivalent  position for temporary defensive purposes to protect against
erosion of its  capital  base.  Depending  upon the  Manager's  analysis  of the
various markets and other considerations,  all or part of the assets of the Fund
may be held in cash and cash equivalents (denominated in U.S. dollars or foreign
currencies),  such  as U.S.  government  securities  or  obligations  issued  or
guaranteed  by  the  government  of a  foreign  country  or by an  international
organization  designed or supported by multiple foreign governmental entities to
promote economic  reconstruction or development,  high-quality commercial paper,
time deposits,  savings accounts,  certificates of deposit, bankers' acceptances
and repurchase agreements with respect to all of the foregoing. Such investments
also may be made for temporary  purposes pending  investment in other securities
and following substantial new investment in the Fund.

Portfolio  securities  are sold  whenever the Manager  believes it  appropriate,
regardless  of how long the  securities  have been held.  The Manager  therefore
changes the Fund's  investments  whenever it believes  doing so will further the
Fund's  investment  objective  or when it appears that a position of the desired
size cannot be accumulated.  Portfolio  turnover generally involves some expense
to  the  Fund,  including  brokerage  commissions,  dealer  mark-ups  and  other
transaction  costs,  and may result in the recognition of capital gains that may
be distributed to shareholders.  Generally, portfolio turnover in excess of 100%
is considered high and increases such costs. The annual  portfolio  turnover for
the Fund is expected to be  approximately  100%. Even if the portfolio  turnover
for the  Fund is in  excess  of 100%,  the Fund  would  not  consider  portfolio
turnover as a limiting factor.  Furthermore, in the case of the Fund, which is a
fixed-income  fund,  portfolio  turnover tends to have a less material effect on
the performance of the Fund and the tax consequences to its shareholders.

Investment Restrictions

The  investment  objective  of the Fund is  fundamental  and may not be  changed
without  shareholder  approval,  but unless otherwise  stated,  the Fund's other
investment  policies  may be changed  by the Board.  If there is a change in the
investment  objective  or policies  of the Fund,  shareholders  should  consider
whether  the  Fund  remains  an   appropriate   investment  in  light  of

                                       8
<PAGE>

their  then-current  financial  positions  and  needs.  The Fund is  subject  to
additional  investment  policies and restrictions  described in the Statement of
Additional Information, some of which are fundamental.

The Fund has  reserved  the right,  if approved by the Board,  to convert in the
future to a "feeder" fund that would invest all of its assets in a "master" fund
having substantially the same investment  objective,  policies and restrictions.
At least 30 days' prior written  notice of any such action would be given to all
shareholders  if and when such a proposal is  approved,  although no such action
has been proposed as of the date of this Prospectus.

Risk Considerations

Below Investment Grade Debt Securities

The Fund invests  primarily in fixed income  securities  rated below  investment
grade  (sometimes  called  "junk  bonds").  These debt  securities  have greater
speculative  characteristics and are regarded as having a great vulnerability to
default  although  currently  having the capacity to meet interest  payments and
principal repayments.  Securities rated immediately below investment grade (i.e.
BB by  S&P,  Fitch  or Duff &  Phelps)  are  regarded  as  having  predominantly
speculative  characteristics  and,  while such  obligations  have less near-term
vulnerability  to default  then other  speculative  grade debt,  they face major
ongoing  uncertainties  or exposure to adverse  business,  financial or economic
conditions  which could lead to inadequate  capacity to meet timely interest and
principal  payments.  Securities  rated C by  Moody's  are  regarded  as  having
extremely  poor  prospects  of ever  attaining  any  real  investment  standing.
Securities  rated D by S&P,  Fitch  and Duff &  Phelps  are in  default  and the
payment  of  interest  and/or  repayment  of  principal  is  in  arrears.   Such
securities,   though  high  yielding,  are  characterized  by  great  risk.  See
"Appendix" in the Statement of Additional  Information for a general description
of securities ratings. Adverse business,  financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay  principal.  The
ability to maintain other terms of the contract over any long period of time may
be small.
   
Junk bonds are more subject to default during  periods of economic  downturns or
increases in interest rates and their yields will fluctuate over time. It may be
more  difficult  to  dispose  of or to value junk  bonds,  especially  during an
economic  recession which could disrupt  severely the market of such securities.
One way to measure this risk is to compare default rates. According to a Moody's
report  entitled,  "Historical  Default  Rates of  Corporate  Bond  Issuers from
1920-1996"  which was published in January of 1997, the weighted  average annual
default rate from 1970 to 1996 was 3.93% for non-investment grade bonds compared
to 0.05% for investment  grade bonds.  During that time, the highest default for
any one year was 10.67% in 1991,  partly  attributed to widespread  recessionary
conditions.
    

The ratings of Moody's S&P, Fitch and Duff & Phelps  represent their opinions as
to the quality of the  obligations,  which they  undertake to rate.  Ratings are
relative and subjective  and,  although  ratings may be useful in evaluating the
safety or interest and principal payments, they do not evaluate the market value
risk of such obligations.  Even though these ratings may be an initial criterion
for  selection of portfolio  securities,  achievement  of the Fund's  investment
objective is more  dependent on the  Manager's  own credit  analysis then is the
case for a fund that invests in higher rated securities.

Foreign Securities

The Fund may invest in foreign  securities,  including debt or equity securities
denominated  in foreign  currencies.  There are certain  risks  associated  with
investments in foreign  securities.  Foreign investments involve the possibility
of expropriation,  nationalization or confiscatory taxation,  taxation of income
earned in foreign nations (including, for example, withholding taxes on interest
and  dividends)  or other taxes imposed with respect to  investments  in foreign
nations,  foreign exchange controls (which may include suspension of the ability
to transfer  currency from a given  country and  repatriation  of  investments),
default in foreign government securities, and political or social instability or
diplomatic  developments that could adversely affect  investments.  In addition,
there is often less publicly  available  information  about foreign issuers than
those in the U.S. Foreign companies are often not subject to uniform accounting,
auditing and  financial  reporting  standards.  Further,  the Fund may encounter
difficulties  in pursuing  legal  remedies or in obtaining  judgments in foreign
courts. Additional risk factors, including use of domestic and foreign custodian
banks and  depositories,  are described  elsewhere in the  Prospectus and in the
Statement of Additional Information.

Brokerage  commissions,  fees for custodial services and other costs relating to
investments  by the Fund in other  countries are  generally  greater than in the
U.S. Foreign markets,  have different  clearance and settlement  procedures from
those in the U.S., and certain markets have  experienced  times when settlements
did not keep pace with the volume of  securities  transactions  and

                                       9
<PAGE>

resulted in  settlement  difficulty.  The inability of the Fund to make intended
security  purchases  due to  settlement  difficulties  could  cause  it to  miss
attractive investment opportunities.  Inability to sell a portfolio security due
to  settlement  problems  could  result  in loss to the Fund if the value of the
portfolio  security  declined  or result in  claims  against  the Fund if it had
entered into a contract to sell the  security.  In certain  countries,  there is
less government  supervision and regulation of business and industry  practices,
stock exchanges,  brokers,  and listed companies than in the U.S. The securities
markets  of many of the  countries  in which  the Fund  may  invest  may also be
smaller,  less liquid, and subject to greater price volatility than those in the
U.S.

Because  the  securities  owned  by the  Fund  may  be  denominated  in  foreign
currencies, the value of such securities will be affected by changes in currency
exchange rates and in exchange control  regulations,  and costs will be incurred
in connection with conversions  between  currencies.  A change in the value of a
foreign  currency  against the U.S. dollar results in a corresponding  change in
the U.S. dollar value of the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and  distributions  to  shareholders.  The
Fund may be affected either  favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations,  and the Fund may
therefore  engage in  foreign  currency  hedging  strategies.  Such  strategies,
however,  involve  certain  transaction  costs and investment  risks,  including
dependence upon the Manager's ability to predict movements in exchange rates.

Some  countries  in which the Fund may  invest  may also have  fixed or  managed
currencies that are not freely convertible at market rates into the U.S. dollar.
Certain  currencies  may  not be  internationally  traded.  A  number  of  these
currencies have experienced steady devaluation  relative to the U.S. dollar, and
such devaluations in the currencies may have a detrimental impact on the Fund.

Many countries in which the Fund may invest have experienced substantial, and in
some periods  extremely high,  rates of inflation for many years.  Inflation and
rapid  fluctuation  in  inflation  rates may have  negative  effects  on certain
economies and securities markets.  Moreover, the economies of some countries may
differ  favorably or unfavorably  from the U.S.  economy in such respects as the
rate  of  growth  of  gross  domestic  product,   rate  of  inflation,   capital
reinvestment, resource self-sufficiency and balance of payments.

Certain  countries also limit the amount of foreign capital that can be invested
in their markets and local  companies,  creating a "foreign  premium" on capital
investments  available to foreign investors such as the Fund. The Fund may pay a
"foreign  premium" to establish  an  investment  position  which it cannot later
recoup because of changes in that country's foreign investment laws.

Interest Rates

The  market  value  of debt  securities  that  are  interest-rate  sensitive  is
inversely  related to changes  in  interest  rates.  That is, an  interest  rate
decline  produces an increase in a security's  market value and an interest rate
increase  produces a decrease in value.  The longer the remaining  maturity of a
security,  the  greater  the effect of  interest  rate  changes.  Changes in the
ability of an issuer to make  payments  of  interest  and  principal  and in the
market's perception of its creditworthiness also affect the market value of that
issuer's debt securities.

Prepayments  of  principal  of  mortgage-related  securities  by  mortgagors  or
mortgage foreclosures affect the average life of the mortgage-related securities
in the Fund's  portfolio.  Mortgage  prepayments  are  affected  by the level of
interest rates and other factors,  including general economic conditions and the
underlying  location  and age of the  mortgage.  In periods  of rising  interest
rates, the prepayment rate tends to decrease,  lengthening the average life of a
pool of mortgage-related  securities.  In periods of falling interest rates, the
prepayment  rate  tends to  increase,  shortening  the  average  life of a pool.
Because  prepayments  of  principal  generally  occur  when  interest  rates are
declining,  it is  likely  that the Fund,  to the  extent  it  retains  the same
percentage of debt securities,  may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments.  If this occurs,
the Fund's yield will correspondingly decline. Thus, mortgage-related securities
may have less potential for capital  appreciation in periods of falling interest
rates than other fixed-income  securities of comparable duration,  although they
may have a  comparable  risk of  decline  in market  value in  periods of rising
interest  rates.  To  the  extent  that  the  Fund  purchases   mortgage-related
securities at a premium, unscheduled prepayments,  which are made at par, result
in a loss equal to any unamortized  premium.  Duration is one of the fundamental
tools used by the Manager in managing  interest rate risks including  prepayment
risks. See "Duration" in the Glossary.

Management Of The Fund

The  Montgomery  Funds  has a Board of  Trustees  that  establishes  the  Fund's
policies and supervises and reviews its management. Day-to-day operations of the
Fund are  administered by the officers of the Trust and by the Manager  pursuant
to the terms of an investment management agreement with the Fund.

                                       10
<PAGE>

Montgomery  Asset  Management,  LLC is the  Fund's  Manager.  The  Manager  is a
Delaware limited  liability  company and is registered as an investment  adviser
with the SEC under the Investment Advisers Act of 1940, as amended.  The Manager
and its predecessor  have advised private  accounts and mutual funds since 1990.
The Manager is a subsidiary of Commerzbank AG.


Commerzbank,  the third largest  publicly held commercial  bank in Germany,  has
total assets of approximately [$268] billion. Commerzbank and its affiliates had
over [$79] billion in assets under management as of June 30, 1997. Commerzbank's
asset  management  operations  involve more than 1,000 employees in 13 countries
worldwide.


Portfolio Manager
   
The Fund is managed by the Manager's  Fixed Income Team,  whose members  include
William C. Stevens and Peter D. Wilson.
    
Mr. Stevens is a managing director and a senior portfolio  manager.  At Barclays
de Zoete Wedd Securities from 1991 to 1992, he started its CMO and  asset-backed
securities  trading.   Mr.  Stevens  traded  stripped  mortgage  securities  and
mortgage-related  interest rate swaps for the First Boston Corporation from 1990
to 1991, and while with Drexel Burnham Lambert from 1984 to 1990 was responsible
for the origination and trading of all derivative mortgage-related securities.

Mr. Wilson is a portfolio manager.  Mr. Wilson joined the Manager's fixed income
team in April,  1994.  From 1992 to 1994 he was an Associate in the Fixed income
Client  Services  Department  of BARRA in Berkeley,  California.  At BARRA,  Mr.
Wilson directed research and development teams on mortgage,  CMO and other fixed
income  projects.  Prior to that, he was an Associate in the structured  finance
department at Security  Pacific Merchant Bank as well as on the mortgage trading
desk at Chemical Bank.

Management Fees and Other Expenses

The Manager  provides  the Fund with  advice on buying and  selling  securities,
manages the Fund's investments,  including the placement of orders for portfolio
transactions,  furnishes  the Fund with office space and certain  administrative
services,  and  provides  personnel  needed  by the  Fund  with  respect  to the
Manager's  responsibilities  under the Manager's Investment Management Agreement
with the Fund.  The Manager  also  compensates  the members of the Board who are
interested persons of the Manager, and assumes the cost of printing prospectuses
and  shareholder  reports  for  dissemination  to  prospective   investors.   As
compensation,  the Fund pays the Manager a monthly management fee (accrued daily
but paid when  requested  by the  Manager)  based upon the value of its  average
daily net assets, according to the following table.

                                     Average Daily Net Assets      Annual Rate
- ---------------------------------- --------------------------- -----------------
Montgomery High Yield Bond Fund      First $500 million                   0.80%
                                     Over $500 million                    0.70%
- ---------------------------------- --------------------------- -----------------

The Manager also serves as the Fund's Administrator (the  "Administrator").  The
Administrator  performs  services  with regard to various  aspects of the Fund's
administrative  operations.  As compensation,  the Fund pays the Administrator a
monthly fee at the annual rate of five  one-hundredths of one percent (0.05%) of
average daily net assets (0.04% of daily net assets over $500 million).

The  Fund is  responsible  for its own  operating  expenses  including,  but not
limited  to:  the  Manager's  fees;  taxes,  if any;  brokerage  and  commission
expenses,   if  any;  interest  charges  on  any  borrowings;   transfer  agent,
administrator,  custodian,  legal and auditing fees;  shareholder servicing fees
including fees to third party  servicing  agents;  fees and expenses of Trustees
who are not interested  persons of the Manager;  salaries of certain  personnel;
costs and expenses of calculating its daily net asset value;  costs and expenses
of  accounting,  bookkeeping  and  recordkeeping  required  under the Investment
Company Act;  insurance  premiums;  trade association dues; fees and expenses of
registering  and  maintaining  registration of its shares for sale under federal
and applicable state  securities  laws; all costs  associated with  shareholders
meetings and the preparation and  dissemination of proxy  materials,  except for
meetings  called  solely  for the  benefit  of the  Manager  or its  affiliates;
printing and mailing  prospectuses,  statements  of additional  information  and
reports to shareholders;  and other expenses relating to the Fund's  operations,
plus any extraordinary and nonrecurring  expenses that are not expressly assumed
by the Manager.

Rule 12b-1 adopted by the Securities and Exchange  Commission  (the "SEC") under
the Investment  Company Act permits an investment company directly or indirectly
to pay expenses  associated with the  distribution of its shares  ("distribution

                                       11
<PAGE>

expenses") in accordance  with a plan adopted by the investment  company's Board
of Trustees and approved by its shareholders. Pursuant to that Rule, the Trust's
Board of Trustees and the initial  shareholder of the Class L shares of the Fund
have  approved,  and the Fund has  entered  into,  a Share  Marketing  Plan (the
"Plan")  with the  Manager,  as the  distribution  coordinator,  for the Class L
shares. Under the Plan, the Fund will pay distribution fees to the Manager at an
annual  rate  of  0.75%  of  the  Fund's  aggregate  average  daily  net  assets
attributable  to  its  Class  L  shares,   to  reimburse  the  Manager  for  its
distribution costs with respect to that Class.

The Plan provides that the Manager may use the  distribution  fees received from
the Class to pay for the distribution expenses of that Class, including, but not
limited  to (i)  incentive  compensation  paid to the  directors,  officers  and
employees  of,  agents  for  and  consultants  to,  the  Manager  or  any  other
broker-dealer or financial  institution that engages in the distribution of that
Class; and (ii) compensation to broker-dealers,  financial institutions or other
persons  for  providing  distribution  assistance  with  respect to that  Class.
Distribution fees may also be used for (i) marketing and promotional activities,
including,  but not limited to, direct mail  promotions and  television,  radio,
newspaper,  magazine and other mass media advertising for that Class; (ii) costs
of printing and distributing prospectuses,  statements of additional information
and reports of the Fund to  prospective  investors  in that  Class;  (iii) costs
involved in preparing,  printing and distributing sales literature pertaining to
the Fund and that Class; and (iv) costs involved obtaining whatever information,
analysis and reports with respect to marketing and  promotional  activities that
the Fund may, from time to time, deem advisable with respect to the distribution
of that Class.  Distribution  fees are accrued daily and paid  monthly,  and are
charged as expenses of the Class L shares as accrued.

In  adopting  the  Plan,  the  Board of  Trustees  determined  that  there was a
reasonable  likelihood that the Plan would benefit the Fund and the shareholders
of Class L  shares.  Information  with  respect  to  distribution  revenues  and
expenses is presented to the Board of Trustees  quarterly for its  consideration
in connection with its  deliberations  as to the continuance of the Plan. In its
review of the Plan,  the Board of Trustees  is asked to take into  consideration
expenses  incurred in connection  with the separate  distribution of the Class L
shares.

The Class L shares  are not  obligated  under  the Plan to pay any  distribution
expenses in excess of the distribution fee. Thus, if the Plan were terminated or
otherwise not continued,  no amounts (other than current amounts accrued but not
yet paid) would be owed by the Class to the Manager.

The distribution fee attributable to the Class L shares is designed to permit an
investor  to  purchase  Class  L  shares  through   broker-dealers  without  the
assessment  of a  front-end  sales  charge  and at the same time to  permit  the
Manager to compensate  broker-dealers on an ongoing basis in connection with the
sale of the Class L shares.

The Plan  provides  that it shall  continue in effect from year to year provided
that a majority of the Board of  Trustees of the Trust,  including a majority of
the  Trustees who are not  "interested  persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the "Independent
Trustees"),  vote  annually to continue the Plan.  The Plan may be terminated at
any time by vote of a majority of the  Independent  Trustees or of a majority of
the outstanding shares (as defined in the Investment Company Act) of the Class L
shares.

All distribution fees paid by the Fund under the Plan will be paid in accordance
with Rule 2830 of the NASD Rules of Conduct.

The Manager has agreed to reduce its  management  fee if necessary to keep total
annual  operating  expenses  (excluding  the Rule 12b-1 fee) at or below one and
two-tenths of one percent (1.20%) of the Fund's average net assets.  The Manager
also may  voluntarily  reduce  additional  amounts to increase the return to the
Fund's  investors.  The Manager may terminate these voluntary  reductions at any
time.  Any  reductions   made  by  the  Manager  in  its  fees  are  subject  to
reimbursement by the Fund within the following two years, provided that the Fund
is able to effect such  reimbursement  and remain in compliance  with applicable
expense  limitations.  The Manager generally seeks  reimbursement for the oldest
reductions  and waivers before payment by the Fund for fees and expenses for the
current year.

In addition, the Manager may elect to absorb operating expenses that the Fund is
obligated to pay in order to increase the return to the Fund's investors. To the
extent the Manager performs a service or assumes an operating  expense for which
the Fund is obligated to pay and the  performance  of such service or payment of
such expense is not an obligation of the Manager under the Investment Management
Agreement,  the Manager is entitled to seek  reimbursement from the Fund for the
Manager's costs incurred in rendering such service or assuming such expense. The
Manager, out of its own funds, also may compensate broker-dealers who distribute
the  Fund's  shares  as well as  other  service  providers  of  shareholder  and
administrative  services.  In addition,  the Manager,  out of its own funds, may
sponsor   seminars  and   educational   programs  on  the  Fund  for   financial
intermediaries and shareholders.

                                       12
<PAGE>

The  Manager  considers  a number of factors  in  determining  which  brokers or
dealers to use for the Fund's  portfolio  transactions.  While these factors are
more fully discussed in the Statement of Additional  Information,  they include,
but are not limited to,  reasonableness of commissions,  quality of services and
execution  and  availability  of  research  that the Manager  may  lawfully  and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive  prices,  the Manager also may
consider sale of the Fund's shares as a factor in selecting  broker-dealers  for
the Fund's portfolio transactions.  It is anticipated that Montgomery Securities
may act as one of the  Fund's  brokers  in the  purchase  and sale of  portfolio
securities  and, in that capacity will receive  brokerage  commissions  from the
Fund.  The Fund will use  Montgomery  Securities as its broker only when, in the
judgment  of the  Manager  and  pursuant  to  review  by the  Board,  Montgomery
Securities  will  obtain a price and  execution  at least as  favorable  as that
available   from  other   qualified   brokers.   See   "Execution  of  Portfolio
Transactions" in the Statement of Additional Information for further information
regarding Fund policies concerning execution of portfolio transactions.

Investors Fiduciary Trust Company,  127 West 10th Street,  Kansas City, Missouri
64105,  serves as the master  transfer agent for the Fund (the "Master  Transfer
Agent") and performs certain recordkeeping and accounting functions.  The Master
Transfer Agent delegates certain transfer agent functions to DST Systems,  Inc.,
P.O. Box 419073,  Kansas City,  Missouri  64141-6073,  the Fund's transfer agent
(the "Transfer  Agent").  Morgan Stanley Trust Company located at One Pierrepont
Plaza,  Brooklyn,  New York 11201, serves as the Fund's principal custodian (the
"Custodian").

How To Contact The Fund

For  information  on the Fund or your  account,  call a  Montgomery  Shareholder
Service Representative at:

                                 (800) 572-3863

Mail  your  completed   application,   any  checks,   investment  or  redemption
instructions and correspondence to:

Regular Mail                                   Express Mail or Overnight Service
The Montgomery Funds                           The Montgomery Funds
C/o DST Systems, Inc.                          c/o DST Systems, Inc.
P.O. Box 419073                                1004 Baltimore St.
Kansas City, MO  64141-6073                    Kansas City, MO  64105


Visit the Montgomery World Wide Web site at:

                           www.montgomeryfunds.com


How To Invest In The Fund

The  Fund's  shares  are  offered  only  through  financial  intermediaries  and
financial professionals,  with no sales load, at their next-determined net asset
value after receipt of an order with payment.  The Fund's shares are offered for
sale by Funds Distributor,  Inc., the Fund's Distributor, 101 California Street,
San Francisco, California 94111, (800) 572-3863, and through selected securities
brokers and dealers.

If an order,  together  with payment in proper form, is received by the Transfer
Agent,  Funds  Distributor,  Inc. or certain  administrators of 401(k) and other
retirement plans by 4:00 p.m., New York time, on any day that the New York Stock
Exchange  ("NYSE") is open for  trading,  Fund shares will be  purchased  at the
Fund's  next-determined  net asset value.  Orders for Fund shares received after
the Fund's cutoff times will be purchased at the next-determined net asset value
after receipt of the order.

The minimum initial  investment in the Fund is $1,000  (including IRAs) and $100
for subsequent investments.  The Manager or the Distributor,  in its discretion,
may waive these  minimums.  The Fund does not accept  third party checks or cash
investments. Checks must be in U.S. dollars and, to avoid fees and delays, drawn
only on  banks  located  in the  U.S.  Purchases  may  also  be made in  certain
circumstances  by  payment  of  securities.  See  the  Statement  of  Additional
Information for further details.

                                       13
<PAGE>

Initial Investments

Minimum Initial Investment (including IRAs):                           $1,000


         Initial Investments by Check

         o   Complete the Account Application. Tell us in which Fund(s) you want
             to invest and make your check payable to The Montgomery Funds.

         o   A charge may be imposed on checks that do not clear.

         Initial Investments by Wire

         o   Call the  Transfer  Agent  to tell  them you  intend  to make  your
             initial  investment by wire.  Provide the Transfer  Agent with your
             name, dollar amount to be invested and Fund(s) in which you want to
             invest. They will provide you with further instructions to complete
             your purchase.  Complete information regarding your account must be
             included in all wire  instructions to ensure  accurate  handling of
             your investment.

         o   Request your bank to transmit  immediately  available funds by wire
             for purchase of shares in your name to the following:

                  Investors Fiduciary Trust Company
                  ABA #101003621
                  For: DST Systems, Inc.
                  Account #7526601
                  Attention: The Montgomery Funds
                  For Credit to: (shareholder(s) name)
                  Shareholder Account Number: (shareholder(s) account number)
                  Name of Fund: Montgomery High Yield Bond Fund

         o   Your bank may charge a fee for any wire transfers.

         o   The Fund and the  Distributor  each reserve the right to reject any
             purchase order in whole or in part.

Subsequent Investments

Minimum Subsequent Investment (including IRAs):                        $100


         Subsequent Investments by Check

         o   Make  your  check  payable  to The  Montgomery  Funds.  Enclose  an
             investment  stub with your check.  If you do not have an investment
             stub, mail your check with written instructions indicating the Fund
             name  and  account  number  to  which  your  investment  should  be
             credited.

         o   A charge may be imposed on checks that do not clear.

         Subsequent Investments by Wire

         o   You do not need to  contact  the  Transfer  Agent  prior to  making
             subsequent investments by wire. Instruct your bank to wire funds to
             the  Transfer  Agent's  affiliated  bank by  using  the  bank  wire
             information under "Initial Investments by Wire."

                                       14
<PAGE>

         Subsequent Investments by Telephone

         o   Shareholders   are   automatically   eligible  to  make   telephone
             purchases.  To make a purchase,  call the  Transfer  Agent at (800)
             572-3863  before the Fund cutoff  time.  Shares for IRAs may not be
             purchased by phone.

         o   The maximum  telephone  purchase is an amount up to five times your
             account value on the previous day.

         o   Payments  for shares  purchased  must be received  by the  Transfer
             Agent within three business days after the purchase request.  Write
             your confirmed  purchase number on your check or include it in your
             wire instructions.

         o   You should do one of the following to ensure payment is received in
             time:

            o   Transfer  funds  directly  from your bank  account  by sending a
                letter  and a  voided  check  or  deposit  slip  (for a  savings
                account) to the Transfer Agent.

            o   Send a check by overnight or 2nd day courier service.

            o   Instruct  your  bank  to  wire  funds  to the  Transfer  Agent's
                affiliated  bank by using  the bank wire  information  under the
                section titled "Initial Investments by Wire."

         Automatic Account Builder ("AAB")

         o   AAB will be established on existing  accounts only. You may not use
             an AAB  investment  to open a new  account.  The minimum  automatic
             investment amount is the Fund's subsequent investment minimum.

         o   Your bank must be a member of the Automated Clearing House.

         o   To  establish  AAB,  attach a voided  check  (checking  account) or
             preprinted deposit slip (savings account) from your bank account to
             your Montgomery account  application or your letter of instruction.
             Investments will  automatically be transferred into your Montgomery
             account from your checking or savings account.

         o   Investments may be transferred either monthly or quarterly on or up
             to two business days before the 5th or 20th day of the month. If no
             day is  specified  on your  account  application  or your letter of
             instruction, the 20th of each month will be selected.

         o   You  should  allow 20  business  days for this  service  to  become
             effective.

         o   You may  cancel  your AAB at any time by  sending  a letter  to the
             Transfer Agent. Your request will be processed upon receipt.

         Payroll Deduction

         o   Investments  through  payroll  deduction  will  be  established  on
             existing accounts only. You may not use payroll deduction to open a
             new account.  The minimum payroll  deduction amount for the Fund is
             $100 per payroll deduction period.

         o   You may automatically  deposit a designated amount of your paycheck
             directly into a Montgomery Fund account.

         o   Please call the Transfer Agent to receive instructions to establish
             this service.

Telephone Transactions

You  agree  to  reimburse  the Fund  for any  expenses  or  losses  incurred  in
connection  with  transfers  from your  accounts,  including  any caused by your
bank's  failure to act in  accordance  with your request or its failure to honor
your debit. If your bank makes erroneous payments or fails to make payment after
shares are purchased on your behalf,  any such purchase may be canceled and this
privilege terminated immediately. This privilege may be discontinued at any time
by the Fund upon 30-days' written notice or at any time by you by written notice
to the Fund. Your request will be processed upon receipt.

                                       15
<PAGE>

Although  Fund  shares are priced at the net asset value next  determined  after
receipt  of a  purchase  request,  shares  are not  purchased  until  payment is
received.  Should payment not be received when required, the Transfer Agent will
cancel the telephone  purchase request and you may be responsible for any losses
incurred  by the Fund.  The Fund and the  Transfer  Agent will not be liable for
following  instructions  communicated  by  telephone  reasonably  believed to be
genuine.  The Fund employs  reasonable  procedures to confirm that  instructions
communicated  by  telephone  are genuine.  These  procedures  include  recording
certain telephone calls, sending a confirmation and requiring the caller to give
a special  authorization  number or other personal  information not likely to be
known by others. The Fund and Transfer Agent may be liable for any losses due to
unauthorized  or  fraudulent  telephone  transactions  only if  such  reasonable
procedures are not followed.

Retirement Plans

Shares of the Fund are available for purchase by any retirement plan,  including
Keogh plans,  401(k) plans, 403(b) plans and IRAs. The Fund may be available for
purchase through  administrators  for retirement  plans.  Investors who purchase
shares as part of a retirement plan should address inquiries and seek investment
servicing  from their  plan  administrators.  Plan  administrators  may  receive
compensation from the Fund for performing shareholder services.

Share Certificates

Share  certificates  will not be  issued  by the Fund.  All  shares  are held in
non-certificated form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder.

How To Redeem An Investment In The Fund

The Fund will redeem all or any portion of an investor's outstanding shares upon
request.  Redemptions  can be made on any day that the NYSE is open for trading.
The redemption  price is the net asset value per share next determined after the
shares are validly  tendered for  redemption and such request is received by the
Transfer Agent or, in the case of repurchase  orders,  Montgomery  Securities or
other  securities  dealers.  Payment of  redemption  proceeds  is made  promptly
regardless  of when  redemption  occurs  and  normally  within  three days after
receipt of all documents in proper form,  including a written  redemption  order
with  appropriate  signature  guarantee.  Redemption  proceeds will be mailed or
wired in accordance with the  shareholder's  instructions.  The Fund may suspend
the right of redemption under certain extraordinary  circumstances in accordance
with the rules of the SEC. In the case of shares purchased by check and redeemed
shortly after the purchase, the Transfer Agent will not mail redemption proceeds
until it has been  notified  that the  monies  used for the  purchase  have been
collected,  which may take up to 15 days from the purchase date. Shares tendered
for redemptions  through brokers or dealers (other than the  Distributor) may be
subject  to a  service  charge  by  such  brokers  or  dealers.  Procedures  for
requesting redemption are set forth below.

         Redeeming by Written Instruction

         o   Write a letter giving your name,  account  number,  the name of the
             Fund from which you wish to redeem and the dollar  amount or number
             of shares you wish to redeem.

         o   Signature guarantee your letter if you want the redemption proceeds
             to  go  to  a  party   other  than  the  account   owner(s),   your
             predesignated   bank  account  or  if  the  dollar  amount  of  the
             redemption exceeds $50,000. Signature guarantees may be provided by
             an eligible guarantor institution such as a commercial bank, a NASD
             member  firm  such  as a  stockbroker,  a  savings  association  or
             national securities  exchange.  Contact the Transfer Agent for more
             information.

         o   If you do not have a  predesignated  bank  account and want to wire
             your  redemption  proceeds,  include a voided check or deposit slip
             with your  letter.  The  minimum  amount  that may be wired is $500
             (wire charges, if any, will be deducted from redemption  proceeds).
             The Fund  reserves the right to permit  lesser wire amounts or fees
             in the Manager's discretion.

         Redeeming By Telephone

         o   Unless you have declined  telephone  redemption  privileges on your
             account application, you may redeem shares up to $50,000 by calling
             the Transfer Agent before the Fund cutoff time.

         o   If you included bank wire  information on your account  application
             or  made   subsequent   arrangements   to  accommodate   bank  wire
             redemptions,  you may  request  that the  Transfer  Agent wire your
             redemption  proceeds  to

                                       16
<PAGE>

             your bank account.  Allow at least two business days for redemption
             proceeds to be credited to your bank  account.  If you want to wire
             your  redemption  proceeds  to  arrive  at your  bank  on the  same
             business day (subject to bank cutoff times), there is a $10 fee.

         o   Telephone redemption  privileges will be suspended 30 days after an
             address change. All redemption  requests during this period must be
             in writing with a guaranteed signature.

         o   Telephone  redemption  privileges may be cancelled after an account
             is  opened by  instructing  the  Transfer  Agent in  writing.  Your
             request  will  be  processed  upon  receipt.  This  service  is not
             available for IRA accounts.

By establishing  telephone redemption  privileges,  a shareholder authorizes the
Fund and the Transfer Agent to act upon the  instruction  of the  shareholder or
his or her  designee  by  telephone  to redeem  from the  account for which such
service has been authorized and transfer the proceeds to a bank or other account
designated in the Authorization.  When a shareholder  appoints a designee on the
Account Application or by other written authorization, the shareholder agrees to
be bound by the telephone  redemption  instructions  given by the  shareholder's
designee.  The Fund may change, modify or terminate these privileges at any time
upon 60-days' notice to  shareholders.  The Fund will not be responsible for any
loss, damage, cost or expense arising out of any transaction that appears on the
shareholder's confirmation after 30 days following mailing of such confirmation.
See  discussion of Fund  telephone  procedures  and liability  under  "Telephone
Transactions."

Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.  During periods of volatile economic
or market conditions,  shareholders may wish to consider transmitting redemption
orders by telegram (not available for IRAs) or overnight courier.

Systematic Withdrawal Plan

Under a Systematic  Withdrawal  Plan,  a  shareholder  with an account  value of
$1,000 or more in the Fund may receive (or have sent to a third party)  periodic
payments (by check or wire).  The minimum  payment  amount is $100 from the Fund
account.  Payments  may be made either  monthly or  quarterly on the 1st of each
month. Depending on the form of payment requested, shares will be redeemed up to
five business days before the  redemption  proceeds are scheduled to be received
by the shareholder. The redemption may result in the recognition of gain or loss
for income tax purposes.

Small Accounts

Due to the relatively high cost of maintaining  smaller accounts,  the Fund will
redeem  shares from any account if at any time,  because of  redemptions  by the
shareholder,  the total value of a shareholder's account is less than $1,000. If
the Fund decides to make an involuntary  redemption,  the shareholder will first
be notified that the value of the shareholder's account is less than the minimum
level and will be allowed 30 days to make an additional  investment to bring the
value of that  account at least to the  minimum  investment  required to open an
account before the Fund takes any action.

Exchange Privileges And Restrictions

You may exchange  shares from another fund in the  Montgomery  Funds family with
the same registration,  taxpayer  identification number and address. An exchange
may  result  in a  recognized  gain or loss for  income  tax  purposes.  See the
discussion of Fund  telephone  procedures  and  limitations  of liability  under
"Telephone Transactions."

         Purchasing and Redeeming Shares by Exchange

         o   You are  automatically  eligible to make  telephone  exchanges with
             your Montgomery account.

         o   Exchange  purchases  and  redemptions  will be processed  using the
             next-determined  net asset value (with no sales  charge or exchange
             fee) after your request is received. Your request is subject to the
             Fund's cut-off times.

         o   Exchange purchases must meet the minimum investment requirements of
             the fund you intend to purchase.

         o   You may  exchange  for  shares of a fund only in states  where that
             Montgomery  fund's shares are qualified for sale and only after you
             have reviewed a prospectus of that fund.

                                       17
<PAGE>

         o   You may not exchange  for shares of a  Montgomery  fund that is not
             open to new  shareholders  unless you have an existing account with
             that fund.

         o   Because  excessive  exchanges  can harm a fund's  performance,  the
             Trust reserves the right to terminate  your exchange  privileges if
             you make  more  than four  exchanges  out of any one fund  during a
             twelve-month  period.  The Fund may also refuse an exchange  into a
             fund from which you have  redeemed  shares  within the  previous 90
             days  (accounts  under common  control and  accounts  with the same
             taxpayer   identification  number  will  be  counted  together).  A
             shareholder's  exchanges  may be  restricted or refused if the Fund
             receives, or the Manager anticipates, simultaneous orders affecting
             significant  portions of the Fund's  assets and, in  particular,  a
             pattern of exchanges  coinciding with a "market  timing"  strategy.
             The Trust  reserves the right to refuse  exchanges by any person or
             group  if, in the  Manager's  judgment,  a fund  would be unable to
             effectively  invest  the money in  accordance  with its  investment
             objective and policies, or would otherwise be potentially adversely
             affected.  Although the Trust  attempts to provide  prior notice to
             affected  shareholders  when it is  reasonable  to do so,  they may
             impose these  restrictions  at any time.  The exchange limit may be
             modified for accounts in certain institutional  retirement plans to
             conform  to plan  exchange  limits  and  U.S.  Department  of Labor
             regulations  (for  those  limits,  see plan  materials).  The Trust
             reserves the right to  terminate or modify the exchange  privileges
             of Fund shareholders in the future.

Automatic Transfer Service ("ATS")

You may elect systematic  exchanges out of the fixed income funds (which include
the Montgomery  Short  Government Bond Fund, the Montgomery  Government  Reserve
Fund, the Montgomery  Total Return Bond Fund,  the Montgomery  Federal  Tax-Free
Money Fund, the Montgomery  California  Tax-Free  Intermediate Bond Fund and the
California  Tax-Free  Money Fund) into the Fund.  The minimum  exchange is $100.
Periodically investing a set dollar amount into the Fund is also referred to, as
dollar-cost averaging because the number of shares purchased will vary depending
on the price per  share.  Your  account  with the Fund must meet the  applicable
minimum of $1,000.  Exchanges  out of the fixed income funds are exempt from the
four exchanges limit policy.

Brokers and Other Intermediaries

Investing through Securities Brokers, Dealers and Financial Intermediaries

Investors  may  purchase  shares  of the Fund  from  other  selected  securities
brokers,  dealers  or through  financial  intermediaries  such as  benefit  plan
administrators.  Investors  should contact these agents directly for appropriate
instructions,  as well as information  pertaining to accounts and any service or
transaction  fees that may be charged by these agents.  Purchase  orders through
securities brokers,  dealers and other financial  intermediaries are effected at
the  next-determined  net asset value after  receipt of the order by such agent,
provided the agent  transmits such order on a timely basis to the Transfer Agent
so that it is received by 4:00 p.m., New York time, on days that the Fund issues
shares.  Orders  received  after  that time  will be  purchased.  Investors  may
purchase shares of the Fund from other selected securities  brokers,  dealers or
through financial  intermediaries at the next-determined net asset value. To the
extent that these agents perform shareholder-servicing  activities for the Fund,
they may receive fees from the Fund for such services.

Redemption Orders Through Brokerage Accounts

Shareholders  also may sell shares back to the Fund by wire or telephone through
selected  securities  brokers or  dealers.  Shareholders  should  contact  their
securities  broker or dealer for  appropriate  instructions  and for information
concerning  any  transaction or service fee that may be imposed by the broker or
dealer.  Shareholders  are entitled to the net asset value next determined after
receipt of a redemption order by such broker-dealer,  provided the broker-dealer
transmits  such  order on a timely  basis  to the  Transfer  Agent so that it is
received by 4:00 p.m.,  New York time,  on a day that the Fund  redeems  shares.
Orders  received  after  that  time are  entitled  to the net asset  value  next
determined after receipt.

How Net Asset Value Is Determined

The net asset value of the Fund is  determined  once daily as of 4:00 p.m.,  New
York  time,  on each day that the  NYSE is open  for  trading  (except  for bank
holidays).  Per-share net asset value is calculated by dividing the value of the
Fund's  total  net  assets  by the  total  number  of  the  Fund's  shares  then
outstanding.

                                       18
<PAGE>

As more fully  described in the Statement of Additional  Information,  portfolio
securities are valued using current market valuations:  either the last reported
sales price or, in the case of  securities  for which there is no reported  last
sale and fixed  income  securities,  the mean  between the closing bid and asked
price. Securities for which market quotations are not readily available or which
are illiquid are valued at their fair values as  determined  in good faith under
the  supervision  of the  Trust's  officers,  and by the manager and the Pricing
Committee  of the  Board  respectively,  in  accordance  with  methods  that are
specifically  authorized by the Board. Short-term obligations with maturities of
60 days or less are valued at amortized cost as reflecting fair value.

The value of securities  denominated in foreign currencies and traded on foreign
exchanges or in foreign markets will be translated into U.S. dollars at the last
price of their respective currency denomination against U.S. dollars quoted by a
major  bank or,  if no such  quotation  is  available,  at the rate of  exchange
determined in accordance with policies established in good faith by the Board of
Trustees. Because the value of securities denominated in foreign currencies must
be translated into U.S. dollars, fluctuations in the value of such currencies in
relation  to the U.S.  dollar may affect the net asset value of Fund shares even
if there has not been any change in the  foreign-currency  denominated values of
such securities.

Because  foreign  securities  markets  may  close  prior  to the  time  the Fund
determines  its net  asset  values,  events  affecting  the  value of  portfolio
securities  occurring  between the time prices are  determined  and the time the
Fund  calculates  its net  asset  values  may  not be  reflected  in the  Fund's
calculation  of net asset values unless the Manager,  under  supervision  of the
Board, determines that a particular event would materially affect the Fund's net
asset values.

Dividends And Distributions

The Fund  distributes  substantially  all of its net  investment  income and net
capital gains to shareholders  each year.  Dividends are declared daily and paid
monthly  on or about the last  business  day of each  month.  Capital  gains are
declared and paid in the last quarter of each year. Additional distributions, if
necessary,  may be made  following the Fund's fiscal year end (June 30) in order
to avoid the  imposition  of tax on the Fund.  The amount and  frequency of Fund
distributions are not guaranteed and are at the discretion of the Board.

Unless investors  request cash  distributions in writing at least seven business
days prior to the distribution, or on the Account Application, all dividends and
other  distributions  will be reinvested  automatically  in  additional  Class L
shares of the Fund and credited to the shareholder's  account at the closing net
asset value on the reinvestment date.

Taxation

The Fund  intends to qualify  and elect as soon as  possible  to be treated as a
regulated  investment  company under  Subchapter M of the Code, by  distributing
substantially  all of its net  investment  income and net  capital  gains to its
shareholders and meeting other  requirements of the Code relating to the sources
of its income and  diversification  of assets.  Accordingly,  the Fund generally
will not be liable  for  federal  income  tax or excise  tax based on net income
except to the extent its earnings are not  distributed  or are  distributed in a
manner that does not  satisfy the  requirements  of the Code  pertaining  to the
timing of distributions.  If the Fund is unable to meet certain  requirements of
the Code,  it may be subject to  taxation  as a  corporation.  The Fund may also
incur tax  liability  to the extent it invests in  "passive  foreign  investment
companies." See the Statement of Additional Information.

For federal  income tax  purposes,  any  dividends  derived from net  investment
income and any excess of net short-term  capital gain over net long-term capital
loss that investors (other than certain  tax-exempt  organizations that have not
borrowed to purchase Fund shares) receive from the Fund are considered  ordinary
income.  Part of the  distributions  paid by the  Fund may be  eligible  for the
dividends-received  deduction allowed to corporate  shareholders under the Code.
Distributions  of the excess of net long-term  capital gain over net  short-term
capital  loss from  transactions  of the Fund are  treated  by  shareholders  as
long-term  capital gains regardless of the length of time the Fund's shares have
been owned.  Distributions  of income and capital  gains are taxed in the manner
described above,  whether they are taken in cash or are reinvested in additional
shares of the Fund.

The Fund  will  inform  its  investors  of the  source  of their  dividends  and
distributions  at the time they are paid,  and will promptly  after the close of
each calendar year advise investors of the tax status of those distributions and
dividends. Investors (including tax-exempt and foreign investors) are advised to
consult their own tax advisers regarding the particular tax consequences to them
of an investment in shares of the Fund.  Additional  information  on tax matters
relating  to the Fund and its  shareholders  is  included  in the  Statement  of
Additional Information.

                                       19
<PAGE>

General Information

The Trust

The Fund is a series of The  Montgomery  Funds, a  Massachusetts  business trust
organized on May 10, 1990 (the "Trust").  The Trust's  Agreement and Declaration
of Trust permits the Board to issue an unlimited  number of full and  fractional
shares of  beneficial  interest,  $.01 par value,  in any number of series.  The
assets and liabilities of each series within the Trust are separate and distinct
from those of each other series.

This  Prospectus  relates  only to the Class L shares of the Fund.  The Fund has
designated other classes of shares and may in the future designate other classes
of shares for specific purposes.

Shareholder Rights

Shares issued by the Fund have no preemptive, conversion or subscription rights.
Each  whole  share  is  entitled  to one  vote as to any  matter  on which it is
entitled  to vote  and each  fractional  share is  entitled  to a  proportionate
fractional  vote.  Shareholders  have equal and exclusive rights as to dividends
and distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution.  The Fund, as a separate series of the Trust,  votes
separately on matters affecting only the Fund (e.g.,  approval of the Investment
Management Agreement); all series of the Trust vote as a single class on matters
affecting  all  series  of the  Trust  jointly  or the  Trust as a whole  (e.g.,
election or removal of Trustees).  Voting rights are not cumulative, so that the
holders of more than 50% of the shares  voting in any election of Trustees  can,
if they so choose,  elect all of the Trustees.  Except as set forth herein,  all
classes  of shares  issued by the Fund shall have  identical  voting,  dividend,
liquidation and other rights,  preferences,  and terms and conditions.  The only
differences  among the various classes of shares relate solely to the following:
(a) each class may be subject to different  class  expenses;  (b) each class may
bear a  different  identifying  designation;  (c) each class may have  exclusive
voting  rights with respect to matters  solely  affecting  such class;  (d) each
class may have different exchange privileges; and (e) each class may provide for
the automatic  conversion of that class into another  class.  While the Trust is
not required and does not intend to hold annual meetings of  shareholders,  such
meetings  may be called by the Board at its  discretion,  or upon  demand by the
holders of 10% or more of the outstanding shares of the Trust for the purpose of
electing  or  removing   Trustees.   Shareholders  may  receive   assistance  in
communicating with other shareholders in connection with the election or removal
of  Trustees  pursuant  to the  provisions  of Section  16(c) of the  Investment
Company Act.

Performance Information

From  time  to  time,  the  Fund  may  publish  its  total  return,  such  as in
advertisements and  communications to investors.  Performance data may be quoted
separately  for the  Class L  shares  as for the  other  classes.  Total  return
information  generally will include the Fund's average annual compounded rate of
return over the most recent four calendar  quarters and over the period from the
Fund's  inception  of  operations.  The Fund may also  advertise  aggregate  and
average total return  information  over  different  periods of time.  The Fund's
average  annual  compounded  rate of  return is  determined  by  reference  to a
hypothetical   $1,000   investment  that  includes   capital   appreciation  and
depreciation  for the stated period according to a specific  formula.  Aggregate
total return is calculated in a similar manner,  except that the results are not
annualized.
Total  return  figures  will reflect all  recurring  charges  against the Fund's
income.

Investment results of the Fund will fluctuate over time, and any presentation of
the Fund's  total  return for any prior  period  should not be  considered  as a
representation of what an investor's total return or current yield may be in any
future period.

Legal Opinion

The  validity of shares  offered by this  Prospectus  will be passed on by Paul,
Hastings,   Janofsky  &  Walker  LLP,  345  California  Street,  San  Francisco,
California 94104.

Shareholder Reports and Inquiries

Unless otherwise  requested,  only one copy of each shareholder  report or other
material sent to  shareholders  will be mailed to each  household  with accounts
under  common  ownership  and the  same  address  regardless  of the  number  of
shareholders or accounts at that household or address. A confirmation  statement
will be mailed to your record address each time you request a transaction except
for pre-authorized automatic investment and redemption services (quarterly). All
transactions are recorded on quarterly account statements which you will receive
at the end of each calendar quarter. Your fourth-quarter  account

                                       20
<PAGE>

statement will be a year-end statement, listing all transaction activity for the
entire year. Retain this statement for your tax records.

In  general,  shareholders  who  redeemed  shares from a  qualifying  Montgomery
account  should  expect to receive an Average Cost  Statement in February of the
following  year.  Your  statement  will  calculate  your  average cost using the
average cost single-category method.

Any  questions  should  be  directed  to The  Montgomery  Funds at  800-572-FUND
(800-572-3863).

Backup Withholding Instructions

Shareholders  are required by law to provide the Fund with their correct  Social
Security or other Taxpayer Identification Number ("TIN"),  regardless of whether
they file tax returns.  Failure to do so may subject a shareholder to penalties.
Failure  to  provide a  correct  TIN or to check  the  appropriate  boxes in the
Account  Application and to sign the  shareholder's  name could result in backup
withholding  by the Fund of an  amount  of  federal  income  tax equal to 31% of
distributions, redemptions, exchanges and other payments made to a shareholder's
account.  Any tax withheld may be credited against taxes owed on a shareholder's
federal income tax return.

A  shareholder  who does not have a TIN  should  apply  for one  immediately  by
contacting the local office of the Social  Security  Administration  or the IRS.
Backup withholding could apply to payments made to a shareholder's account while
awaiting  receipt  of a TIN.  Special  rules  apply for  certain  entities.  For
example,  for an account  established under the Uniform Gifts to Minors Act, the
TIN of the minor should be furnished.  If a shareholder has been notified by the
IRS that he or she is subject to backup withholding  because he or she failed to
report  all  interest  and  dividend  income  on his or her tax  return  and the
shareholder has not been notified by the IRS that such  withholding  will cease,
the  shareholder   should  cross  out  the  appropriate   item  in  the  Account
Application.  Dividends paid to a foreign  shareholder's account by the Fund may
be subject to up to 30% withholding instead of backup withholding.

A shareholder  that is an exempt  recipient  should  furnish a TIN and check the
appropriate  box.  Exempt  recipients  include  certain  corporations,   certain
tax-exempt entities,  tax-exempt pension plans and IRAs,  governmental agencies,
financial  institutions,  registered  securities  and  commodities  dealers  and
others. For further information, see Section 3406 of the Code and consult with a
tax adviser.

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

This  Prospectus is not an offering of the  securities  herein  described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is  authorized to give any  information  or make any  representation  other than
those contained in this Prospectus, the Statement of Additional Information,  or
in the Fund's official sales literature.

                                       21
<PAGE>

                                    Glossary

o   Asset backed securities.  Asset backed securities are secured by and payable
    from, pools of assets,  such as motor vehicle  installment  sales contracts,
    installment  loan  contracts,  leases of various  types of real and personal
    property  and  receivables  from  revolving   credit  (e.g.,   credit  card)
    agreements.

o   Below  Investment  Grade  Debt  Securities.   Debt  securities  rated  below
    "investment grade."

o   Cash  Equivalents.   Cash  equivalents  are  short-term,   interest  bearing
    instruments  or deposits and may include,  for  example,  commercial  paper,
    certificates of deposit, repurchase agreements,  bankers' acceptances,  U.S.
    Treasury bills, bank money market deposit accounts,  master demand notes and
    money market mutual funds.  These consist of high-quality  debt obligations,
    certificates of deposit and bankers'  acceptances  rated at least A-1 by S&P
    or  Prime-1 by  Moody's,  or the  issuer  has an  outstanding  issue of debt
    securities rated at least A by S&P or Moody's,  or are of comparable quality
    in the opinion of the Manager.

o    Collateralized  Mortgage  Obligations (CMOs).  Derivative  mortgage-related
    securities  that  separate the cash flows of mortgage  pools into  different
    classes or tranches.  Stripped  mortgage  securities  are CMOs that allocate
    different  proportions  of  interest  and  principal  payments  on a pool of
    mortgages.  One class may receive all of the interest  (the interest only or
    "IO" class) while another may receive all of the principal  (principal  only
    or "PO"  class).  The yield to maturity  on any IO or PO class is  extremely
    sensitive  not only to  changes  in  interest  rates but also to the rate of
    principal  payments and  prepayments  on underlying  mortgages.  In the most
    extreme cases, an IO class may become worthless.

o   Convertible  security. A fixed-income  security (a bond or preferred stock)
    that may be converted  at a stated  price within a specified  period of time
    into a  certain  quantity  of the  common  stock of the same or a  different
    issuer. Convertible securities are senior to common stock in a corporation's
    capital  structure but are usually  subordinated to similar  non-convertible
    securities.  The price of a convertible security is influenced by the market
    value of the underlying common stock.

o   Covered  call  option.  A call  option  is  "covered"  if the Fund  owns the
    underlying  securities,  has the right to acquire  such  securities  without
    additional  consideration,  has  collateral  assets  sufficient  to meet its
    obligations under the option, or owns an offsetting call option.

o   Covered put option.  A put option is  "covered"  if the Fund has  collateral
    assets with a value not less than the exercise  price of the option or holds
    a put option on the underlying security.

o   Depositary receipts include American Depositary Receipts ("ADRs"),  European
    Depositary Receipts ("EDRs"),  Global Depositary Receipts ("GDRs") and other
    similar  instruments.  Depositary  receipts are receipts typically issued in
    connection  with a U.S.  or  foreign  bank or  trust  company  and  evidence
    ownership of underlying securities issued by a foreign corporation.

o   Derivatives include forward currency exchange  contracts,  currency options,
    futures contracts, swaps and options on futures contracts on U.S. government
    and foreign government securities and currencies.

o   Duff & Phelps.  Duff & Phelps  Credit  Rating Co., a  nationally  recognized
    statistical rating organization.

o   Duration.  Traditionally, a debt security's "term to maturity" characterizes
    a security's  sensitivity to changes in interest  rates.  However,  "term to
    maturity"  measures only the time until a debt  security  provides its final
    payment,  taking no account of pre-maturity  payments.  Most debt securities
    provide interest  ("coupon") payments in addition to a final ("par") payment
    at maturity, and some securities have call provisions allowing the issuer to
    repay the instrument in full before  maturity date, each of which affect the
    security's  response to interest  rate  changes.  "Duration" is considered a
    more  precise  measure  of  interest  rate  risk  than  "term to  maturity."
    Determining  duration may involve the Manager's estimates of future economic
    parameters,   which  may  vary  from  actual  future  values.   Fixed-income
    securities  with effective  durations of three years are more  responsive to
    interest rate fluctuations than those with effective  durations of one year.
    For example, if interest rates rise by 1%, the value of securities having an
    effective  duration of three years will generally  decrease by approximately
    3%.

o    FHLMC. The Federal Home Loan Mortgage Corporation.

o    FNMA. The Federal National Mortgage Association.

o   Equity derivative securities include,  among other things, options on equity
    securities, warrants and future contracts on equity securities.

o   Fitch. Fitch Investors Service,  L.P., a nationally  recognized  statistical
    rating organization.

o   Forward  currency  contracts.  A forward  currency  contract  is a  contract
    individually  negotiated and privately  traded by currency traders and their
    customers and creates an obligation to purchase or sell a specific  currency
    for an agreed-upon price at a future date. The Fund generally does not enter
    into forward  contracts with terms greater than one year. The Fund generally
    enters into forward  contracts only under two  circumstances.  First, if the
    Fund  enters  into a  contract  for  the  purchase  or  sale  of a  security
    denominated  in a  foreign  currency,  it may  desire  to "lock in" the U.S.
    dollar price of the security by entering into a forward  contract to buy the
    amount of a foreign  currency needed to settle the transaction.  Second,  if
    the Manager believes that the currency of a particular  foreign country will
    substantially  rise or fall  against  the U.S.  dollar,  it may enter into a
    forward contract to buy or sell the currency approximating the value of some
    or all of the Fund's portfolio securities  denominated in such currency. The
    Fund will not enter into a forward  contract if, as a result,  it would have
    more than one-third of total assets  committed to such contracts  (unless it
    owns the currency that it is obligated to deliver or has

                                       22
<PAGE>

    collateral  assets  sufficient to cover its  obligations).  Although forward
    contracts  are used  primarily  to protect  the Fund from  adverse  currency
    movements,  they  involve  the  risk  that  currency  movements  will not be
    accurately predicted.

o   Futures and options on futures.  An  interest  rate  futures  contract is an
    agreement  to  purchase or sell debt  securities,  usually  U.S.  government
    securities,  at a specified date and price.  For example,  the Fund may sell
    interest rate futures contracts (i.e., enter into a futures contract to sell
    the underlying  debt security) in an attempt to hedge against an anticipated
    increase in interest rates and a corresponding decline in debt securities it
    owns.  The Fund will have  collateral  assets equal to the purchase price of
    the portfolio securities represented by the underlying interest rate futures
    contracts it has an obligation to purchase.

o   GNMA. The Government National Mortgage Association.

o   Illiquid securities.  The Fund treats any securities subject to restrictions
    on repatriation for more than seven days and securities issued in connection
    with foreign debt  conversion  programs that are restricted as to remittance
    of invested capital or profit as illiquid.  The Fund also treats  repurchase
    agreements  with  maturities  in excess of seven days as illiquid.  Illiquid
    securities do not include  securities  that are  restricted  from trading on
    formal  markets  for some  period of time but for  which an active  informal
    market exists,  or securities that meet the  requirements of Rule 144A under
    the Securities Act of 1933 and that,  subject to the review by the Board and
    guidelines adopted by the Board, the Manager has determined to be liquid.

o   Investment  grade.  Investment  grade debt securities are those rated within
    the four  highest  grades by S&P (at least  BBB),  Moody's (at least Baa) or
    Fitch  (at  least  Baa)  or  in  unrated  debt  securities  deemed  to be of
    comparable quality by the Manager using guidelines  approved by the Board of
    Trustees.

o   Leverage.  Some  Funds may use  leverage  in an effort to  increase  return.
    Although  leverage  creates an opportunity for increased income and gain, it
    also creates special risk  considerations.  Leveraging also creates interest
    expenses that can exceed the income from the assets retained.

o   Moody's.   Moody's  Investors   Service,   Inc.,  a  nationally   recognized
    statistical rating organization.

o   Repurchase agreement.  With a repurchase  agreement,  a Fund acquires a U.S.
    government  security or other  high-grade  liquid debt  instrument  (for the
    Money Market Funds,  the instrument must be rated in the highest grade) from
    a financial  institution that  simultaneously  agrees to repurchase the same
    security at a specified time and price.

o   Reverse  dollar roll  transactions.  When a Fund engages in a reverse dollar
    roll, it purchases a security from a financial  institution and concurrently
    agrees to resell a similar  security to that  institution at a later date at
    an agreed-upon price.

o   Reverse  repurchase  agreement.  In a reverse repurchase  agreement,  a Fund
    sells to a  financial  institution  a  security  that it holds and agrees to
    repurchase the same security at an agreed-upon price and date.

o   S&P.  Standard & Poor's Ratings Group, a nationally  recognized  statistical
    rating organization.

o   Securities lending. A fund may lend securities to brokers, dealers and other
    financial  organizations.   Each  securities  loan  is  collateralized  with
    collateral assets in an amount at least equal to the current market value of
    the loaned  securities,  plus accrued interest.  There is a risk of delay in
    receiving  collateral or in recovering the securities  loaned or even a loss
    of rights in collateral should the borrower fail financially.

o   U.S.  government  securities  include U.S. Treasury bills,  notes, bonds and
    other obligations issued or guaranteed by the U.S. government,  its agencies
    or instrumentalities.

o   A warrant  typically is a long-term  option that permits the holder to buy a
    specified  number of shares of the  issuer's  underlying  common  stock at a
    specified  exercise  price by a  particular  expiration  date. A warrant not
    exercised or disposed of by its expiration date expires worthless.

o   When-issued and forward  commitment  securities.  The Fund may purchase U.S.
    government or other securities on a "when-issued"  basis and may purchase or
    sell securities on a "forward  commitment" or "delayed  delivery" basis. The
    price is fixed at the time the  commitment is made, but delivery and payment
    for the securities  take place at a later date.  When-issued  securities and
    forward  commitments  may be sold prior to the  settlement  date, but a Fund
    will enter into when-issued and forward  commitments only with the intention
    of actually  receiving or delivering  the  securities.  No income accrues on
    securities that have been purchased pursuant to a forward commitment or on a
    when-issued  basis prior to  delivery  to a Fund.  At the time a Fund enters
    into a transaction on a when-issued or forward commitment basis, it supports
    its obligation with collateral  assets equal to the value of the when-issued
    or forward  commitment  securities  and causes the  collateral  assets to be
    marked  to market  daily.  There is a risk  that the  securities  may not be
    delivered and that the Fund may incur a loss.

o   Zero coupon bonds.  Zero coupon bonds are debt  obligations  that do not pay
    current interest and are consequently issued at a significant  discount from
    face value.  The  discount  approximates  the total  interest the bonds will
    accrue   and   compound   over  the   period  to   maturity   or  the  first
    interest-payment  date at a rate of interest  reflecting  the market rate of
    interest at the time of issuance.

                                       23
<PAGE>
   
                               Investment Manager
                        Montgomery Asset Management, LLC
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-FUND
    
                                   Distributor
                             Funds Distributor, Inc.
                              101 California Street
                         San Francisco, California 94111
                                 1-800-572-3863

                                    Custodian
                          Morgan Stanley Trust Company
                              One Pierrepont Plaza
                            Brooklyn, New York 11201

                                 Transfer Agent
                                DST Systems, Inc.
                                 P.O. Box 419073
                        Kansas City, Missouri 64141-6073
                                 1-800-447-4210

                                  Legal Counsel
                      Paul, Hastings, Janofsky & Walker LLP
                              345 California Street
                         San Francisco, California 94104

<PAGE>

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

                                     PART B

                  COMBINED STATEMENT OF ADDITIONAL INFORMATION

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

<PAGE>
                              THE MONTGOMERY FUNDS

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

                         MONTGOMERY HIGH YIELD BOND FUND



                              101 California Street

                         San Francisco, California 94111

                                 1-800-572-FUND

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

                       STATEMENT OF ADDITIONAL INFORMATION
   
                               September 30, 1997

         The Montgomery Funds (the "Trust") is an open-end management investment
company  organized as a  Massachusetts  business trust with different  series of
shares of beneficial interest. Montgomery High Yield Bond Fund (the "Fund") is a
series of the Trust.  The Fund is managed by Montgomery Asset  Management,  L.P.
(the  "Manager") and distributed by Montgomery  Securities (the  "Distributor").
This  Statement of Additional  Information  contains  information in addition to
that  set  forth  in the  Prospectus  for the  Fund  (the  "Prospectus"),  dated
September 30, 1997, as may be revised from time to time. The Prospectus provides
the basic  information  a  prospective  investor  should know before  purchasing
shares  of the  Fund  and may be  obtained  without  charge  at the  address  or
telephone number provided above. This Statement of Additional Information is not
a prospectus and should be read in conjunction with the Prospectus.
    
                                TABLE OF CONTENTS

The Trust......................................................................2

Investment Objective And Policies Of The Fund..................................2

Risk Factors..................................................................12

Investment Restrictions.......................................................13

Distributions And Tax Information.............................................16

                                      B-1
<PAGE>

Trustees And Officers.........................................................20

Investment Management And Other Services......................................24

Execution Of Portfolio Transactions...........................................27

Additional Purchase And Redemption Information................................30

Determination Of Net Asset Value..............................................32

Principal Underwriter.........................................................34

Performance Information.......................................................34

General Information...........................................................37

Financial Statements..........................................................38

Appendix......................................................................41


                                    THE TRUST

         The Trust is an open-end  management  investment company organized as a
Massachusetts  business  trust  on  May  10,  1990,  and  registered  under  the
Investment  Company Act of 1940, as amended (the "Investment  Company Act"). The
Trust currently offers shares of beneficial interest,  $.01 par value per share,
in various series.  Each series offers three classes of shares (Class R, Class P
and Class L). This  Statement  of  Additional  Information  pertains to Class R,
Class P and Class L shares of Montgomery High Yield Bond Fund.


                  INVESTMENT OBJECTIVE AND POLICIES OF THE FUND

         The  investment  objective  and  policies of the Fund are  described in
detail in the Prospectus. The following discussion supplements the discussion in
the Prospectus.

         The Fund is a diversified  series of the Trust, an open-end  management
investment  company  offering  redeemable  shares of  beneficial  interest.  The
achievement of the Fund's investment  objective will depend on market conditions
generally and on the Manager's analytical and portfolio management skills.


Portfolio Securities

         Depositary Receipts. The Fund may hold securities of foreign issuers in
the form of American Depositary Receipts ("ADRs"),  European Depositary Receipts
("EDRs") and other similar global instruments  available in emerging markets, or
other  securities   convertible  into  securities  of  eligible  issuers.  These
securities  may not  necessarily  be  denominated  in the same  currency  as the
securities for which they may be exchanged.  Generally,  ADRs in registered form
are  designed for use in U.S.  securities  markets,  and EDRs and other  similar
global  instruments  in

                                      B-2
<PAGE>

bearer form are designed for use in European securities markets. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments  will  be  deemed  to  be  investments  in  the  equity   securities
representing the securities of foreign issuers into which they may be converted.
   
         Other Investment Companies.  The Fund may invest up to 10% of its total
assets  in  securities  issued  by  other  investment   companies  investing  in
securities in which the Fund can invest provided that such investment  companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies.  Applicable  provisions  of the  Investment  Company Act
require that the Fund limit its  investments so that, as determined  immediately
after a securities  purchase is made:  (a) not more than 10% of the value of the
Fund's  total  assets  will  be  invested  in the  aggregate  in  securities  of
investment  companies as a group; and (b) either the Fund and affiliated persons
of the Fund not own together more than 3% of the total outstanding shares of any
one  investment  company  at the time of  purchase  (and that all  shares of the
investment  company  held by the Fund in  excess  of 1% of the  company's  total
outstanding  shares be deemed illiquid);  or the Fund not invest more than 5% of
its total assets in any one investment  company and the investment not represent
more than 3% of the total outstanding  voting stock of the investment company at
the time of purchase.  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.
    
         U.S. Government Securities.  Generally, the value of obligations issued
or guaranteed by the U.S. Government,  its agencies or instrumentalities  ("U.S.
Government  securities") held by the Fund will fluctuate inversely with interest
rates.  U.S.  Government  securities  in which the Fund may invest  include debt
obligations  of  varying  maturities  issued by the U.S.  Treasury  or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal   Housing   Administration   ("FHA"),   Farmers   Home   Administration,
Export-Import  Bank  of  the  United  States,  Small  Business   Administration,
Government   National   Mortgage   Association   ("GNMA"),    General   Services
Administration,  Central Bank for  Cooperatives,  Federal Farm Credit Bank, Farm
Credit System Financial Assistance Corporation, Federal Home Loan Banks, Federal
Home Loan Mortgage  Corporation  ("FHLMC"),  Federal  Intermediate Credit Banks,
Federal Land Banks,  Financing  Corporation,  Federal  Financing  Bank,  Federal
National  Mortgage  Association  ("FNMA"),  Maritime  Administration,  Tennessee
Valley  Authority,  Resolution  Funding  Corporation,   Student  Loan  Marketing
Association  and  Washington   Metropolitan  Area  Transit   Authority.   Direct
obligations  of the U.S.  Treasury  include a variety of securities  that differ
primarily in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it  sponsors,  the  Fund  will  not  invest  in  obligations  issued  by an
instrumentality  of the U.S.  Government unless the Manager  determines that the
instrumentality's  credit risk makes its  securities  suitable for investment by
the Fund.

         Risk Factors/Special  Considerations  Relating to Debt Securities.  The
Fund invests  primarily in fixed income  securities rated below investment grade
(commonly  called "junk bonds").  The market value of debt securities  generally
varies in response to changes in interest

                                      B-3
<PAGE>

rates and the financial  condition of each issuer.  During  periods of declining
interest rates, the value of debt securities  generally  increases.  Conversely,
during periods of rising interest rates, the value of such securities  generally
declines.  The net asset value of the Fund will reflect  these changes in market
value.

         Bonds  rated C by Moody's  are the  lowest  rated  class of bonds,  and
issues so rated can be  regarded  as having  extremely  poor  prospects  of ever
attaining any real investment standing.  Bonds rated C by S&P are obligations on
which no interest is being paid. Bonds rated below BBB or Baa are often referred
to as "junk bonds."

         Although   such  bonds  may  offer  higher  yields  than  higher  rated
securities, low rated debt securities generally involve greater price volatility
and risk of principal and income loss,  including the possibility of default by,
or bankruptcy  of, the issuers of the  securities.  In addition,  the markets in
which low rated  debt  securities  are traded  are more  limited  than those for
higher  rated  securities.  The  existence  of limited  markets  for  particular
securities  may diminish the ability of the Fund to sell the  securities at fair
value either to meet redemption requests or to respond to changes in the economy
or financial markets and could adversely affect,  and cause fluctuations in, the
per share net asset value of the Fund.

         Adverse  publicity  and investor  perceptions,  whether or not based on
fundamental  analysis,  may decrease the values and  liquidity of low rated debt
securities,   especially   in  a  thinly   traded   market.   Analysis   of  the
creditworthiness  of issuers of low rated debt  securities  may be more  complex
than for  issuers of higher  rated  securities,  and the  ability of the Fund to
achieve  its  investment  objectives  may, to the extent it invests in low rated
debt  securities,  be more dependent upon such credit analysis than would be the
case if the Fund invested in higher rated debt securities.

         Low rated debt securities may be more  susceptible to real or perceived
adverse  economic and competitive  industry  conditions  than  investment  grade
securities.  The prices of low rated debt  securities have been found to be less
sensitive to interest  rate changes than higher rated debt  securities  but more
sensitive to adverse economic downturns or individual corporate developments.  A
projection of an economic  downturn or of a period of rising interest rates, for
example,  could  cause  a  sharper  decline  in the  prices  of low  rated  debt
securities  because  the advent of a  recession  could  lessen the  ability of a
highly  leveraged  company to make  principal and interest  payments on its debt
securities.  If the issuer of low rated debt securities  defaults,  the Fund may
incur additional expenses to seek financial recovery.  The low rated bond market
is relatively  new, and many of the outstanding low rated bonds have not endured
a major business downturn.


Hedging and Risk Management Practices

         In order to hedge against  foreign  currency  exchange rate risks,  the
Fund may enter  into  forward  foreign  currency  exchange  contracts  ("forward
contracts") and foreign currency futures  contracts,  as well as purchase put or
call  options on  foreign  currencies,  as  described  below.  The Fund also may
conduct its foreign currency exchange transactions on a spot ( i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.

                                      B-4
<PAGE>

         The Fund also may purchase  other types of options and futures and may,
in the future, write covered options, as described below and in the Prospectus.

         Forward Contracts. The Fund may enter into forward contracts to attempt
to minimize the risk from adverse changes in the  relationship  between the U.S.
dollar  and  foreign  currencies.  A  forward  contract,  which is  individually
negotiated  and  privately  traded by  currency  traders  and  their  customers,
involves an  obligation  to purchase or sell a specific  currency  for an agreed
upon price at a future date.

         The Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security  denominated in a foreign
currency or is  expecting  a dividend or interest  payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When the Fund
believes that a foreign  currency may suffer a substantial  decline  against the
U.S.  dollar,  it may enter  into a forward  contract  to sell an amount of that
foreign currency  approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when the Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.

         In connection with the Fund's forward contract transactions,  an amount
of the Fund's assets equal to the amount of its  commitments  will be held aside
or  segregated  to be used to pay for the  commitments.  Accordingly,  the  Fund
always will have cash,  cash  equivalents  or liquid  equity or debt  securities
denominated in the  appropriate  currency  available in an amount  sufficient to
cover any commitments  under these  contracts.  Segregated  assets used to cover
forward  contracts  will be  marked  to market  on a daily  basis.  While  these
contracts  are  not  presently   regulated  by  the  Commodity  Futures  Trading
Commission  ("CFTC"),  the CFTC may in the future regulate them, and the ability
of the Fund to utilize forward  contracts may be restricted.  Forward  contracts
may limit potential gain from a positive change in the relationship  between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by the Fund than if it had not entered into
such  contracts.  The Fund  generally  will not  enter  into a  forward  foreign
currency exchange contract with a term greater than one year.

         Futures  Contracts and Options on Futures  Contracts.  To hedge against
movements in interest rates,  securities  prices or currency exchange rates, the
Fund may  purchase and sell various  kinds of futures  contracts  and options on
futures  contracts.  The Fund  also may enter  into  closing  purchase  and sale
transactions  with respect to any such contracts and options.  Futures contracts
may be  based  on  various  securities  (such  as U.S.  Government  securities),
securities  indices,  foreign  currencies and other  financial  instruments  and
indices.

         The Fund has  filed a notice  of  eligibility  for  exclusion  from the
definition of the term  "commodity pool operator" with the CFTC and the National
Futures  Association,  which  regulate  trading in the futures  markets,  before
engaging in any  purchases  or sales of futures  contracts or options on futures
contracts.  Pursuant  to  Section  4.5 of the  regulations  under the  Commodity
Exchange Act, the notice of  eligibility  included the  representation  that the
Fund will use  futures  contracts  and  related  options  for bona fide  hedging
purposes within the meaning of CFTC

                                      B-5
<PAGE>

regulations,  provided that the Fund may hold positions in futures contracts and
related  options  that do not fall within the  definition  of bona fide  hedging
transactions if the aggregate  initial margin and premiums required to establish
such  positions  will not exceed 5% of the Fund's net assets  (after taking into
account unrealized profits and unrealized losses on any such positions) and that
in the case of an  option  that is  in-the-money  at the time of  purchase,  the
in-the-money amount may be excluded from such 5%.

         The Fund will attempt to determine  whether the price  fluctuations  in
the futures  contracts  and options on futures  used for  hedging  purposes  are
substantially  related to price  fluctuations  in securities held by the Fund or
which it expects to purchase.  The Fund's futures transactions generally will be
entered into only for traditional  hedging purposes -- i.e.,  futures  contracts
will be sold to  protect  against  a  decline  in the  price  of  securities  or
currencies  and will be purchased to protect the Fund against an increase in the
price of securities it intends to purchase (or the  currencies in which they are
denominated).  All futures contracts entered into by the Fund are traded on U.S.
exchanges or boards of trade  licensed  and  regulated by the CFTC or on foreign
exchanges.

         Positions  taken  in the  futures  markets  are  not  normally  held to
maturity but are instead  liquidated through offsetting or "closing" purchase or
sale  transactions,  which may  result in a profit or a loss.  While the  Fund's
futures contracts on securities or currencies will usually be liquidated in this
manner,  the Fund may make or take  delivery  of the  underlying  securities  or
currencies whenever it appears economically advantageous. A clearing corporation
associated  with the exchange on which futures on  securities or currencies  are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.

         By using futures  contracts to hedge its  positions,  the Fund seeks to
establish more  certainty  than would  otherwise be possible with respect to the
effective  price,  rate  of  return  or  currency  exchange  rate  on  portfolio
securities or securities  that the Fund proposes to acquire.  For example,  when
interest rates are rising or securities  prices are falling,  the Fund can seek,
through the sale of futures  contracts,  to offset a decline in the value of its
current portfolio  securities.  When rates are falling or prices are rising, the
Fund,  through the purchase of futures  contracts,  can attempt to secure better
rates or prices than might  later be  available  in the market  with  respect to
anticipated  purchases.  Similarly,  the Fund can sell  futures  contracts  on a
specified  currency to protect  against a decline in the value of such  currency
and its portfolio  securities  which are denominated in such currency.  The Fund
can purchase  futures  contracts on a foreign  currency to fix the price in U.S.
dollars of a security  denominated  in such currency that such Fund has acquired
or expects to acquire.

         As part of its  hedging  strategy,  the Fund also may enter  into other
types of financial futures contracts if, in the opinion of the Manager, there is
a sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts.  Although under some circumstances prices
of securities  in the Fund's  portfolio may be more or less volatile than prices
of such  futures  contracts,  the Manager will attempt to estimate the extent of
this difference in volatility based on historical patterns and to compensate for
it by  having  that  Fund  enter  into a greater  or  lesser  number of  futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting that Fund's  securities  portfolio.  When hedging of

                                      B-6
<PAGE>

this  character  is  successful,  any  depreciation  in the  value of  portfolio
securities  can be  substantially  offset  by  appreciation  in the value of the
futures position.  However,  any unanticipated  appreciation in the value of the
Fund's portfolio  securities  could be offset  substantially by a decline in the
value of the futures position.

         The acquisition of put and call options on futures  contracts gives the
Fund the right  (but not the  obligation),  for a  specified  price,  to sell or
purchase the underlying  futures  contract at any time during the option period.
Purchasing  an option on a futures  contract  gives the Fund the  benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement,  to the loss of the premium
and transaction costs.

         The Fund may terminate its position in an option contract by selling an
offsetting option on the same series.  There is no guarantee that such a closing
transaction  can be  effected.  The Fund's  ability to  establish  and close out
positions on such options is dependent upon a liquid market.

         Loss from investing in futures  transactions by the Fund is potentially
unlimited.

         The Fund will engage in transactions  in futures  contracts and related
options  only  to  the  extent  such   transactions   are  consistent  with  the
requirements of the Internal  Revenue Code of 1986, as amended,  for maintaining
their  qualification  as a regulated  investment  company for federal income tax
purposes.

         Options on Securities,  Securities Indices and Currencies. The Fund may
purchase  put and call options on  securities  in which they have  invested,  on
foreign  currencies  represented in their portfolios and on any securities index
based in whole or in part on securities  in which the Fund may invest.  The Fund
also may enter into  closing  sales  transactions  in order to realize  gains or
minimize losses on options they have purchased.

         The Fund  normally will  purchase  call options in  anticipation  of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated.  The
purchase of a call  option  would  entitle  the Fund,  in return for the premium
paid,  to  purchase  specified  securities  or a  specified  amount of a foreign
currency at a specified price during the option period.

         The Fund may  purchase  and sell  options  traded on U.S.  and  foreign
exchanges.  Although the Fund will  generally  purchase  only those  options for
which there appears to be an active secondary market,  there can be no assurance
that a liquid  secondary  market on an  exchange  will exist for any  particular
option or at any particular  time. For some options,  no secondary  market on an
exchange may exist.  In such event,  it might not be possible to effect  closing
transactions in particular options,  with the result that the Fund would have to
exercise its options in order to realize any profit and would incur  transaction
costs upon the purchase or sale of the underlying securities.

         Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons  including:  (i)  insufficient  trading interest in certain
options;  (ii)  restrictions  on opening

                                      B-7
<PAGE>

transactions  or closing  transactions  imposed by an  exchange;  (iii)  trading
halts,  suspensions  or  other  restrictions  may be  imposed  with  respect  to
particular   classes  or  series  of  options;   (iv)   unusual  or   unforeseen
circumstances  which interrupt normal operations on an exchange;  (v) inadequate
facilities of an exchange or the Options Clearing  Corporation to handle current
trading volume at all times; or (vi) discontinuance in the future by one or more
exchanges  for  economic  or other  reasons,  of  trading  of  options  (or of a
particular  class or series of options),  in which event the secondary market on
that  exchange  (or in that class or series of  options)  would  cease to exist,
although  outstanding  options  on that  exchange  that had been  issued  by the
Options  Clearing  Corporation  as a result  of trades  on that  exchange  would
continue to be exercisable in accordance with their terms.

         Although  the Fund does not  currently  intend to do so, it may, in the
future,  write  (i.e.,  sell)  covered  put  and  call  options  on  securities,
securities  indices and currencies in which it may invest. A covered call option
involves a Fund's giving  another party,  in return for a premium,  the right to
buy specified  securities owned by the Fund at a specified future date and price
set at the time of the contract. A covered call option serves as a partial hedge
against the price  decline of the  underlying  security.  However,  by writing a
covered call option,  the Fund gives up the opportunity,  while the option is in
effect,  to realize  gain from any price  increase  (above  the option  exercise
price) in the underlying security.  In addition,  the Fund's ability to sell the
underlying  security  is limited  while the option is in effect  unless the Fund
effects a closing purchase transaction.

         The Fund also may write covered put options that give the holder of the
option  the  right to sell the  underlying  security  to the Fund at the  stated
exercise  price.  The Fund will  receive a premium  for writing a put option but
will be  obligated  for as long as the option is  outstanding  to  purchase  the
underlying  security at a price that may be higher than the market value of that
security  at the time of  exercise.  In  order to  "cover"  put  options  it has
written,  the Fund will cause its custodian to segregate cash, cash equivalents,
U.S.  Government  securities or other liquid equity or debt  securities  with at
least the value of the exercise price of the put options.  In  segregating  such
assets,  the custodian  either  deposits such assets in a segregated  account or
separately  identifies such assets and renders them  unavailable for investment.
The Fund will not write put options if the  aggregate  value of the  obligations
underlying the put options exceeds 25% of the Fund's total assets.

         There is no assurance that higher than anticipated  trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special  procedures that may interfere with the timely  execution of
the Fund's orders.


Other Investment Practices

         Repurchase Agreements.  As noted in the Prospectus,  the Fund may enter
into repurchase  agreements.  The Fund's  repurchase  agreements  generally will
involve a  short-term  investment  in a U.S.  Government  security or other high
grade liquid debt security,  with the seller of the underlying security agreeing
to repurchase  it from the Fund at a mutually  agreed-upon  time and 

                                      B-8
<PAGE>

price.  The repurchase  price generally is higher than the purchase  price,  the
difference  being interest income to the Fund.  Alternatively,  the purchase and
repurchase  prices may be the same,  with  interest  at a stated rate due to the
Fund together with the  repurchase  price on the date of  repurchase.  In either
case, the income to the Fund is unrelated to the interest rate on the underlying
security.

         Under each repurchase agreement, the seller is required to maintain the
value of the  securities  subject to the  repurchase  agreement at not less than
their repurchase  price. The Manager,  acting under the supervision of the Board
of Trustees,  reviews on a periodic basis the suitability and  creditworthiness,
and the value of the collateral, of those sellers with whom the Fund enters into
repurchase agreements to evaluate potential risk. All repurchase agreements will
be made  pursuant to procedures  adopted and  regularly  reviewed by the Trust's
Board of Trustees.

         The Fund  generally  will enter  into  repurchase  agreements  of short
maturities,  from overnight to one week, although the underlying securities will
generally have longer maturities.  The Fund regards  repurchase  agreements with
maturities  in excess of seven days as  illiquid.  The Fund may not invest  more
than 15% of the  value  of its net  assets  in  illiquid  securities,  including
repurchase agreements with maturities greater than seven days.

         For purposes of the Investment  Company Act, a repurchase  agreement is
deemed to be a  collateralized  loan from the Fund to the seller of the security
subject  to the  repurchase  agreement.  It is not clear  whether a court  would
consider the security acquired by the Fund subject to a repurchase  agreement as
being  owned by the Fund or as  being  collateral  for a loan by the Fund to the
seller.  If bankruptcy or insolvency  proceedings  are commenced with respect to
the seller of the security before its repurchase  under a repurchase  agreement,
the Fund may  encounter  delays and incur  costs  before  being able to sell the
security.  Delays  may  involve  loss of  interest  or a decline in price of the
security. If a court characterizes such a transaction as a loan and the Fund has
not perfected a security  interest in the security,  the Fund may be required to
return the  security  to the  seller's  estate  and be  treated as an  unsecured
creditor of the seller. As an unsecured  creditor,  the Fund would be at risk of
losing some or all of the principal and income involved in the  transaction.  As
with any unsecured debt instrument  purchased for the Fund, the Manager seeks to
minimize  the  risk of loss  through  repurchase  agreements  by  analyzing  the
creditworthiness of the seller of the security.

         Apart from the risk of bankruptcy or insolvency  proceedings,  the Fund
also runs the risk that the seller may fail to repurchase the security. However,
the Fund always requires collateral for any repurchase  agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and the Fund makes payment against such  securities only upon physical  delivery
or evidence of book entry transfer to the account of its custodian  bank. If the
market value of the security  subject to the repurchase  agreement  becomes less
than the  repurchase  price  (including  interest),  the Fund,  pursuant  to its
repurchase  agreement,  may  require  the  seller  of the  security  to  deliver
additional  securities so that the market value of all securities subject to the
repurchase  agreement  at all  times  equals or  exceeds  the  repurchase  price
(including interest) at all times.

                                      B-9
<PAGE>

         The Fund may participate in one or more joint accounts with other funds
of the Trust that may invest in repurchase  agreements  collateralized either by
(i)  obligations  issued or  guaranteed as to principal and interest by the U.S.
Government  or by one of its agencies or  instrumentalities,  or (ii)  privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
nationally  recognized  statistical  rating  organization,  or, if unrated,  are
deemed by the Manager to be of comparable quality using objective criteria.  Any
such  repurchase  agreement  will  have,  with rare  exceptions,  an  overnight,
over-the-weekend  or  over-the-holiday  duration,  and in no event  will  have a
duration of more than seven days.

         Reverse  Repurchase  Agreements.   The  Fund  may  enter  into  reverse
repurchase agreements,  as set forth in the Prospectus.  The Fund typically will
invest  the  proceeds  of  a  reverse  repurchase   agreement  in  money  market
instruments or repurchase  agreements  maturing not later than the expiration of
the reverse repurchase  agreement.  This use of proceeds involves leverage,  and
the Fund will enter into a reverse  repurchase  agreement for leverage  purposes
only when the Manager  believes  that the interest  income to be earned from the
investment  of the proceeds  would be greater  than the interest  expense of the
transaction. The Fund also may use the proceeds of reverse repurchase agreements
to  provide  liquidity  to meet  redemption  requests  when  sale of the  Fund's
securities is disadvantageous.
         The Fund causes its custodian to segregate liquid assets, such as cash,
U.S.  Government  securities or other liquid equity or debt securities  equal in
value to its obligations  (including  accrued  interest) with respect to reverse
repurchase  agreements.  In segregating such assets, the custodian either places
such securities in a segregated account or separately identifies such assets and
renders them unavailable for investment.  Such assets are marked to market daily
to ensure that full collateralization is maintained.

         Lending of Portfolio  Securities.  Although the Fund does not currently
intend to do so, the Fund may lend its portfolio securities having a value of up
to 30% of its total assets in order to generate  additional  income.  Such loans
may  be  made  to   broker-dealers   or  other  financial   institutions   whose
creditworthiness is acceptable to the Manager.  These loans would be required to
be  secured  continuously  by  collateral,  including  cash,  cash  equivalents,
irrevocable letters of credit, U.S. Government  securities,  or other high grade
liquid debt  securities,  maintained on a current basis (i.e.,  marked to market
daily) at an amount at least equal to 100% of the market value of the securities
loaned plus accrued  interest.  The Fund may pay reasonable  administrative  and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing  broker.  Loans are subject
to termination at the option of the Fund or the borrower at any time.  Upon such
termination,  the Fund is entitled to obtain the return of the securities loaned
within five business days.

         For the  duration  of the loan,  the Fund will  continue to receive the
equivalent  of the  interest or dividends  paid by the issuer on the  securities
loaned,  will receive  proceeds from the  investment of the  collateral and will
continue to retain any voting  rights with  respect to the  securities.  As with
other extensions of credit,  there are risks of delay in recovery or even losses
of rights in the securities  loaned should the borrower of the  securities  fail
financially.  However,  the loans will be made only to  borrowers  deemed by the
Manager to be creditworthy, and when,

                                      B-10
<PAGE>

in the judgment of the Manager,  the income which can be earned  currently  from
such loans justifies the attendant risk.

         When-Issued and Forward  Commitment  Securities.  The Fund may purchase
securities  on a  "when-issued"  basis and may purchase or sell  securities on a
"forward  commitment" or "delayed  delivery" basis. The price of such securities
is fixed at the time the  commitment  to purchase or sell is made,  but delivery
and  payment  for the  securities  take  place at a later  date.  Normally,  the
settlement  date  occurs  within  one month of the  purchase;  during the period
between  purchase and settlement,  no payment is made by the Fund to the issuer.
While  the Fund  reserves  the right to sell  when-issued  or  delayed  delivery
securities  prior to the  settlement  date,  the Fund  intends to purchase  such
securities  with the purpose of actually  acquiring  them unless a sale  appears
desirable  for  investment  reasons.  At the time the Fund makes a commitment to
purchase a security on a when-issued or delayed  delivery  basis, it will record
the  transaction  and reflect the value of the security in  determining  its net
asset value. The market value of the when-issued  securities may be more or less
than the  settlement  price.  The Fund does not believe that its net asset value
will be adversely  affected by its purchase of securities  on a  when-issued  or
delayed  delivery  basis.  The Fund causes its custodian to segregate cash, U.S.
Government  securities  or other liquid equity or debt  securities  with a value
equal in value to commitments  for when-issued or delayed  delivery  securities.
The  segregated  securities  either will mature or, if necessary,  be sold on or
before the  settlement  date.  To the extent that assets of the Fund are held in
cash pending the settlement of a purchase of  securities,  the Fund will earn no
income on these assets.

         Illiquid Securities. The Fund may invest up to 15% of its net assets in
illiquid  securities.  The term  "illiquid  securities"  for this purpose  means
securities  that cannot be disposed of within seven days in the ordinary  course
of  business  at  approximately  the  amount  at  which a Fund  has  valued  the
securities and includes,  among others,  repurchase  agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not  freely  transferable.   Illiquid  securities  also  include  shares  of  an
investment  company  held by the Fund in excess  of 1% of the total  outstanding
shares of that  investment  company.  Restricted  securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933, as amended
("1933 Act").  Illiquid  securities  acquired by the Fund may include those that
are subject to restrictions on transferability  contained in the securities laws
of other countries.  Securities that are freely  marketable in the country where
they are  principally  traded,  but that would not be freely  marketable  in the
United States, will not be considered illiquid.  Where registration is required,
the Fund may be obligated to pay all or part of the registration  expenses and a
considerable  period may elapse between the time of the decision to sell and the
time  the  Fund  may  be  permitted  to  sell  a  security  under  an  effective
registration statement. If, during such a period, adverse market conditions were
to develop,  the Fund might obtain a less favorable price than prevailed when it
decided to sell.

         In recent years a large institutional  market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in  private  placements,   repurchase  agreements,   commercial  paper,  foreign
securities and corporate bonds and notes. These instruments often are restricted
securities  because  the  securities  are  sold in  transactions  not

                                      B-11
<PAGE>

requiring registration.  Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient  institutional market in which such unregistered  securities can be
resold  readily  or on an  issuer's  ability  to honor a demand  for  repayment.
Therefore,  the fact that there are contractual or legal  restrictions on resale
to the  general  public or  certain  institutions  is not  determinative  of the
liquidity of such investments.

         Rule  144A  under  the  1933 Act  establishes  a safe  harbor  from the
registration  requirements of the 1933 Act for resales of certain  securities to
qualified institutional buyers.  Institutional markets for restricted securities
sold  pursuant to Rule 144A in many cases  provide  both  readily  ascertainable
values for  restricted  securities and the ability to liquidate an investment to
satisfy share redemption  orders.  Such markets might include  automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and  foreign  issuers,  such as the  PORTAL  System  sponsored  by the  National
Association  of Securities  Dealers,  Inc. An  insufficient  number of qualified
buyers interested in purchasing Rule 144A-eligible restricted securities held by
the Fund,  however,  could affect adversely the  marketability of such portfolio
securities,  and the Fund might be unable to dispose of such securities promptly
or at favorable prices.

         The Board of Trustees has delegated  the function of making  day-to-day
determinations  of liquidity to the Manager  pursuant to guidelines  approved by
the  Board.  The  Manager  takes into  account a number of  factors in  reaching
liquidity  decisions,  including  but not limited to (i) the frequency of trades
for the security, (ii) the number of dealers that quote prices for the security,
(iii)  the  number  of  dealers  that  have  undertaken  to make a market in the
security,  (iv) the number of other potential purchasers,  and (v) the nature of
the  security  and how  trading is effected  (e.g.,  the time needed to sell the
security,  how bids are solicited  and the  mechanics of transfer).  The Manager
monitors the  liquidity of  restricted  securities  in the Fund's  portfolio and
reports periodically on such decisions to the Board of Trustees.


                                  RISK FACTORS

         Foreign Securities. Investors in the Fund should consider carefully the
substantial  risks involved in securities of companies located or doing business
in, and  governments  of,  foreign  nations,  which are in addition to the usual
risks  inherent in domestic  investments.  There may be less publicly  available
information  about  foreign  companies  comparable  to the  reports  and ratings
published  regarding  companies  in the U.S.  Foreign  companies  are  often not
subject to uniform accounting,  auditing and financial reporting standards,  and
auditing  practices  and  requirements  often  may not be  comparable  to  those
applicable  to U.S.  companies.  Many foreign  markets have  substantially  less
volume than either the  established  domestic  securities  exchanges  or the OTC
markets.  Securities of some foreign companies are less liquid and more volatile
than  securities  of  comparable  U.S.  companies.  Commission  rates in foreign
countries, which may be fixed rather than subject to negotiation as in the U.S.,
are likely to be higher.  In many  foreign  countries  there is less  government
supervision and regulation of securities exchanges, brokers and listed companies
than in the U.S.,  and capital  requirements  for brokerage  firms are generally
lower.  Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.

                                      B-12
<PAGE>

         Exchange Rates and Polices.  The Fund endeavors to buy and sell foreign
currencies on favorable terms. Some price spreads on currency exchange (to cover
service charges) may be incurred,  particularly when the Fund change investments
from one  country to another  or when  proceeds  from the sale of shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also, some
countries  may adopt  policies  which would  prevent the Fund from  repatriating
invested capital and dividends,  withhold  portions of interest and dividends at
the source,  or impose other taxes,  with respect to the Fund's  investments  in
securities  of  issuers  of  that  country.  There  also is the  possibility  of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include  suspension of the ability to transfer currency from
a given country), default in foreign government securities,  political or social
instability,  or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.

         The  Fund  may  be  affected   either   favorably  or   unfavorably  by
fluctuations  in the  relative  rates of  exchange  between  the  currencies  of
different  nations,  exchange  control  regulations and indigenous  economic and
political developments.

         The Board of the Trust  considers at least  annually the  likelihood of
the imposition by any foreign  government of exchange control  restrictions that
would affect the liquidity of the Fund's assets  maintained  with  custodians in
foreign countries,  as well as the degree of risk from political acts of foreign
governments  to which such assets may be exposed.  The Board also  considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories (see "Investment Management and Other Services").

         Hedging Transactions. While transactions in forward contracts, options,
futures contracts and options on futures (i.e.,  "hedging positions") may reduce
certain risks,  such transactions  themselves entail certain other risks.  Thus,
while the Fund may  benefit  from the use of  hedging  positions,  unanticipated
changes in interest  rates,  securities  prices or currency  exchange  rates may
result in a poorer overall  performance  for the Fund than if it had not entered
into any hedging  positions.  If the correlation  between a hedging position and
portfolio  position which is intended to be protected is imperfect,  the desired
protection may not be obtained, and the Fund may be exposed to risk of financial
loss.

         Perfect  correlation between the Fund's hedging positions and portfolio
positions  may be  difficult  to achieve  because  hedging  instruments  in many
foreign  countries  are not yet  available.  In addition,  it is not possible to
hedge fully  against  currency  fluctuations  affecting  the value of securities
denominated in foreign currencies because the value of such securities is likely
to  fluctuate  as a result  of  independent  factors  not  related  to  currency
fluctuations.


                            INVESTMENT RESTRICTIONS

         The following policies and investment restrictions have been adopted by
the Fund and  (unless  otherwise  noted) are  fundamental  and cannot be changed
without  the  affirmative  vote of a majority of the Fund's  outstanding  voting
securities as defined in the Investment Company Act. The Fund may not:

                                      B-13
<PAGE>

         1. With respect to 75% of its total assets, invest in the securities of
any  one  issuer  (other  than  the  U.S.   Government   and  its  agencies  and
instrumentalities)  if immediately after and as a result of such investment more
than 5% of the total assets of the Fund would be invested in such issuer.  There
are no limitations with respect to the remaining 25% of its total assets, except
to the extent other investment restrictions may be applicable.

         2. Make  loans to others,  except  (a)  through  the  purchase  of debt
securities in accordance with its investment objective and policies, (b) through
the lending of up to 30% of its portfolio  securities as described  above and in
its  Prospectus,  or (c) to the extent the entry into a repurchase  agreement is
deemed to be a loan.

         3. (a) Borrow money,  except for temporary or emergency purposes from a
bank, or pursuant to reverse  repurchase  agreements,  and then not in excess of
one-third  of the value of its total assets (at the lower of cost or fair market
value). Any such borrowing will be made only if immediately  thereafter there is
an  asset  coverage  of at  least  300%  of all  borrowings,  and no  additional
investments  may be made while any such borrowings are in excess of 10% of total
assets.

            (b)  Mortgage,  pledge or  hypothecate  any of its assets  except in
connection  with  permissible  borrowings  and  permissible  forward  contracts,
futures contracts, option contracts or other hedging transactions.

         4.  Except  as  required  in  connection   with   permissible   hedging
activities,  purchase securities on margin or underwrite securities.  (This does
not preclude the Fund from obtaining such short-term  credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)

         5. Buy or sell real estate (including  interests in real estate limited
partnerships  or issuers  that  qualify as real estate  investment  trusts under
federal  income tax law) or  commodities or commodity  contracts;  however,  the
Fund, to the extent not otherwise prohibited in the Prospectus or this Statement
of Additional  Information,  may invest in securities  secured by real estate or
interests  therein  or  issued  by  companies  which  invest  in real  estate or
interests therein,  including real estate investment trusts, and may purchase or
sell  currencies  (including  forward  currency  exchange  contracts),   futures
contracts  and related  options  generally as described  in the  Prospectus  and
Statement of Additional Information. As an operating policy which may be changed
without  shareholder  approval,  the Fund may invest in real  estate  investment
trusts only up to 10% of its total assets.

         6. Invest in securities of other  investment  companies,  except to the
extent  permitted by the Investment  Company Act and discussed in the Prospectus
or this  Statement  of  Additional  Information,  or as such  securities  may be
acquired as part of a merger, consolidation or acquisition of assets.

         7.  Invest,  in the  aggregate,  more  than  15% of its net  assets  in
illiquid securities,  including (under current SEC  interpretations)  restricted
securities   (excluding  liquid  Rule  144A-eligible   restricted   securities),
securities which are not otherwise  readily  marketable,  repurchase

                                      B-14
<PAGE>

agreements that mature in more than seven days and over-the-counter options (and
securities  underlying such options)  purchased by a Fund. (This is an operating
policy which may be changed  without  shareholder  approval  consistent with the
Investment Company Act and changes in relevant SEC interpretations.)

         8.  Invest  in  any  issuer  for  purposes  of  exercising  control  or
management  of the issuer.  (This is an  operating  policy  which may be changed
without shareholder approval, consistent with the Investment Company Act.)

         9. Invest more than 25% of the market  value of its total assets in the
securities  of companies  engaged in any one  industry.  (This does not apply to
investment  in  the  securities  of  the  U.S.   Government,   its  agencies  or
instrumentalities.) For purposes of this restriction,  the Fund generally relies
on  the  U.S.   Office  of   Management   and   Budget's   Standard   Industrial
Classifications.

         10. Issue senior securities,  as defined in the Investment Company Act,
except that this  restriction  shall not be deemed to prohibit the Fund from (a)
making any  permitted  borrowings,  mortgages or pledges,  or (b) entering  into
permissible repurchase transactions.

         11.  Except  as  described  in the  Prospectus  and this  Statement  of
Additional  Information,  acquire or dispose of put,  call,  straddle  or spread
options and subject to the following conditions:

                  (A) such options are written by other persons, and

                  (B) the aggregate  premiums paid on all such options which are
held at any time do not exceed 5% of the Fund's total assets.

         12. Except as and unless described in the Prospectus and this Statement
of  Additional  Information,  engage in short sales of  securities.  (This is an
operating policy which may be changed without shareholder  approval,  consistent
with applicable regulations.)

         13.  Invest in  warrants,  valued at the  lower of cost or  market,  in
excess of 5% of the value of the Fund's net  assets.  Warrants  acquired  by the
Fund in units or attached to securities may be deemed to be without value. (This
is an operating policy which may be changed without shareholder approval.)

         14. Purchase more than 10% of the outstanding  voting securities of any
one  issuer.  (This  is  an  operating  policy  which  may  be  changed  without
shareholder approval.)

         15. Invest in commodities,  except for futures  contracts or options on
futures  contracts  if, as a result  thereof,  more than 5% of the Fund's  total
assets (taken at market value at the time of entering  into the contract)  would
be committed to initial  deposits  and  premiums on open futures  contracts  and
options on such contracts.

                                      B-15
<PAGE>

         To the extent these  restrictions  reflect matters of operating  policy
which may be changed without shareholder vote, these restrictions may be amended
upon approval by the Board of Trustees and notice to shareholders.

         If a percentage restriction is adhered to at the time of investment,  a
subsequent  increase or decrease in a percentage  resulting from a change in the
values of assets will not constitute a violation of that restriction,  except as
otherwise noted.


                        DISTRIBUTIONS AND TAX INFORMATION

         Distributions.  The Fund will  receive  income in the form of dividends
and interest  earned on its  investments  in securities.  This income,  less the
expenses  incurred  in its  operations,  is the  Fund's net  investment  income,
substantially  all of  which  will  be  declared  as  dividends  to  the  Fund's
shareholders.

         The amount of income  dividend  payments by the Fund is dependent  upon
the amount of net  investment  income  received  by the Fund from its  portfolio
holdings,  is not  guaranteed  and is  subject to the  discretion  of the Fund's
Board. The Fund does not pay "interest" or guarantee any fixed rate of return on
an investment in its shares.

         The Fund also may derive  capital  gains or losses in  connection  with
sales or other dispositions of its portfolio  securities.  Any net gain the Fund
may realize from  transactions  involving  investments held less than the period
required for long-term  capital gain or loss recognition or otherwise  producing
short-term  capital  gains and losses  (taking  into  account any  carryover  of
capital losses from previous  years),  while a distribution  from capital gains,
will be distributed to shareholders with and as a part of income  dividends.  If
during  any  year  the  Fund  realizes  a net  gain  on  transactions  involving
investments  held more than the period  required for  long-term  capital gain or
loss recognition or otherwise  producing long-term capital gains and losses, the
Fund will have a net long-term  capital gain.  After  deduction of the amount of
any net  short-term  capital loss,  the balance (to the extent not offset by any
capital losses carried over from previous years) will be distributed and treated
as long-term  capital gains in the hands of the  shareholders  regardless of the
length of time the Fund's shares may have been held.

         Any  dividend or  distribution  paid by the Fund reduces the Fund's net
asset  value  per  share on the  date  paid by the  amount  of the  dividend  or
distribution  per share.  Accordingly,  a dividend or distribution  paid shortly
after a purchase of shares by a shareholder  would  represent,  in substance,  a
partial return of capital (to the extent it is paid on the shares so purchased),
even though it would be subject to income taxes.

         Dividends  and  other  distributions  will  be  made  in  the  form  of
additional  shares of the Fund unless the shareholder  has otherwise  indicated.
Investors  have  the  right  to  change  their  election  with  respect  to  the
reinvestment of dividends and  distributions  by notifying the Transfer Agent in
writing,  but any such change will be effective  only as to dividends  and other
distributions for which the record date is seven or more business days after the
Transfer Agent has received the written request.

                                      B-16
<PAGE>

         Tax Information. The Fund intends to qualify and elect to be treated as
a regulated  investment  company under Subchapter M of the Internal Revenue Code
of 1986,  as amended (the "Code"),  for each taxable year by complying  with all
applicable  requirements regarding the source of its income, the diversification
of its  assets,  and the timing of its  distributions.  The Fund's  policy is to
distribute to its shareholders all of its investment  company taxable income and
any net realized  capital  gains for each fiscal year in a manner that  complies
with the  distribution  requirements  of the Code,  so that the Fund will not be
subject to any federal income or excise taxes based on net income.  However, the
Board of  Trustees  may elect to pay such  excise  taxes if it  determines  that
payment is, under the circumstances, in the best interests of the Fund.
   
         In order to qualify as a regulated  investment company,  the Fund must,
among other  things,  (a) derive at least 90% of its gross income each year from
dividends,  interest,  payments  with respect to loans of stock and  securities,
gains  from the sale or other  disposition  of stock or  securities  or  foreign
currency gains related to  investments  in stock or securities,  or other income
(generally  including gains from options,  futures or forward contracts) derived
with respect to the business of investing in stock,  securities or currency, and
(b) diversify its holdings so that,  at the end of each fiscal  quarter,  (i) at
least 50% of the market value of its assets is represented by cash,  cash items,
U.S. Government  securities,  securities of other regulated investment companies
and other securities limited,  for purposes of this calculation,  in the case of
other  securities  of any one  issuer to an amount  not  greater  than 5% of the
Fund's assets or 10% of the voting  securities of the issuer,  and (ii) not more
than 25% of the value of its assets is  invested  in the  securities  of any one
issuer (other than U.S.  Government  securities or securities of other regulated
investment companies).  As such, and by complying with the applicable provisions
of the Code,  the Fund will not be  subject  to  federal  income  tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance  with the timing  requirements  of the Code. If the Fund is unable to
meet  certain  requirements  of the Code,  it may be  subject to  taxation  as a
corporation.
    
         Distributions  of net investment  income and net realized capital gains
by the Fund will be taxable to  shareholders  whether made in cash or reinvested
by the Fund in shares.  In determining  amounts of net realized capital gains to
be  distributed,  any capital loss  carryovers  from prior years will be applied
against  capital  gains.  Shareholders  receiving  distributions  in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so  received  equal to the net  asset  value of a share of the Fund on the
reinvestment  date. Fund  distributions  also will be included in individual and
corporate  shareholders'  income on which  the  alternative  minimum  tax may be
imposed.

         The Fund or the securities  dealer effecting a redemption of the Fund's
shares by a shareholder  will be required to file  information  reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder.  In addition,  the Fund will be required to withhold federal
income  tax at the  rate of 31% on  taxable  dividends,  redemptions  and  other
payments  made to accounts of individual or other  non-exempt  shareholders  who
have not furnished  their correct  taxpayer  identification  numbers and certain
required certifications on the Account Application Form or with respect to which
the Fund or the  securities  dealer has been

                                      B-17
<PAGE>

notified by the IRS that the number  furnished  is incorrect or that the account
is otherwise subject to withholding.

         The Fund intends to declare and pay dividends and other  distributions,
as stated in the Prospectus. In order to avoid the payment of any federal excise
tax based on net income,  the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following  year,  distributions  at
least equal to 98% of its ordinary  income for that  calendar  year and at least
98% of the excess of any capital gains over any capital  losses  realized in the
one-year period ending October 31 of that year,  together with any undistributed
amounts of ordinary  income and capital gains (in excess of capital losses) from
the previous calendar year.

         The Fund may receive dividend distributions from U.S. corporations.  To
the extent that the Fund receives such  dividends  and  distributes  them to its
shareholders,  and meets  certain  other  requirements  of the  Code,  corporate
shareholders of the Fund may be entitled to the "dividends  received" deduction.
Availability  of  the  deduction  is  subject  to  certain  holding  period  and
debt-financing limitations.

         If more than 50% in value of the total assets of the Fund at the end of
its fiscal year is invested in stock or securities of foreign corporations,  the
Fund may elect to pass  through  to its  shareholders  the pro rata share of all
foreign  income taxes paid by the Fund. If this  election is made,  shareholders
will be (i)  required to include in their gross  income  their pro rata share of
the Fund's foreign source income (including any foreign income taxes paid by the
Fund),  and (ii) entitled  either to deduct their share of such foreign taxes in
computing their taxable income or to claim a credit for such taxes against their
U.S. income tax,  subject to certain  limitations  under the Code. In this case,
shareholders  will be  informed  by the  Fund at the end of each  calendar  year
regarding the  availability  of any credits on and the amount of foreign  source
income  (including  or  excluding  foreign  income taxes paid by the Fund) to be
included  in their  income  tax  returns.  If not more  than 50% in value of the
Fund's  total  assets  at the end of its  fiscal  year is  invested  in stock or
securities of foreign corporations, the Fund will not be entitled under the Code
to pass through to its  shareholders  their pro rata share of the foreign  taxes
paid by the Fund. In this case,  these taxes will be taken as a deduction by the
Fund.

         The Fund may be subject to foreign  withholding  taxes on dividends and
interest earned with respect to securities of foreign corporations. The Fund may
invest  up to  10% of its  total  assets  in the  stock  of  foreign  investment
companies  that  may  be  treated  as  "passive  foreign  investment  companies"
("PFICs") under the Code.  Certain other foreign  corporations,  not operated as
investment companies, may nevertheless satisfy the PFIC definition. A portion of
the income and gains that the Fund  derives  from PFIC stock may be subject to a
non-deductible federal income tax at the Fund level. In some cases, the Fund may
be able to avoid this tax by electing to be taxed  currently on its share of the
PFIC's income,  whether or not such income is actually  distributed by the PFIC.
The Fund will  endeavor to limit its  exposure to the PFIC tax by  investing  in
PFICs only where the election to be taxed currently will be made.  Because it is
not always  possible to identify a foreign issuer as a PFIC in advance of making
the investment, the Fund may incur the PFIC tax in some instances.

                                      B-18
<PAGE>

         Hedging.  The use of hedging strategies,  such as entering into futures
contracts and forward contracts and purchasing  options,  involves complex rules
that will  determine  the  character  and  timing of  recognition  of the income
received in  connection  therewith by the Fund.  Income from foreign  currencies
(except certain gains therefrom that may be excluded by future  regulations) and
income from  transactions in options,  futures  contracts and forward  contracts
derived by the Fund with respect to its business of investing in  securities  or
foreign  currencies will qualify as permissible income under Subchapter M of the
Code.

         For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is  recorded  as an asset and is  subsequently  adjusted to the
current  market value of the option.  Any gain or loss realized by the Fund upon
the  expiration  or sale of such  options  held by the  Fund  generally  will be
capital gain or loss.

         Any security,  option,  or other  position  entered into or held by the
Fund  that  substantially  diminishes  the  Fund's  risk of loss  from any other
position  held by the Fund may  constitute a "straddle"  for federal  income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount,  character  and timing of the Fund's  gains and losses  with  respect to
straddle positions by requiring,  among other things,  that the loss realized on
disposition  of one position of a straddle be deferred until gain is realized on
disposition  of the  offsetting  position;  that the  Fund's  holding  period in
certain straddle positions not begin until the straddle is terminated  (possibly
resulting  in the gain being  treated as  short-term  capital  gain  rather than
long-term  capital  gain);  and that losses  recognized  with respect to certain
straddle positions,  which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.

         Certain  options,  futures  contracts  and forward  contracts  that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its  taxable  year  generally  will be  required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value.  Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss  realized  from any actual sales of
Section 1256  Contracts  will be treated as long-term  capital gain or loss, and
the balance will be treated as short-term capital gain or loss.

         Section  988 of the Code  contains  special  tax  rules  applicable  to
certain foreign  currency  transactions  that may affect the amount,  timing and
character of income,  gain or loss  recognized  by the Fund.  Under these rules,
foreign   exchange   gain   or   loss   realized   with   respect   to   foreign
currency-denominated  debt  instruments,  foreign  currency  forward  contracts,
foreign  currency  denominated  payables and  receivables  and foreign  currency
options and futures contracts (other than options and futures contracts that are
governed by the  mark-to-market  and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary  income or loss. Some part
of the  Fund's  gain or loss on the sale or other  disposition  of  shares  of a
foreign  corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary  income or loss under Section 988 of the Code rather than
as capital gain or loss.

         Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's  adjusted tax

                                      B-19
<PAGE>

basis for the  shares.  Any loss  realized  upon the  redemption  or exchange of
shares  within six  months  from  their  date of  purchase  will be treated as a
long-term  capital loss to the extent of distributions of long-term capital gain
dividends during such six-month period. All or a portion of a loss realized upon
the  redemption  of shares may be  disallowed to the extent shares are purchased
(including  shares  acquired by means of  reinvested  dividends)  within 30 days
before or after such redemption.

         Distributions  and redemptions may be subject to state and local income
taxes,  and the  treatment  thereof  may  differ  from the  federal  income  tax
treatment. Foreign taxes may apply to non-U.S. investors.

         The above  discussion and the related  discussion in the Prospectus are
not  intended  to  be  complete   discussions  of  all  applicable  federal  tax
consequences  of an  investment  in the  Fund.  The law firm of Paul,  Hastings,
Janofsky & Walker LLP has expressed no opinion in respect  thereof.  Nonresident
aliens and  foreign  persons  are  subject to  different  tax rules,  and may be
subject to withholding of up to 30% on certain payments  received from the Fund.
Shareholders  are advised to consult with their own tax advisers  concerning the
application of foreign,  federal,  state and local taxes to an investment in the
Fund.


                             TRUSTEES AND OFFICERS

         The Trustees are  responsible  for the overall  management of the Fund,
including  general  supervision  and review of its  investment  activities.  The
officers, who administer the Fund's daily operations, are appointed by the Board
of  Trustees.  The  current  Trustees  and  officers of the Trust  performing  a
policy-making  function and their affiliations and principal occupations for the
past five years are set forth below:

         R. Stephen Doyle, Trustee.* (Age 57)

         101 California Street,  San Francisco,  California 94111. Mr. Doyle has
         been the Chairman and a Director of Montgomery Asset Management,  Inc.,
         the general  partner of the Manager,  and Chairman of the Manager since
         April 1990. Mr. Doyle is a managing director of the investment  banking
         firm of Montgomery  Securities,  the Fund's  Distributor,  and has been
         employed by Montgomery Securities since October 1983.

         John A. Farnsworth, Trustee (Age 56)

         One California Street, Suite 1950, San Francisco, California 94111. Mr.
         Farnsworth  is a partner of Pearson,  Caldwell &  Farnsworth,  Inc., an
         executive search  consulting firm. From May 1988 to September 1991, Mr.
         Farnsworth was the Managing Partner of the San Francisco office of Ward
         Howell International, Inc., an executive recruiting firm.

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

*        Trustee  deemed an  "interested  person"  of the Fund as defined in the
         Investment Company Act.

                                      B-20
<PAGE>

         From May 1987 until May 1988, Mr.  Farnsworth was Managing  Director of
         Jeffrey Casdin & Company, an investment management firm specializing in
         biotechnology  companies.  From May 1984 until May 1987, Mr. Farnsworth
         served as a Senior  Vice  President  of Bank of America and head of the
         U.S. Private Banking Division.

         Andrew Cox, Trustee (Age 53)

         750 Vine Street,  Denver,  Colorado 80206. Since June 1988, Mr. Cox has
         been engaged as an independent  investment  consultant.  From September
         1976 until June 1988,  Mr.  Cox was a Vice  President  of the  Founders
         Group of Mutual  Funds,  Denver,  Colorado,  and  Portfolio  Manager or
         Co-Portfolio  Manager of several  of the mutual  funds in the  Founders
         Group.

         Cecilia Herbert, Trustee (Age 48)

         2636 Vallejo Street,  San Francisco,  California 94123. Ms. Herbert was
         Managing  Director of Morgan Guaranty Trust Company.  From 1983 to 1991
         she was  General  Manager  of the  bank's San  Francisco  office,  with
         responsibility for lending,  corporate finance and investment  banking.
         Ms.  Herbert is a member of the board of  Schools of the Sacred  Heart,
         and is on the Archdiocese of San Francisco  Finance Council,  where she
         chairs the Investment Committee.
   
         Richard W. Ingram, President and Treasurer  (Age 41)

         60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Ingram is
         the  Executive  Vice  President  and  Director of Client  Services  and
         Treasury Administration of FDI; Senior Vice President of Premier Mutual
         Fund  Services,  Inc.,  an affiliate of FDI  ("Premier  Mutual") and an
         officer of certain  investment  companies advised or administered by JP
         Morgan ("Morgan"),  Dreyfus Corporation  ("Dreyfus"),  Waterhouse Asset
         Management, Inc. ("Waterhouse"),  RCM Capital Management L.L.C. ("RCM")
         and  Harris  Trust and  Savings  Bank  ("Harris")  or their  respective
         affiliates.  Prior to April 1997,  Mr. Ingram was Senior Vice President
         and Director of Client  Services and  Treasury  Administration  of FDI.
         From March 1994 to November  1995,  Mr.  Ingram was Vice  President and
         Division Manager of First Data Investor  Services Group, Inc. From 1989
         to 1994,  Mr. Ingram was Vice  President,  Assistant  Treasurer and Tax
         Director - Mutual Funds of The Boston Company, Inc.

         Karen Jacoppo-Wood, Vice President and Assistant Secretary (Age 30)

         60  State  Street,   Suite  1300,  Boston,   Massachusetts  02109.  Ms.
         Jacoppo-Wood  is the Assistant  Vice President of FDI and an officer of
         certain  investment   companies  advised  or  administered  by  Morgan,
         Waterhouse,  RCM and Harris or their respective  affiliates.  From June
         1994 to January 1996, Ms. Jacoppo-Wood was a Manager, SEC Registration,
         Scudder,  Stevens & Clark, Inc. From 1988 to May 1994, Ms. Jacoppo-Wood
         was a Senior Paralegal at The Boston Company Advisers, Inc. ("TBCA").

                                      B-21
<PAGE>

         Elizabeth A. Keeley, Vice President and Assistant Secretary (Age 27)

         200 Park  Avenue,  New York,  New York  10166.  Ms.  Keeley is the Vice
         President and Senior Counsel of FDI and Premier Mutual,  and an officer
         of certain  investment  companies  advised or  administered  by Morgan,
         Dreyfus,  RCM,  Waterhouse and Harris or their  respective  affiliates.
         Prior to August 1996,  Ms.  Keeley was  Assistant  Vice  President  and
         Counsel of FDI and Premier Mutual.  Prior to September 1995, Ms. Keeley
         was enrolled at Fordham  University School of Law and received her J.D.
         in May 1995.  Prior to September  1992,  Ms. Keeley was an Assistant at
         the National Association for Public Interest Law.

         Christopher J. Kelley, Vice President and Assistant Secretary (Age 32)

         60 State Street, Suite 1300, Boston,  Massachusetts  002109. Mr. Kelley
         is the Vice President and Associate  General Counsel of FDI and Premier
         Mutual,  and an  officer  of certain  investment  companies  advised or
         administered  by  Morgan,  Waterhouse  and  Harris or their  respective
         affiliates.  From  April 1994 to July 1996,  Mr.  Kelley was  Assistant
         Counsel at Forum  Financial  Group.  From 1992 to 1994,  Mr. Kelley was
         employed  by Putnam  Investments  in Legal and  Compliance  capacities.
         Prior to 1992,  Mr. Kelley  attended  Boston  College Law School,  from
         which he graduated in May 1992.

         Mary A. Nelson, Vice President and Assistant Treasurer (Age 33)

         60 State Street, Suite 1300, Boston, Massachusetts 02109. Ms. Nelson is
         the Vice President and Manager of Treasury Services and  Administration
         of FDI  and  Premier  Mutual,  and an  officer  of  certain  investment
         companies advised or administered by Morgan, Dreyfus,  Waterhouse,  RCM
         and Harris or their respective affiliates. From 1989 to 1994 Ms. Nelson
         was Assistant Vice President and Client Manager for The Boston Company,
         Inc.

         John E. Pelletier, Vice President and Secretary (Age 33)

         60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Pelletier
         is the Senior Vice President,  General Counsel,  Secretary and Clerk of
         FDI and Premier Mutual, and an officer of certain investment  companies
         advised or administered by Morgan, Dreyfus,  Waterhouse, RCM and Harris
         or their respective  affiliates.  From February 1992 to April 1994, Mr.
         Pelletier  served as Counsel  for TBCA.  From  August  1990 to February
         1992,  Mr.  Pelletier  was  employed as an Associate at Ropes & Gray (a
         Boston law firm).

         Gary S. MacDonald, Vice President and Assistant Treasurer (Age 32)

         60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. MacDonald
         is the Vice  President of FDI with which he has been  associated  since
         November  1996. He also is an officer of certain  investment  companies
         advised or administered by RCM. From September 1992 to November 1996 he
         was Vice President of BayBanks Investment Management/Bay Bank Financial
         Services;  and from April 1989 to  September  1992 he was an Analyst at
         Wellington Management Company.
    

                                      B-22
<PAGE>
   

         Marie E. Connolly, Vice President and Assistant Treasurer (Age 40)

         60 State Street, Suite 1300, Boston,  Massachusetts 02109. Ms. Connolly
         is the President, Chief Executive Officer, Chief Compliance Officer and
         Director  of  FDI  and  Premier  Mutual,  and  an  officer  of  certain
         investment  companies  advised or administered by Morgan and Dreyfus or
         their  respective  affiliates.  From  December  1991 to July 1994,  Ms.
         Connolly was President and Chief  Compliance  Officer of FDI.  Prior to
         December 1991, Ms.  Connolly  served as Vice President and  Controller,
         and later Senior Vice President of TBCA.

         Douglas C. Conroy, Vice President and Assistant Treasurer (Age 28)

         60 State Street, Suite 1300, Boston, Massachusetts 02109. Mr. Conroy is
         the  Assistant  Vice  President  and Manager of Treasury  Services  and
         Administration  of FDI and an officer of certain  investment  companies
         advised  or  administered  by Morgan and  Dreyfus  or their  respective
         affiliates.  Prior to April 1997, Mr. Conroy was Supervisor of Treasury
         Services and  Administration  of FDI.  From April 1993 to January 1995,
         Mr.  Conroy was a Senior Fund  Accountant  for  Investors  Bank & Trust
         Company. From December 1991 to March 1993, Mr. Conroy was employed as a
         Fund Accountant at The Boston Company, Inc.
    
<TABLE>
   
         The  officers  of the  Trust,  and  the  Trustees  who  are  considered
"interested  persons" of the Trust,  receive no  compensation  directly from the
Trust for performing the duties of their  offices.  However,  those officers and
Trustees who are officers or partners of the may receive remuneration indirectly
because the Manager will receive a management fee from the. The Trustees who are
not affiliated  with the Manager or the  Distributor  receive an annual retainer
and fees and expenses for each regular  Board  meeting  attended.  The aggregate
compensation  paid by the Trust to each of the  Trustees  during the fiscal year
ended June 30, 1997, and the aggregate compensation paid to each of the Trustees
during the fiscal year ended June 30, 1997 by all of the  registered  investment
companies to which the Manager provides  investment  advisory services,  are set
forth below.
    



<CAPTION>
                                                                Pension or Retirement          Total Compensation From the
                                  Aggregate Compensation        Benefits Accrued as Part of    Trust and Fund Complex
Name of Trustee                   from the Trust                Fund Expenses*                 (2 additional Trusts)
- ---------------                   ---------                     --------------                 ---------------------
<S>                               <C>                           <C>                              <C>
R. Stephen Doyle                  None                          --                               None
John A. Farnsworth                $25,000                       --                               $35,000
Andrew Cox                        $25,000                       --                               $35,000
Cecilia H. Herbert                $25,000                       --                               $35,000
<FN>
         * The Trusts do not maintain pension or retirement plans.
</FN>
</TABLE>

                                      B-23
<PAGE>

         Each  of  the  above  persons  serves  in the  same  capacity  for  The
Montgomery  Funds  II  and  The  Montgomery  Funds  III,  investment   companies
registered  under the  Investment  Company Act,  with  separate  series of funds
managed by the Manager.
   
                    INVESTMENT MANAGEMENT AND OTHER SERVICES

         Investment Management Services. As stated in the Prospectus, investment
management  services are provided to the Fund by  Montgomery  Asset  Management,
LLC, the Manager,  pursuant to an Investment Management Agreement dated July 31,
1997 (the "Agreement").  The Agreement is in effect with respect to the Fund for
two years after the Fund's inclusion in the Trust's  Agreement (on or around the
beginning of public  operations)  and shall  continue in effect  thereafter  for
periods not exceeding one year so long as such continuation is approved at least
annually  by (i) the Board of Trustees of the Trust or the vote of a majority of
the outstanding  shares of the Fund, and (ii) a majority of the Trustees who are
not  interested  persons of any party to the  Agreement,  in each case by a vote
cast in person at a meeting  called for the purpose of voting on such  approval.
The Agreement may be terminated at any time, without penalty, by the Fund or the
Manager upon 60 days' written  notice,  and is  automatically  terminated in the
event of its assignment as defined in the Investment Company Act.
    
         For services performed under the Agreement, the Fund pays the Manager a
monthly  management  fee (accrued  daily but paid when requested by the Manager)
based  upon the  average  daily net assets of the Fund,  at the  annual  rate of
eightieth  one  hundredths  of one percent  (0.80%) of the first $500 million in
average daily net assets and seventieth one hundredths of one percent (0.70%) of
average daily assets over $500 million.

         As noted in the  Prospectus,  the  Manager has agreed to reduce some or
all  of its  management  fee if  necessary  to  keep  total  operating  expenses
(excluding any Rule 12b-1 fees),  expressed on an annualized  basis, at or below
one and two-tenths of one percent (1.20%) of the Fund's average net assets.  The
Manager also may voluntarily reduce additional amounts to increase the return to
the Fund's investors. Any reductions made by the Manager in its fees are subject
to  reimbursement by the Fund within the following three years provided the Fund
is able to effect such reimbursement and remain in compliance with the foregoing
expense  limitation.  The Manager  generally seeks  reimbursement for the oldest
reductions  and waivers before payment by the Fund for fees and expenses for the
current year.

         Operating  expenses for purposes of the Agreement include the Manager's
management fee but do not include any taxes, interest, brokerage commissions, if
any,  expenses  incurred in connection  with any merger or  reorganization,  any
extraordinary  expenses such as  litigation,  and such other  expenses as may be
deemed  excludable  with the prior  written  approval  of any  state  securities
commission  imposing  an  expense  limitation.  The  Manager  may  also  at  its
discretion  from time to time pay for other Fund  expenses from its own funds or
reduce the management fee of the Fund in excess of that required.

         The  Agreement  was  approved  with respect to the Fund by the Board of
Trustees of the Trust at a duly called  meeting.  In considering  the Agreement,
the Trustees  specifically

                                      B-24
<PAGE>

considered  and  approved  the  provision  which  permits  the  Manager  to seek
reimbursement  of any reduction made to its management fee within the three-year
period  following  such  reduction  subject to the Fund's ability to effect such
reimbursement and remain in compliance with applicable expense limitations.  The
Trustees also  considered  that any such  management fee  reimbursement  will be
accounted for on the financial  statements of the Fund as a contingent liability
of the Fund and will  appear as a footnote  to the Fund's  financial  statements
until  such  time as it  appears  that  the  Fund  will be able to  effect  such
reimbursement.  At such  time as it  appears  probable  that the Fund is able to
effect such reimbursement,  the amount of reimbursement that the Fund is able to
effect will be accrued as an expense of the Fund for that current period.

         The Manager also may act as an investment  adviser or  administrator to
other persons, entities, and corporations, including other investment companies.
Please refer to the table above,  which indicates  officers and trustees who are
affiliated  persons  of the Trust  and who are also  affiliated  persons  of the
Manager.

         The  use of the  name  "Montgomery"  by the  Trust  and by the  Fund is
pursuant to the consent of the  Manager,  which may be  withdrawn if the Manager
ceases to be the Manager of the Fund.

         Share  Marketing Plan. The Trust has adopted a Share Marketing Plan (or
Rule 12b-1 Plan) (the "12b-1  Plan") with  respect to the Fund  pursuant to Rule
12b-1 under the Investment  Company Act. The Manager serves as the  distribution
coordinator  under the 12b-1 Plan and,  as such,  receives  any fees paid by the
Fund pursuant to the 12b-1 Plan.

         The  Board of  Trustees  of the  Trust,  including  a  majority  of the
Trustees who are not  interested  persons of the Trust and who have no direct or
indirect  financial  interest  in the  operation  of the  12b-1  Plan  or in any
agreement  related  to the 12b-1  Plan (the  "Independent  Trustees"),  at their
regular  quarterly  meeting,  adopted the 12b-1 Plan for the Class P and Class L
shares of the Fund. The initial shareholder of the Class P and Class L shares of
the Fund  approved the 12b-1 Plan  covering  each Class prior to offering  those
Classes to the public.
Class R shares are not covered by the 12b-1 Plan.

         Under the 12b-1 Plan, the Fund pays distribution fees to the Manager at
an  annual  rate of 0.25% of the  Fund's  aggregate  average  daily  net  assets
attributable  to its Class P shares and at an annual rate of 0.75% of the Fund's
aggregate  average  daily  net  assets  attributable  to  its  Class  L  shares,
respectively,  to reimburse the Manager for its expenses in connection  with the
promotion and distribution of those Classes.

         The 12b-1 Plan provides that the Manager may use the distribution  fees
received  from the Class of the Fund  covered  by the 12b-1 Plan only to pay for
the distribution expenses of that Class. Distribution fees are accrued daily and
paid  monthly,  and are charged as expenses of the Class P and Class L shares as
accrued.

         Class P and Class L shares  are not  obligated  under the 12b-1 Plan to
pay any  distribution  expense in excess of the  distribution  fee. Thus, if the
12b-1 Plan were  terminated or otherwise

                                      B-25
<PAGE>

not continued,  no amounts (other than current amounts accrued but not yet paid)
would be owed by the Class to the Manager.

         The 12b-1 Plan provides  that it shall  continue in effect from year to
year provided that a majority of the Board of Trustees of the Trust, including a
majority of the Independent Trustees,  vote annually to continue the 12b-1 Plan.
The 12b-1 Plan (and any distribution agreement between the Fund, the Distributor
or the  Manager  and a  selling  agent  with  respect  to the Class P or Class L
shares) may be terminated  without  penalty upon at least 60-days' notice by the
Distributor  or the  Manager,  or by the  Fund  by  vote  of a  majority  of the
Independent  Trustees,  or by vote of a majority of the  outstanding  shares (as
defined  in the  Investment  Company  Act) of the Class to which the 12b-1  Plan
applies.
   
         All  distribution  fees paid by the Fund  under the 12b-1  Plan will be
paid in accordance with Rule 2830 of the NASD Rules of Conduct, as such Rule may
change from time to time. Pursuant to the 12b-1 Plan, the Board of Trustees will
review at least quarterly a written report of the distribution expenses incurred
by the  Manager  on behalf  of the  Class P and  Class L shares of the Fund.  In
addition,  as long as the 12b-1  Plan  remains  in  effect,  the  selection  and
nomination  of  Trustees  who are not  interested  persons  (as  defined  in the
Investment  Company  Act) of the  Trust  shall be made by the  Trustees  then in
office who are not interested persons of the Trust.
    
         Shareholder Services Plan. The Trust has adopted a Shareholder Services
Plan (the  "Services  Plan")  with  respect  to the Fund.  The  Manager  (or its
affiliate)  serves as the service provider under the Services Plan and, as such,
receives any fees paid by the Fund pursuant to the Services  Plan. The Trust has
not yet  implemented  the Services  Plan for the Fund and has not set a date for
implementation.  Affected  shareholders will be notified at least 60 days before
implementation of the Services Plan.

         The  Board of  Trustees  of the  Trust,  including  a  majority  of the
Trustees who are not  interested  persons of the Trust and who have no direct or
indirect  financial  interest in the  operation of the  Services  Plan or in any
agreement  related to the Services Plan (the "Independent  Trustees"),  at their
regular quarterly meeting, adopted the Services Plan for the Class P and Class L
shares of the Fund. The initial shareholder of the Class P and Class L shares of
the Fund approved the Services Plan covering each Class prior to offering  those
Classes to the public. Class R shares are not covered by the Services Plan.

         Under the Services Plan, when  implemented,  Class P and Class L of the
Fund will pay a continuing service fee to the Manager,  the Distributor or other
service providers,  in an amount,  computed and prorated on a daily basis, equal
to 0.25% per annum of the average daily net assets of Class P and Class L shares
of the Fund. Such amounts are  compensation  for providing  certain  services to
clients  owning  shares  of Class P or Class L of the Fund,  including  personal
services such as processing purchase and redemption  transactions,  assisting in
change of address  requests and similar  administrative  details,  and providing
other information and assistance with respect to the Fund,  including responding
to shareholder inquiries.

         The  Distributor.  The Distributor  may provide certain  administrative
services to the Fund on behalf of the Manager. The Distributor will also perform
investment banking, investment

                                      B-26
<PAGE>

advisory  and  brokerage  services  for persons  other than the Fund,  including
issuers of securities in which the Fund may invest.  These  activities from time
to time may result in a conflict of interests of the  Distributor  with those of
the Fund, and may restrict the ability of the Distributor to provide services to
the Fund.

         The  Custodian.  Morgan  Stanley  Trust  Company  serves  as  principal
Custodian  of the  Fund's  assets,  which  are  maintained  at  the  Custodian's
principal office and at the offices of its branches and agencies  throughout the
world.  The Custodian has entered into  agreements  with foreign  sub-custodians
approved by the  Trustees  pursuant to Rule 17f-5 under the  Investment  Company
Act. The Custodian,  its branches and sub-custodians generally hold certificates
for the  securities  in their  custody,  but may,  in certain  cases,  have book
records with domestic and foreign  securities  depositories,  which in turn have
book  records  with  the  transfer  agents  of the  issuers  of the  securities.
Compensation for the services of the Custodian is based on a schedule of charges
agreed on from time to time.


                       EXECUTION OF PORTFOLIO TRANSACTIONS

         In all  purchases  and sales of  securities  for the Fund,  the primary
consideration  is to obtain the most  favorable  price and execution  available.
Pursuant to the Agreement,  the Manager  determines  which  securities are to be
purchased and sold by the Fund and which  broker-dealers are eligible to execute
the Fund's  portfolio  transactions,  subject to the instructions of, and review
by,  the  Fund  and the  Trust's  Board  of  Trustees.  Purchases  and  sales of
securities within the U.S. other than on a securities exchange will generally be
executed directly with a "market-maker" unless, in the opinion of the Manager or
the Fund,  a better  price and  execution  can  otherwise be obtained by using a
broker for the transaction.

         The Fund contemplates purchasing most equity securities directly in the
securities  markets  located  in  emerging  or  developing  countries  or in the
over-the-counter  markets.  A Fund  purchasing  ADRs and EDRs may purchase those
listed on stock exchanges, or traded in the over-the-counter markets in the U.S.
or Europe,  as the case may be. ADRs, like other securities  traded in the U.S.,
will be subject to negotiated  commission  rates.  The foreign and domestic debt
securities  and money  market  instruments  in which the Fund may  invest may be
traded in the over-the-counter markets.

         Purchases  of  portfolio  securities  for  the  Fund  also  may be made
directly from issuers or from  underwriters.  Where possible,  purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the  types of  securities  which  the Fund  will be  holding,  unless  better
executions  are available  elsewhere.  Dealers and  underwriters  usually act as
principals  for their own account.  Purchases from  underwriters  will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread  between the bid and the asked price.  If the  execution  and
price offered by more than one dealer or underwriter are  comparable,  the order
may be allocated to a dealer or underwriter that has provided  research or other
services as discussed below.

         In  placing  portfolio  transactions,  the  Manager  will  use its best
efforts to choose a  broker-dealer  capable of providing the services  necessary
generally to obtain the most favorable price

                                      B-27
<PAGE>

and execution  available.  The full range and quality of services available will
be  considered  in making these  determinations,  such as the firm's  ability to
execute trades in a specific market required by the Fund, such as in an emerging
market,  the size of the order,  the  difficulty of execution,  the  operational
facilities  of the firm  involved,  the firm's  risk in  positioning  a block of
securities, and other factors.

         Provided the Trust's  officers are satisfied that the Fund is receiving
the most favorable price and execution available,  the Manager may also consider
the sale of the Fund's shares as a factor in the selection of  broker-dealers to
execute its portfolio transactions. The placement of portfolio transactions with
broker-dealers  who sell  shares of the Fund is subject to rules  adopted by the
National Association of Securities Dealers, Inc. ("NASD").

         While the  Fund's  general  policy is to seek  first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio  transactions,   weight  may  also  be  given  to  the  ability  of  a
broker-dealer  to furnish  brokerage,  research and statistical  services to the
Fund or to the Manager,  even if the specific  services were not imputed just to
the Fund and may be lawfully and  appropriately  used by the Manager in advising
other clients. The Manager considers such information,  which is in addition to,
and not in lieu of,  the  services  required  to be  performed  by it under  the
Agreement,  to be useful in varying  degrees,  but of  indeterminable  value. In
negotiating any commissions with a broker or evaluating the spread to be paid to
a dealer, the Fund may therefore pay a higher commission or spread than would be
the case if no  weight  were  given  to the  furnishing  of  these  supplemental
services,  provided  that the  amount  of such  commission  or  spread  has been
determined  in good  faith by the  Fund  and the  Manager  to be  reasonable  in
relation to the value of the brokerage and/or research services provided by such
broker-dealer,  which  services  either  produce a direct benefit to the Fund or
assist  the  Manager  in  carrying  out its  responsibilities  to the Fund.  The
standard of  reasonableness  is to be measured in light of the Manager's overall
responsibilities to the Fund.

         Investment decisions for the Funds are made independently from those of
other  client  accounts of the Manager or its  affiliates,  and  suitability  is
always a paramount consideration. Nevertheless, it is possible that at times the
same  securities  will be  acceptable  for the  Fund and for one or more of such
client accounts. The Manager and its personnel may have interests in one or more
of those  client  accounts,  either  through  direct  investment  or  because of
management  fees  based  on  gains  in the  account.  The  Manager  has  adopted
allocation  procedures to ensure the fair  allocation  of securities  and prices
between the Fund and the Manager's  various  other  accounts.  These  procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve  objective  fairness among clients advised by the same portfolio manager
or  portfolio  team.  Where trades  cannot be bunched,  the  procedures  specify
alternatives  designed to ensure that buy and sell  opportunities  are allocated
fairly and that,  over time,  all clients are treated  equitably.  The Manager's
trade allocation  procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
use allocation methodologies that are appropriate to their investment discipline
on client accounts.

         To the extent any of the Manager's client accounts and the Fund seek to
acquire the same security at the same general time  (especially  if the security
is thinly  traded or is a small cap

                                      B-28
<PAGE>

stock),  the Fund may not be able to acquire as large a portion of such security
as it desires,  or it may have to pay a higher price or obtain a lower yield for
such  security.  Similarly,  the Fund may not be able to  obtain as high a price
for, or as large an execution  of, an order to sell any  particular  security at
the same time. If one or more of such client accounts  simultaneously  purchases
or sells the same security  that the Fund is  purchasing or selling,  each day's
transactions in such security  generally will be allocated  between the Fund and
all such client  accounts in a manner  deemed  equitable by the Manager,  taking
into account the respective sizes of the accounts, the amount being purchased or
sold and other factors deemed relevant by the Manager. In many cases, the Fund's
transactions are bunched with the transactions for other client accounts.  It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as the Fund is concerned. In other cases,
however,  it is believed that the ability of the Fund to  participate  in volume
transactions may produce better executions for the Fund.

         The Manager's sell  discipline for the Fund's  investment in issuers is
based on the premise of a long-term investment horizon;  however, sudden changes
in valuation  levels  arising from,  for example,  new  macroeconomic  policies,
political  developments,  and industry  conditions could change the assumed time
horizon. Liquidity, volatility, and overall risk of a position are other factors
considered by the Manager in determining the appropriate investment horizon. The
Fund will limit investments in illiquid securities to 15% of net assets.

         Sell decisions at the country level are dependent on the results of the
Manager's  asset  allocation  model.  Some  countries  impose   restrictions  on
repatriation  of capital  and/or  dividends  which would  lengthen the Manager's
assumed  time  horizon  in those  countries.  In  addition,  the  rapid  pace of
privatization  and initial public offerings creates a flood of new opportunities
which must continually be assessed against current holdings.

         At the company  level,  sell  decisions  are  influenced by a number of
factors including  current stock valuation  relative to the estimated fair value
range,  or a high P/E  relative  to  expected  growth.  Negative  changes in the
relevant industry sector, or a reduction in international  competitiveness and a
declining financial flexibility may also signal a sell.
   
         The Fund does not effect  securities  transactions  through  brokers in
accordance with any formula, nor does it effect securities  transactions through
such brokers  solely for selling shares of the Fund.  However,  as stated above,
Montgomery  Securities  may act as one of the Fund's brokers in the purchase and
sale  of  portfolio   securities,   and  other  brokers  who  execute  brokerage
transactions as described above may from time to time effect purchases of shares
of the Fund for their customers.
    
         Depending on the Manager's view of market  conditions,  the Fund may or
may not purchase  securities  with the  expectation of holding them to maturity,
although its general  policy is to hold  securities  to maturity.  The Fund may,
however, sell securities prior to maturity to meet redemptions or as a result of
a revised management evaluation of the issuer.

                                      B-29
<PAGE>

                 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

         The Trust reserves the right in its sole  discretion to (i) suspend the
continued  offering of the Fund's  shares,  and (ii) reject  purchase  orders in
whole or in part when in the  judgment  of the Manager or the  Distributor  such
suspension or rejection is in the best interest of the Fund.

         When in the judgment of the Manager it is in the best  interests of the
Fund, an investor may purchase  shares of the Fund by tendering  payment in kind
in the  form of  securities,  provided  that any such  tendered  securities  are
readily  marketable,  their acquisition is consistent with the Fund's investment
objective and policies,  and the tendered securities are otherwise acceptable to
the Fund's  Manager.  For the  purposes  of sales of shares of the Fund for such
securities, the tendered securities shall be valued at the identical time and in
the identical  manner that the  portfolio  securities of the Fund are valued for
the  purpose  of  calculating  the net  asset  value  of the  Fund's  shares.  A
shareholder who purchases shares of the Fund by tendering payment for the shares
in the form of other  securities  may be required to recognize  gain or loss for
income tax purposes on the difference, if any, between the adjusted basis of the
securities  tendered  to the Fund and the  purchase  price of the Fund's  shares
acquired by the shareholder.

         Payments to shareholders for shares of the Fund redeemed  directly from
the Fund will be made as promptly as possible but no later than three days after
receipt by the Transfer  Agent of the written  request in proper form,  with the
appropriate documentation as stated in the Prospectus,  except that the Fund may
suspend  the right of  redemption  or  postpone  the date of payment  during any
period when (a) trading on the New York Stock Exchange ("NYSE") is restricted as
determined  by the  SEC or the  NYSE is  closed  for  other  than  weekends  and
holidays;  (b) an emergency exists as determined by the SEC (upon application by
the Fund  pursuant  to  Section  22(e) of the  Investment  Company  Act)  making
disposal of  portfolio  securities  or  valuation  of net assets of the Fund not
reasonably  practicable;  or (c) for such other period as the SEC may permit for
the protection of the Fund's shareholders.

         The Fund intends to pay cash (U.S.  dollars)  for all shares  redeemed,
but, as described  below or under abnormal  conditions that make payment in cash
unwise,  the Fund may make payment  partly in its  portfolio  securities  with a
current amortized cost or market value, as appropriate,  equal to the redemption
price. Although the Fund does not anticipate that it will normally make any part
of a redemption  payment in  securities,  if such payment were made, an investor
may incur  brokerage  costs in converting such securities to cash. The Trust has
elected to be governed  by the  provisions  of Rule 18f-1  under the  Investment
Company Act, which require that the Fund pay in cash all requests for redemption
by any  shareholder  of record  limited  in amount,  however,  during any 90-day
period to the lesser of $250,000 or 1% of the value of the Trust's net assets at
the beginning of such period.

         When in the judgment of the Manager it is in the best  interests of the
Fund, an investor may redeem shares of the Fund and receive  securities from the
Fund's portfolio  selected by the Manager in its sole discretion,  provided that
such  redemption  is not  expected  to affect the  Fund's  ability to attain its
investment  objective or otherwise  materially  affect its  operations.  For the
purposes of redemptions in kind, the redeemed  securities shall be valued at the
identical time and

                                      B-30
<PAGE>

in the  identical  manner  that the other  portfolio  securities  are valued for
purposes of calculating the net asset value of the Fund's shares.

         The value of shares on  redemption  or  repurchase  may be more or less
than the  investor's  cost,  depending  upon  the  market  value  of the  Fund's
portfolio securities at the time of redemption or repurchase.

         Retirement Plans.  Shares of the Fund are available for purchase by any
retirement  plan,   including  Keogh  plans,  401(k)  plans,  403(b)  plans  and
individual retirement accounts ("IRAs").

         For individuals who wish to purchase shares of the Fund through an IRA,
there is available through the Fund a prototype  individual  retirement  account
and custody  agreement.  The custody agreement  provides that DST Systems,  Inc.
will act as custodian under the plan, and will furnish custodial services for an
annual  maintenance  fee per  participating  account of $10.  (These fees are in
addition to the normal  custodian  charges paid by the Fund and will be deducted
automatically from each Participant's  account.) For further details,  including
the right to appoint a successor custodian,  see the plan and custody agreements
and the IRA Disclosure Statement as provided by the Fund. An IRA that invests in
shares of the Fund may also be used by  employers  who have adopted a Simplified
Employee Pension Plan.  Individuals or employers who wish to invest in shares of
the Fund under a  custodianship  with  another  bank or trust  company must make
individual arrangements with such institution.
   
         The IRA  Disclosure  Statement  available  from the Fund  contains more
information on the amount investors may contribute and the  deductibility of IRA
contributions. In summary, for tax years prior to January 1, 1998, an individual
may  make  deductible  contributions  to  the  IRA  of  up  to  100%  of  earned
compensation, not to exceed $2,000 annually (or $4,000 to two IRAs if there is a
non-working  spouse). An IRA may be established whether or not the amount of the
contribution is deductible.  Generally,  a full deduction for federal income tax
purposes  will only be allowed to taxpayers  who meet one of the  following  two
additional tests:
    
         (A) the individual and the  individual's  spouse are each not an active
participant in an employer's qualified retirement plan, or

         (B) the  individual's  adjusted gross income (with some  modifications)
before the IRA  deduction  is (i)  $40,000 or less for  married  couples  filing
jointly, or (ii) $25,000 or less for single  individuals.  The maximum deduction
is reduced for a married  couple filing  jointly with a combined  adjusted gross
income (before the IRA deduction) between $40,000 and $50,000,  and for a single
individual  with an adjusted  gross income  (before the IRA  deduction)  between
$25,000 and $35,000.

         It is  advisable  for  an  investor  considering  the  funding  of  any
retirement plan to consult with an attorney or to obtain advice from a competent
retirement plan  consultant  with respect to the  requirements of such plans and
the tax aspects thereof.

                                      B-31
<PAGE>

                        DETERMINATION OF NET ASSET VALUE

         The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which includes accrued but  undistributed  income;  the resulting net assets are
divided  by the  number  of shares  of the Fund  outstanding  at the time of the
valuation  and the result  (adjusted to the nearest cent) is the net asset value
per share.

         As noted in the  Prospectus,  the net asset value of shares of the Fund
generally  will be determined at least once daily as of 4:00 p.m., New York City
time, on each day the NYSE is open for trading. It is expected that the Exchange
will be closed on Saturdays and Sundays and on New Year's Day,  Presidents' Day,
Good Friday,  Memorial Day,  Independence  Day, Labor Day,  Thanksgiving Day and
Christmas.  The Fund may, but does not expect to,  determine the net asset value
of its  shares  on any day when the  NYSE is not  open for  trading  if there is
sufficient trading in its portfolio securities on such days to materially affect
the per share net asset value.

         Generally,   trading  in  and   valuation  of  foreign   securities  is
substantially  completed  each day at  various  times  prior to the close of the
NYSE. In addition,  trading in and valuation of foreign  securities may not take
place on every day in which the NYSE is open for trading.  Furthermore,  trading
takes place in various foreign markets on days in which the NYSE is not open for
trading  and  on  which  the  Fund's  net  asset  values  are  not   calculated.
Occasionally,  events affecting the values of such securities in U.S. dollars on
a day on which the Fund  calculates  its net asset  value may occur  between the
times when such  securities  are valued and the close of the NYSE which will not
be  reflected  in the  computation  of the  Fund's  net asset  value  unless the
Trustees or their  delegates deem that such events would  materially  affect the
net asset value, in which case an adjustment would be made.

         Generally, the Fund's investments are valued at market value or, in the
absence  of a market  value,  at fair value as  determined  in good faith by the
Manager and the Trust's Pricing Committee pursuant to procedures  approved by or
under the direction of the Board of Trustees.

         The Fund's securities,  including ADRs, EDRs and GDRs, which are traded
on  securities  exchanges  are valued at the last sale price on the  exchange on
which such  securities  are  traded,  as of the close of business on the day the
securities are being valued or, lacking any reported  sales, at the mean between
the last available bid and asked price.  Securities that are traded on more than
one  exchange,  are valued on the exchange  determined  by the Manager to be the
primary market.  Securities traded in the over-the-counter  market are valued at
the mean  between  the last  available  bid and asked price prior to the time of
valuation.  Securities  and assets for which market  quotations  are not readily
available (including  restricted  securities which are subject to limitations as
to their sale) are valued at fair value as  determined in good faith by or under
the direction of the Board of Trustees.

         Short-term debt obligations  with remaining  maturities in excess of 60
days are  valued at  current  market  prices,  as  discussed  above.  Short-term
securities  with 60 days or less  remaining to maturity are,  unless  conditions
indicate  otherwise,  amortized  to maturity  based on their cost to

                                      B-32
<PAGE>

the Fund if acquired  within 60 days of maturity or, if already held by the Fund
on the 60th day, based on the value determined on the 61st day.

         Corporate debt securities, mortgage-related securities and asset-backed
securities  held by the Fund are valued on the basis of  valuations  provided by
dealers in those instruments or by an independent  pricing service,  approved by
the Board of Trustees.  Any such pricing service, in determining value, will use
information  with  respect  to  transactions  in the  securities  being  valued,
quotations from dealers, market transactions in comparable securities,  analyses
and  evaluations  of  various  relationships  between  securities  and  yield to
maturity information.

         An option that is written by the Fund is  generally  valued at the last
sale price or, in the absence of the last sale price,  the last offer price.  An
option that is purchased by the Fund is generally  valued at the last sale price
or, in the  absence of the last sale price,  the last bid price.  The value of a
futures  contract  equals the  unrealized  gain or loss on the contract  that is
determined  by marking the contract to the current  settlement  price for a like
contract  on the  valuation  date  of the  futures  contract  if the  securities
underlying the futures contract experience  significant price fluctuations after
the  determination  of the settlement  price.  When a settlement price cannot be
used,  futures contracts will be valued at their fair market value as determined
by or under the direction of the Trust's Board of Trustees.

         If any  securities  held by the Fund are  restricted as to resale or do
not have  readily  available  market  quotations,  the  Manager  and the Trust's
Pricing Committee determine their fair value,  following  procedures approved by
the Board of Trustees.  The Trustees  periodically  review such  valuations  and
valuation procedures.  The fair value of such securities is generally determined
as the amount which the Fund could reasonably  expect to realize from an orderly
disposition of such securities  over a reasonable  period of time. The valuation
procedures  applied  in any  specific  instance  are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other  fundamental  analytical data relating to the investment and to
the nature of the  restrictions on disposition of the securities  (including any
registration  expenses that might be borne by the Fund in  connection  with such
disposition).  In addition, specific factors are also generally considered, such
as the cost of the investment,  the market value of any unrestricted  securities
of the same class (both at the time of purchase  and at the time of  valuation),
the size of the holding,  the prices of any recent  transactions  or offers with
respect to such  securities and any available  analysts'  reports  regarding the
issuer.

         Any  assets or  liabilities  initially  expressed  in terms of  foreign
currencies are translated  into U.S.  dollars at the official  exchange rate or,
alternatively,  at the  mean  of the  current  bid  and  asked  prices  of  such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign  exchange market or on the basis of a pricing service
that takes into account the quotes  provided by a number of such major banks. If
neither of these  alternatives  is available or both are deemed not to provide a
suitable  methodology for converting a foreign currency into U.S.  dollars,  the
Board of  Trustees  in good  faith will  establish  a  conversion  rate for such
currency.

         All other  assets of the Fund are valued in such manner as the Board of
Trustees in good faith deems appropriate to reflect their fair value.

                                      B-33
<PAGE>

                              PRINCIPAL UNDERWRITER

         The  Distributor  acts  as  the  Fund's  principal   underwriter  in  a
continuous  public  offering of the Fund's shares.  The Distributor is currently
registered as a broker-dealer with the SEC and in all 50 states, and is a member
of most of the principal securities exchanges in the U.S. and is a member of the
NASD.  The  Underwriting  Agreement  between the Fund and the  Distributor is in
effect for two years from when the Fund commences  public  offerings,  and shall
continue in effect  thereafter for periods not exceeding one year if approved at
least  annually  by (i) the  Board  of  Trustees  of the  Trust or the vote of a
majority of the outstanding securities of the Fund (as defined in the Investment
Company Act), and (ii) a majority of the Trustees who are not interested persons
of any such party, in each case by a vote cast in person at a meeting called for
the  purpose  of voting on such  approval.  The  Underwriting  Agreement  may be
terminated  without penalty by the parties thereto upon 60 days' written notice,
and is automatically terminated in the event of its assignment as defined in the
Investment Company Act. There are no underwriting  commissions paid with respect
to sales of the Fund's shares.


                             PERFORMANCE INFORMATION

         As noted in the  Prospectus,  the Fund may,  from  time to time,  quote
various  performance  figures in advertisements  and investor  communications to
illustrate  its  past  performance.   Performance  figures  will  be  calculated
separately for Class R, Class P and Class L shares.

         Average  Annual  Total  Return.  Total  return  may be  stated  for any
relevant  period  as  specified  in  the  advertisement  or  communication.  Any
statements of total return for the Fund will be  accompanied  by  information on
the Fund's  average annual  compounded  rate of return over the most recent four
calendar  quarters and the period from the Fund's  inception of operations.  The
Fund may also  advertise  aggregate  and average total return  information  over
different  periods of time. The Fund's "average annual total return" figures are
computed according to a formula prescribed by the SEC, expressed as follows:


                                                   P(1 + T)n=ERV

Where:            P        =       a hypothetical initial payment of $1,000.
                  T        =       average annual total return.
                  n        =       number of years.
                  ERV      =       Ending  Redeemable  Value  of a  hypothetical
                                   $1,000  investment made at the beginning of a
                                   1-, 5- or  10-year  period at the end of each
                                   respective  period  (or  fractional   portion
                                   thereof),   assuming   reinvestment   of  all
                                   dividends  and   distributions  and  complete
                                   redemption of the hypothetical  investment at
                                   the end of the measuring period.

         Aggregate  Total Return.  The Fund's  "aggregate  total return" figures
represent  the  cumulative  change in the value of an investment in the Fund for
the specified period and are computed by the following formula:

                                      B-34
<PAGE>

                                     ERV - P
                                     -------
                                        P

Where:            P        =       a hypothetical initial payment of $10,000.

                  ERV      =       Ending  Redeemable  Value  of a  hypothetical
                                   $10,000 investment made at the beginning of a
                                   l-, 5- or 10-year  period at the end of a l-,
                                   5- or 10-year period (or  fractional  portion
                                   thereof),   assuming   reinvestment   of  all
                                   dividends  and   distributions  and  complete
                                   redemption of the hypothetical  investment at
                                   the end of the measuring period.

         The  Fund's  performance  will vary from  time to time  depending  upon
market conditions,  the composition of its portfolio and its operating expenses.
The total return  information also assumes cash investments and redemptions and,
therefore,  includes the applicable expense  reimbursement fees discussed in the
Prospectus.   Consequently,  any  given  performance  quotation  should  not  be
considered  representative of the Fund's performance for any specified period in
the future. In addition,  because performance will fluctuate, it may not provide
a basis for  comparing an  investment  in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time.  Investors
comparing the Fund's performance with that of other investment  companies should
give  consideration  to the quality and  maturity of the  respective  investment
companies' portfolio securities.

         Comparisons. To help investors better evaluate how an investment in the
Fund  might  satisfy  their  investment  objectives,  advertisements  and  other
materials  regarding  the  Fund  may  discuss  various  financial  publications.
Materials may also compare  performance (as calculated  above) to performance as
reported  by  other   investments,   indices,   and   averages.   The  following
publications, indices and averages may be used:

         a)  Standard & Poor's 500  Composite  Stock  Index,  one or more of the
Morgan  Stanley  Capital   International   Indices,  and  one  or  more  of  the
International Finance Corporation Indices.

         b) Bank Rate Monitor -- A weekly publication which reports various bank
investments, such as certificate of deposit rates, average savings account rates
and average loan rates.

         c) Lipper - Mutual Fund  Performance  Analysis  and Lipper Fixed Income
Fund  Performance  Analysis -- A ranking  service that measures total return and
average current yield for the mutual fund industry and ranks  individual  mutual
fund  performance  over  specified  time periods  assuming  reinvestment  of all
distributions, exclusive of any applicable sales charges.

         d) Salomon Brothers Bond Market Roundup -- A weekly  publication  which
reviews  yield  spread  changes in the major  sectors  of the money,  government
agency, futures, options, 

                                      B-35
<PAGE>

mortgage, corporate, Yankee, Eurodollar, municipal, and preferred stock markets.
This  publication  also  summarizes  changes in banking  statistics  and reserve
aggregates.

         In addition,  one or more portfolio  managers or other employees of the
Manager may be interviewed by print media, such as by the Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.

         In assessing such  comparisons of performance,  an investor should keep
in mind that the  composition  of the  investments  in the reported  indices and
averages  is not  identical  to the Fund's  portfolios,  that the  averages  are
generally  unmanaged,  and that the items included in the  calculations  of such
averages may not be identical to the formulae  used by the Fund to calculate its
figures.

         The Fund may also  publish  its  relative  rankings  as  determined  by
independent mutual fund ranking services like Lipper Analytical  Services,  Inc.
and Morningstar, Inc.

         Investors  should  note that the  investment  results  of the Fund will
fluctuate  over time,  and any  presentation  of the Fund's total return for any
period should not be considered as a  representation  of what an investment  may
earn or what an investor's total return may be in any future period.

         Reasons to Invest in the Fund.  From time to time the Fund may  publish
or distribute  information  and reasons  supporting the Manager's  belief that a
particular  Fund may be  appropriate  for  investors at a particular  time.  The
information will generally be based on internally  generated estimates resulting
from the Manager's research activities and projections from independent sources.
These  sources may  include,  but are not limited to,  Barings,  The WEFA Group,
Consensus Estimate, Datastream, Micropal, I/B/E/S Consensus Forecast, Worldscope
and  Reuters  as well as both  local  and  international  brokerage  firms.  For
example,   the  Fund  may  suggest  that  certain  countries  or  areas  may  be
particularly   appealing  to  investors  because  of  interest  rate  movements,
increasing exports and/or economic growth.
   
         Research.   Largely  inspired  by  its  prior   affiliate,   Montgomery
Securities  -- which has  established a tradition  for  specialized  research in
emerging  growth  companies -- the Manager has  developed  its own  tradition of
intensive research. The Manager has made intensive research one of the important
characteristics of the Montgomery Funds style.
    
         The portfolio managers for Montgomery's  global and international Funds
work extensively on developing an in-depth  understanding of particular  foreign
markets and particular companies. And they very often discover that they are the
first  analysts from the United States to meet with  representatives  of foreign
companies, especially those in emerging markets nations.

         Extensive   research  into   companies  that  are  not  well  known  --
discovering new  opportunities for investment -- is a theme that may be used for
the Fund.

                                      B-36
<PAGE>

         In-depth  research,  however,  goes beyond gaining an  understanding of
unknown  opportunities.  The portfolio  analysts have also developed new ways of
gaining information about well-known parts of the domestic market.


                               GENERAL INFORMATION

         Investors in the Fund will be informed of the Fund's  progress  through
periodic  reports.  Financial  statements  will  be  submitted  to  shareholders
semi-annually,  at least one of which will be  certified by  independent  public
accountants.  All expenses incurred in connection with the Trust's  organization
and the registration of shares of the Fund as one of the three initial series of
the Trust  have been  assumed  pro rata by each  series;  expenses  incurred  in
connection with the  establishment and registration of shares of any other funds
constituting a separate  series of the Trust will be assumed by each  respective
series.   The  expenses  incurred  in  connection  with  the  establishment  and
registration  of shares of the Fund as a separate  series of the Trust have been
assumed  by the  Fund  and are  being  amortized  over a  period  of five  years
commencing with the date of the Fund's inception. The Manager has agreed, to the
extent necessary,  to advance the  organizational  expenses incurred by the Fund
and will be  reimbursed  for such  expenses  after  commencement  of the  Fund's
operations.  Investors  purchasing shares of the Fund bear such expenses only as
they are amortized daily against the Fund's investment income.

         As noted above, Morgan Stanley and Trust Company (the "Custodian") acts
as custodian of the  securities and other assets of the Fund. The Custodian does
not participate in decisions  relating to the purchase and sale of securities by
the Fund.

         Investors Fiduciary Trust Company,  127 West 10th Street,  Kansas City,
Missouri 64105,  is the Fund's Master Transfer Agent.  The Master Transfer Agent
has delegated  certain  transfer agent functions to DST Systems,  Inc., P.O. Box
419073,  Kansas  City,  Missouri  64141-6073,  the Fund's  Transfer and Dividend
Disbursing Agent.

         [______________________],  50 Fremont Street, San Francisco, California
94105, are the independent auditors for the Fund.

         The validity of shares offered hereby will be passed on Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, California 94104.

         Among the Trustees'  powers  enumerated in the  Declaration of Trust is
the authority to terminate the Trust or any series of the Trust,  or to merge or
consolidate the Trust or one or more of its series with another trust or company
without the need to seek shareholder approval of any such action.

         The Trust is registered with the Securities and Exchange  Commission as
a  non-diversified  management  investment  company,  although  the  Fund  is  a
diversified   series  of  the  Trust.  Such  a  registration  does  not  involve
supervision  of the  management or policies of the Fund. The Prospectus and this
Statement of Additional Information omit certain of the information contained in
the  Registration  Statement  filed  with the SEC.  Copies  of the  Registration
Statement may be obtained from the SEC upon payment of the prescribed fee.

                                      B-37
<PAGE>

                              FINANCIAL STATEMENTS

The Fund has recently commenced operations and, therefore,  has not yet prepared
financial statements for public distribution.

                                      B-38
<PAGE>

                                    APPENDIX

         Description  ratings  for  Standard  & Poor's  Ratings  Group  ("S&P");
Moody's Investors Service,  Inc.,  ("Moody's"),  Fitch Investors  Service,  L.P.
("Fitch") and Duff & Phelps Credit Rating Co. ("Duff & Phelps").

1.       Standard & Poor's Rating Group

         A.       Bond Rating

                                       AAA

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

                                       AA

        Bonds rated AA have a very strong  capacity  to pay  interest  and repay
principal and differ from the highest rated issues only in small degree.

                                        A

        Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances   and  economic   conditions  than  obligations  in  higher  rated
categories.

                                       BBB

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

                                       BB

        Bonds rated BB have less near-term  vulnerability  to default than other
speculative  grade  debt.  However,  they face major  ongoing  uncertainties  or
exposure to adverse business,  financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.

                                      B-39

<PAGE>

                                        B

        Bonds rated B have a greater vulnerability to default but presently have
the  capacity  to meet  interest  payments  and  principal  repayments.  Adverse
business,  financial  or economic  conditions  would likely  impair  capacity or
willingness to pay interest and repay principal.

                                       CCC

        Bonds rated CCC have a current identifiable vulnerability to default and
are dependent upon favorable business, financial and economic conditions to meet
timely payments of interest and repayment of principal.  In the event of adverse
business,  financial  or  economic  conditions,  they are not likely to have the
capacity to pay interest and repay principal.

                                       CC

        The rating CC is typically  applied to debt  subordinated to senior debt
which is assigned an actual or implied CCC rating.

                                        C

        The rating C is typically  applied to debt  subordinated  to senior debt
which is assigned an actual or implied CCC- debt rating.

                                        D

        Bonds rated D are in default,  and payment of interest and/or  repayment
of principal is in arrears.

        S&P's letter  ratings may be modified by the addition of a plus (+) or a
minus (-) sign  designation,  which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.

        B.        Commercial Paper Rating

        An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original  maturity of no more than 365 days.
Issues  assigned an A rating are  regarded as having the  greatest  capacity for
timely payment. Issues in this category are delineated with the numbers 1, 2 and
3 to indicate the relative degree of safety.

                                       A-1

         This  designation  indicates that the degree of safety regarding timely
payment is either  overwhelming  or very  strong.  Those  issues  determined  to
possess overwhelming safety characteristics are denoted with a plus designation.

                                      B-40
<PAGE>

                                       A-2

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

                                       A-3

        Issues carrying this designation have a satisfactory capacity for timely
payment.  They are, however,  somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.

                                        B

        Issues carrying this designation are regarded as having only speculative
capacity for timely payment.

                                        C

        This  designation  is assigned to short-term  obligations  with doubtful
capacity for payment.

                                        D

        Issues carrying this designation are in default, and payment of interest
and/or repayment of principal is in arrears.

2.         Moody's Investors Service, Inc.

        A.        Bond Rating
                                       Aaa

         Bonds  which are rated Aaa are judged to be of the best  quality.  They
carry the smallest  degree of  investment  risk and generally are 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  which  are  rated  Aa are  judged  to be of high  quality  by all
standards. Together with the Aaa group they comprise what generally are 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.

                                      B-41
<PAGE>

                                        A

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

                                       Baa

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

                                       Ba

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

                                        B

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

                                       Caa

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

                                       Ca

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

                                        C

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

        Moody's  applies the  numerical  modifiers  1, 2 and 3 to show  relative
standing within the major rating  categories,  except in the Aaa category and in
the  categories  below B. The modifier 1

                                      B-42
<PAGE>

indicates a ranking for the security in the higher end of a rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of a rating category.

        B.        Commercial Paper Rating

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

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

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

        Issuers (or related supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.

3.         Fitch Investors Service, L.P.

        A.        Bond Rating

        The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration   special  features  of  the  issue,  its  relationship  to  other
obligations  of the  issuer,  the  current  financial  condition  and  operative
performance  of the issuer and of any  guarantor,  as well as the  political and
economic  environment that might affect the issuer's future  financial  strength
and credit quality.

                                       AAA

        Bonds rated AAA are 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.

                                      B-43
<PAGE>

                                       AA

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

                                        A

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

                                       BBB

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

                                       BB

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

                                        B

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

                                       CCC

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

                                       CC

                                      B-44
<PAGE>

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


                                        C

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

                                  DDD, DD and D

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

         Plus (+) and minus (-) signs are used with a rating  symbol to indicate
the relative  position of a credit  within the rating  category.  Plus and minus
signs, however, are not used in the AAA category covering 12-36 months.

         B.       Short-Term Rating

         Fitch's  short-term  ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit,  medium-term notes, and municipal and investment
notes.

         Although  the  credit  analysis  is  similar  to  Fitch's  bond  rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity  necessary to meet the issuer's  obligations  in a timely
manner.

                                      F-l+

         Exceptionally  Strong Credit  Quality.  Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

                                       F-1

         Very Strong Credit  Quality.  Issues  assigned  this rating  reflect an
assurance of timely payment only slightly less in degree than issues rated F1+.

                                       F-2

         Good Credit  Quality.  Issues  carrying this rating have a satisfactory
degree of  assurance  for  timely  payments,  but the margin of safety is not as
great as the F-l+ and F-1 categories.

                                      B-45
<PAGE>


                                       F-3

         Fair Credit Quality.  Issues assigned this rating have  characteristics
  suggesting  that the  degree of  assurance  for timely  payment  is  adequate;
  however,  near-term  adverse changes could cause these  securities to be rated
  below investment grade.

                                       F-S

         Weak Credit Quality.  Issues assigned this rating have  characteristics
  suggesting a minimal degree of assurance for timely payment and are vulnerable
  to near-term adverse changes in financial and economic conditions.

                                        D

         Default.  Issues assigned this rating are in actual or imminent payment
default.

4.        Duff & Phelps Credit Rating Co.

         A.       Bond Rating

                                       AAA

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

                                       AA

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

                                        A

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

                                       BBB

        Bonds rated BBB are considered to have below average  protection factors
but  still  considered   sufficient  for  prudent   investment.   There  may  be
considerable  variability  in risk for bonds in this  category  during  economic
cycles.

                                       BB

        Bonds  rated BB are below  investment  grade  but are  deemed by Duff as
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to

                                      B-46
<PAGE>

industry  conditions or company  fortunes.  Overall  quality may move up or down
frequently within the category.

                                        B

        Bonds  rated B are  below  investment  grade and  possess  the risk that
obligations  will  not  be met  when  due.  Financial  protection  factors  will
fluctuate  widely  according  to economic  cycles,  industry  conditions  and/or
company fortunes. Potential exists for frequent changes in quality rating within
this category or into a higher or lower quality rating grade.

                                       CCC

        Bonds rated CCC are well below investment grade  securities.  Such bonds
may be in  default  or have  considerable  uncertainty  as to timely  payment of
interest,  preferred  dividends and/or principal.  Protection factors are narrow
and risk can be substantial  with  unfavorable  economic or industry  conditions
and/or with unfavorable company developments.

                                       DD

        Defaulted  debt  obligations.   Issuer  has  failed  to  meet  scheduled
principal and/or interest payments.

        Plus (+) and minus (-) signs are used with a rating symbol  (except AAA)
to indicate the relative position of a credit within the rating category.

B.       Commercial Paper Rating

         The rating Duff-1I is the highest  commercial  paper rating assigned by
Duff.  Paper rated  Duff-1 is regarded as having very high  certainty  of timely
payment with  excellent  liquidity  factors  which are  supported by ample asset
protection.  Risk  factors are minor.  Paper rated  Duff-2 is regarded as having
good  certainty  of timely  payment,  good  access to capital  markets and sound
liquidity factors and company fundamentals.  Risk factors are small. Paper rated
Duff 3 is  regarded  as  having  satisfactory  liquidity  and  other  protection
factors.  Risk factors are larger and subject to more  variation.  Nevertheless,
timely payment is expected. Paper rated Duff 4 is regarded as having speculative
investment  characteristics.  Liquidity  is not  sufficient  to  insure  against
disruption in debt service.  operating  factors and market access may be subject
to a high degree of variation.  Paper rated Duff 5 is in default. The issuer has
failed to meet scheduled principal and/or interest payments.

                                      B-47
<PAGE>

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

                                     PART C

                                OTHER INFORMATION

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

<PAGE>

                              THE MONTGOMERY FUNDS
                                 --------------
                                    FORM N-1A
                                 --------------
                                     PART C
                                 --------------



Item 24.  Financial Statements and Exhibits
          (a)       Financial Statements:
   
                    (1)      Portfolio   Investments   as  of  June  30,   1997;
                             Statements of Assets and Liabilities as of June 30,
                             1997;  Statements of Operations  For the Year Ended
                             June 30,  1997;  Statement  of Cash  Flows for year
                             ended June 30, 1997;  Statements  of Changes in Net
                             Assets for the Year Ended June 30, 1997;  Financial
                             Highlights for a Fund share outstanding  throughout
                             each year,  including  the year ended June 30, 1997
                             for Montgomery  Growth Fund,  Montgomery  Micro Cap
                             Fund,  Montgomery Small Cap Fund,  Montgomery Small
                             Cap  Opportunities  Fund,  Montgomery Equity Income
                             Fund,  Montgomery Asset Allocation Fund, Montgomery
                             Select  50 Fund,  Montgomery  Global  Opportunities
                             Fund,   Montgomery  Global   Communications   Fund,
                             Montgomery International Small Cap Fund, Montgomery
                             International  Growth  Fund,   Montgomery  Emerging
                             Markets Fund,  Montgomery Short Duration Government
                             Bond  Fund,  Montgomery  Government  Reserve  Fund,
                             Montgomery  California  Tax-Free  Intermediate Bond
                             Fund and Montgomery California Tax-Free Money Fund;
                             Notes   to   Financial   Statements;    Independent
                             Auditors' Report on the foregoing, all incorporated
                             by reference to the Annual  Report to  Shareholders
                             of the above-named funds.
    

          (b)       Exhibits:

          (1)(A)               Agreement   and    Declaration    of   Trust   is
                               incorporated  by  reference  to the  Registrant's
                               Registration   Statement   as   filed   with  the
                               Commission   on  May  16,   1990   ("Registration
                               Statement").

          (1)(B) Amendment to Agreement and Declaration of Trust is incorporated
                 by reference to
                               Post-Effective    Amendment   No.   17   to   the
                               Registration   Statement   as   filed   with  the
                               Commission on December 30, 1993  ("Post-Effective
                               Amendment No. 17").

          (1)(C) Amended and Restated  Agreement  and  Declaration  of Trust is
                 incorporated by reference to
                               Post-Effective    Amendment   No.   28   to   the
                               Registration   Statement   as   filed   with  the
                               Commission on September 13, 1995 ("Post-Effective
                               Amendment No. 28").

          (2)    By-Laws  are  incorporated  by  reference  to the  Registration
                 Statement.

          (3)    Voting Trust Agreement - Not applicable.

          (4)    Specimen Share Certificate - Not applicable.
   
          (5)    Form of  Investment  Management  Agreement is  incorporated  by
                 reference to Post-Effective
                               Amendment No. 52 to the Registration Statement as
                               filed  with  the  Commission  on  July  31,  1997
                               ("Post-Effective Amendment No. 52")
    

<PAGE>
   
          (6)(A) Form of Underwriting  Agreement is incorporated by reference to
                              Post-Effective Amendment No. 52.
    
          (6)(B) Form of Selling Group Agreement is incorporated by reference to
                              Pre-Effective Amendment No. 1.

          (7)    Benefit Plan(s) - Not applicable.

          (8)    Custody    Agreement   is    incorporated   by   reference   to
                              Post-Effective Amendment No. 24.
   
          (9)(A)    Form of Administrative Services Agreement is incorporated by
                              reference to Post-Effective Amendment No. 52.
    

          (9)(B) Form of Multiple  Class Plan is  incorporated  by  reference to
                              Post-Effective Amendment No. 28.

          (9)(C) Form of Shareholder  Services Plan is incorporated by reference
                              to Post-Effective Amendment No. 28.

          (10)   Consent  and  Opinion of Counsel  as to  legality  of shares is
                              incorporated   by   reference   to   Pre-Effective
                              Amendment No. 1.
   
          (11)   Independent Auditors' Consent - Not applicable
    
          (12)   Financial Statements omitted from Item 23 - Not applicable.

          (13)   Letter of  Understanding  re: Initial Shares is incorporated by
                              reference to Pre-Effective Amendment No. 1.

          (14)   Model  Retirement Plan Documents are  incorporated by reference
                              to   Post-Effective   Amendmen   No.   2  to   the
                              Registration   Statement   as   filed   with   the
                              Commission  on  March  4,  1991   ("Post-Effective
                              Amendment No. 2").

          (15)   Form of Share Marketing Plan  (Rule 12b-1 Plan) is incorporated
                              by reference to Post-Effective Amendment No. 52.

          (16)(A)  Performance  Computation for Montgomery Short Government Bond
                              Fund   is    incorporated    by    reference    to
                              Post-Effective Amendment No. 13.

          (16)(B)  Performance  Computation  for Montgomery  Government  Reserve
                              Fund   is    incorporated    by    reference    to
                              Post-Effective Amendment No. 12.

          (16)(C)  Performance  Computation for Montgomery  California  Tax-Free
                              Intermediate   Bond   Fund  is   incorporated   by
                              reference to Post-Effective Amendment No. 17.

          (16)(D)  Performance Computation for the other series of Registrant is
                              incorporated   by  reference   to   Post-Effective
                              Amendment No. 2.

          (27)   Financial  Data Schedule is  incorporated  by reference to Form
                              N-SAR  filed for the  period  ended  December  31,
                              1996.

Item 25.  Persons Controlled by or Under Common Control with Registrant.
   
         Montgomery Asset  Management,  LLC, a Delaware limited company,  is the
manager of each series of the Registrant, of The Montgomery Funds II, a Delaware
business  trust,  and of The  Montgomery  Funds III, a Delaware  business  trust
Montgomery  Asset  Management,  LLC is a subsidiary of  Commerzbank  AG based in
Frankfurt. The
    

                                      C-2
<PAGE>

Registrant,  The Montgomery  Funds II and The Montgomery Funds III are deemed to
be under the common control of each of those two entities.

Item 26.  Number of Holders of Securities

                                                       Number of Record Holders
   
Title of Class                                            as August 29, 1997
- --------------                                            ------------------
Shares of Beneficial
Interest, $0.01 par value
- -------------------------
Montgomery Small Cap Fund (Class R)                                    6,305

Montgomery Growth Fund (Class R)                                      56,140

Montgomery Emerging Markets                                           48,044
  Fund  (Class R)

Montgomery International Small Cap Fund (Class R)                      2,095

Montgomery Global Opportunities Fund (Class R)                         1,472

Montgomery Global Communications Fund (Class R)                       12,16

Montgomery Equity Income Fund (Class R)                                1,70

Montgomery Short Duration Government Bond Fund                         1,150
  (Class R

Montgomery California Tax-Free                                           201
  Intermediate Bond Fund (Class R

Montgomery Government Reserve Fund (Class R)                          11,050

Montgomery California Tax-Free                                         1,594
  Money Fund (Class R)

Montgomery Micro Cap Fund (Class R)                                    1,059

Montgomery Select 50 Fund (Class R)                                    9,359

Montgomery Small Cap Opportunities Fund (Class R)                     15,905

Montgomery Federal Tax-Free Money Fund (Class R)                       1,046
    
Montgomery Technology Fund                                                 0
   
Montgomery Emerging Asia Fund                                          3,151

Montgomery Global Asset Allocation Fund                                  334

Montgomery Total Return Bond Fund                                         67

Montgomery Latin America Fund                                            859
    

                                      C-3
<PAGE>

Item 27.  Indemnification

         Article  VII,  Section  3 of the  Agreement  and  Declaration  of Trust
empowers  the  Trustees of the Trust,  to the full extent  permitted  by law, to
purchase with Trust assets insurance for  indemnification  from liability and to
pay for all  expenses  reasonably  incurred  or paid or expected to be paid by a
Trustee or officer in connection with any claim,  action,  suit or proceeding in
which he or she  becomes  involved  by virtue of his or her  capacity  or former
capacity with the Trust.

         Article VI of the  By-Laws of the Trust  provides  that the Trust shall
indemnify  any person who was or is a party or is  threatened to be made a party
to any proceeding by reason of the fact that such person is and other amounts or
was an agent of the Trust, against expenses,  judgments,  fines,  settlement and
other  amounts  actually  and  reasonable   incurred  in  connection  with  such
proceeding if that person acted in good faith and reasonably believed his or her
conduct to be in the best  interests of the Trust.  Indemnification  will not be
provided  in certain  circumstances,  however,  including  instances  of willful
misfeasance,  bad faith, gross negligence,  and reckless disregard of the duties
involved in the conduct of the particular office involved.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees,  officers and controlling  persons
of the  Registrant  pursuant  to the  foregoing  provisions  or  otherwise,  the
Registrant  has been advised that in the opinion of the  Securities and Exchange
Commission  such  indemnification  is against  public policy as expressed in the
Securities  Act of 1933 and is,  therefore,  unenforceable  in the event  that a
claim for  indemnification  against such liabilities  (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the  Registrant  in the  successful  defense  of any  action,  suit or
proceeding)  is  asserted  by such  Trustee,  officer or  controlling  person in
connection with the securities being registered,  the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against  public policy as expressed in the  Securities
Act of 1933 and will be governed by the final adjudication of such issue.
   
Item 28.  Business and Other Connections of Investment Adviser.

         Effective July 31, 1997, MAM, L.P.  completed the sale of substantially
all  of its  assets  to the  current  investment  manager  --  Montgomery  Asset
Management,  LLC (`MAM,  LLC"),  a subsidiary of  Commezbank  AG. Mr. R. Stephan
Doyle is the Chief  Executive  Officer,  Mr.  Kevin T.  Hamilton  is a  Managing
Director,  Mr. John T. Story is an  Executive  Vice  President  and Mr. David E.
Demarest is a Managing Director and Chief Administrative Officer of MAM, LLC. In
addition to their  positions  as  officers,  each of them are also a Director of
MAM, LLC. Furthermore,  Mr. Heinz Josef Hockmann,  Mr. Dietrich-Kurt Frowein and
Mr.  Andreas  Kleffel  (each of whom is an  officer  of  Commezbank)  are each a
Director of MAM, LLC.

         Prior to July 31, 1997, Montgomery Securities, which is a broker-dealer
and the  prior  principal  underwriter  of The  Montgomery  Funds,  was the sole
limited partner of the prior investment  manager,  Montgomery Asset  Management,
L.P.  ("MAM,  L.P.").  The  general  partner  of MAM,  L.P.  was a  corporation,
Montgomery Asset  Management,  Inc. ("MAM,  Inc."),  certain of the officers and
directors of which serve in similar  capacities  for MAM,  L.P. R. Stephen Doyle
was the Chairman and Chief Executive Officer of MAM, L.P.; John T. Story was the
Managing  Director of Mutual Funds and Executive  Vice  President;  and David E.
Demarest was Chief Administrative Officer; Information about the individuals who
functioned  as officers of MAM,  L.P. was set forth in Part B of  Post-Effective
Amendment No. 51 to the  Registration  Statement as filed with the Commission on
July 16, 1997 and are herein incorporated by reference.
    
<PAGE>


         Item 29.  Principal Underwriter.
   
                  Funds Distributor, Inc. currently acts as distributor for:
                  BJB Investment Funds
                  Burridge Funds
                  The Brinson Funds
                  Fremont Mutual Funds, Inc.
                  Harris Insight Funds Trust
                  HT Insight Funds, Inc. d/b/a Harris Insight Funds
                  The JPM Advisor Funds
                  The JPM Institutional Funds
                  The JPM Pierpont Funds
                  The JPM Series Trust
                  The JPM Series Trust II
                  LKCM Fund
                  Monetta Fund, Inc.
                  Monetta Trust
                  The Munder Framlington Funds Trust
                  The Munder Funds Trust
                  The Munder Funds, Inc.
                  Orbitex Group of Funds
                  The PanAgora Institutional Funds
                  RCM Capital Funds, Inc.
                  RCM Equity Funds, Inc.
                  St. Clair Funds, Inc.
                  The Skyline Funds
                  Waterhouse Investors Cash Management Fund, Inc.
                  WEBS Index Fund, Inc.

         Funds Distributor,  Inc. is registered with the Securities and Exchange
Commission as a  broker-dealer  and is a member of the National  Association  of
Securities  Dealers.  Funds  Distributor,   Inc.  is  an  indirect  wholly-owned
subsidiary of Boston  Institutional  Group, Inc., a holding company all of whose
outstanding shares are owned by key employees.

         The  following  is a list  of the  executive  officers,  directors  and
partners of Funds Distributor, Inc.:

       Director, President and Chief Executive Officer   - Marie E. Connolly

       Executive Vice President                          - Richard W. Ingram

       Executive Vice President                          - Donald R. Roberson

       Senior Vice President, General Counsel,           - John E. Pelletier
         Secretary and Clerk

       Senior Vice President                             - Michael S. Petrucelli

       Director, Senior Vice President, Treasurer and    - Joseph F. Tower, III
         Chief Financial Officer

       Senior Vice President                             - Paula R. David

       Senior Vice President                             - Bernard A. Whalen

       Director                                          - William J. Nutt
    
                                      C-5
<PAGE>


                  (c)  Not applicable.



Item 30.  Location of Accounts and Records.

         The accounts,  books, or other  documents  required to be maintained by
Section  31(a)  of the  Investment  Company  Act of  1940  will  be  kept by the
Registrant's  Transfer Agent,  DST Systems,  Inc., 1004 Baltimore,  Kansas City,
Missouri 64105, except those records relating to portfolio  transactions and the
basic  organizational  and Trust  documents of the Registrant  (see  Subsections
(2)(iii),  (4), (5), (6), (7), (9), (10) and (11) of Rule 31a-1(b)),  which will
be kept by the Registrant at 101 California  Street,  San Francisco,  California
94111.

Item 31.  Management Services.

         There are no  management-related  service  contracts  not  discussed in
Parts A and B.

Item 32.  Undertakings.

         (a)      Not applicable.
   
         (b) Registrant  hereby  undertakes to file a  post-effective  amendment
including financial statements of Montgomery  Technology Fund, Montgomery Growth
& Income Fund,  Montgomery Latin America Fund,  Montgomery Japan Small Cap Fund,
Montgomery  Total Return Bond Fund and  Montgomery  High Yield Bond Fund,  which
need not be  certified,  within  four to six months from the  effective  date of
Registrant's 1933 Act registration statement as to those series.
    

         (c)  Registrant  hereby  undertakes  to furnish  each  person to whom a
prospectus is delivered with a copy of the Registrant's  latest annual report to
shareholders, upon request and without charge.

         (d)  Registrant  has  undertaken  to comply with  Section  16(a) of the
Investment Company Act of 1940, as amended,  which requires the prompt convening
of a meeting of shareholders to elect trustees to fill existing vacancies in the
Registrant's  Board of  Trustees  in the event that less than a majority  of the
trustees have been elected to such position by shareholders. Registrant has also
undertaken  promptly to call a meeting of shareholders for the purpose of voting
upon the  question  of removal of any  Trustee or  Trustees  when  requested  in
writing  to do so by the  record  holders  of not less  than 10  percent  of the
Registrant's  outstanding shares and to assist its shareholders in communicating
with other  shareholders in accordance with the requirements of Section 16(c) of
the Investment Company Act of 1940, as amended.

                                      C-6

<PAGE>

                                   SIGNATURES
   
         Pursuant  to the  requirements  of the  Securities  Act of 1933 and the
Investment  Company Act of 1940, the Registrant  certifies that it meets all the
requirements for  effectiveness of this Amendment  pursuant to Rule 485(b) under
the Securities Act of 1933, as amended,  and that the Registrant has duly caused
this Amendment to the  Registration  Statement to be signed on its behalf by the
undersigned,  thereunto duly authorized,  in the City of San Francisco and State
of California on this 26th day of September, 1997.
    



                                            THE MONTGOMERY FUNDS


   

                                            By:      Richard W. Ingram*
                                                     ------------------------
                                                     Executive Vice President
    



Pursuant to the  requirements  of the Securities Act of 1933,  this Amendment to
Registrant's  Registration  Statement  has been  signed  below by the  following
persons in the capacities and on the dates indicated.


   
R. Stephen Doyle*                       Trustee
- ----------------
R. Stephen Doyle
                                                             September 26, 1997
Andrew Cox *                            Trustee
- -----------
Andrew Cox
                                                             September 26, 1997
Cecilia H. Herbert *                    Trustee
- -------------------
Cecilia H. Herbert
                                                             September 26, 1997
John A. Farnsworth *                    Trustee
- -------------------
John A. Farnsworth
                                                             September 26, 1997
    




         * By:    /s/ Julie Allecta
              ---------------------
         Julie   Allecta,   Attorney-in-Fact   pursuant  to  Power  of  Attorney
         previously filed.




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