BAYFUNDS, 497, 1996-02-27

BAYFUNDS
497, 1996-02-27

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INCOME PORTFOLIOS
& EQUITY PORTFOLIO

Bond Portfolio
Short Term Yield Portfolio
Equity Portfolio

PROSPECTUS

Investment Shares

Institutional Shares

BayBanks Investment Management, Inc.
Investment Adviser

Federated Securities Corp.
Distributor

March 1, 1996

[LOGO] Printed on recycled paper

G00981-01 (2/96)
Z00411

Mutual Funds At BayBank

BayFunds

BAYFUNDS
INCOME FUNDS AND EQUITY FUND
INVESTMENT SHARES AND INSTITUTIONAL SHARES

PROSPECTUS

The shares offered in this prospectus represent interests in the INVESTMENT
SHARES and INSTITUTIONAL SHARES ("Shares") of the following income and equity
portfolios of BayFunds, an open-end, management investment company (a mutual
fund):

INCOME FUNDS
- BAYFUNDS BOND PORTFOLIO
- BAYFUNDS SHORT TERM YIELD PORTFOLIO

EQUITY FUND
- BAYFUNDS EQUITY PORTFOLIO

This prospectus relates only to the INCOME FUNDS and EQUITY FUND (individually
referred to as a "Fund" or collectively as the "Funds"). The Funds offer a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of securities. INVESTMENT SHARES of the Funds are sold
primarily to individuals who purchase Shares through BayBanks and its
affiliates. INSTITUTIONAL SHARES of the Funds are offered primarily to trusts,
fiduciaries and other institutions. Shareholders can invest, reinvest, or redeem
Shares with no sales loads or redemption fees imposed by the Funds. Shareholders
have access to other portfolios in BayFunds.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND
ARE NOT ENDORSED OR GUARANTEED BY BAYBANKS, INC., OR ITS SUBSIDIARIES, AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT
RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in the Funds. Keep this prospectus for future reference.

The Funds have also filed a combined Statement of Additional Information dated
March 1, 1996, with the Securities and Exchange Commission. The information
contained in the combined Statement of Additional Information is incorporated by
reference into this prospectus. To request a copy of the combined Statement of
Additional Information or a paper copy of this prospectus (if you have received
your prospectus electronically), free of charge, shareholders of INVESTMENT
SHARES can call toll-free 1-800-BAY-FUND (1-800-229-3863) and shareholders of
INSTITUTIONAL SHARES may call toll-free 1-800-462-9999 ext. 4589 during normal
business hours.

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.

Prospectus dated March 1, 1996

- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS

- --------------------------------------------------------------------------------
KEY FACTS

General Information.......................................................... 1
Summary of Fund Expenses..................................................... 2
Financial Highlights......................................................... 6

- --------------------------------------------------------------------------------
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS

Investment Objective and Policies............................................. 8
Bond Fund................................................................ 8
Short Term Yield Fund.................................................... 9
Equity Fund............................................................. 10

Portfolio Investments........................................................ 10
Investment Limitations....................................................... 17

- --------------------------------------------------------------------------------
SHAREHOLDER MANUAL

Pricing of Shares............................................................ 18
How to Buy Investment Shares................................................. 19
How to Exchange Investment
Shares.................................................................... 21
How to Redeem Investment
Shares.................................................................... 22
How to Buy Institutional Shares.............................................. 24
How to Exchange Institutional
Shares.................................................................... 24
How to Redeem Institutional
Shares.................................................................... 25

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION YOU SHOULD KNOW

Minimum Balance.............................................................. 26
Dividends and Distributions.................................................. 26
Tax Information.............................................................. 27
Performance Information...................................................... 27
Management, Distribution and
Administration............................................................ 28
Code of Ethics Compliance.................................................... 32

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

KEY FACTS

GENERAL INFORMATION

BayFunds offers you a convenient and affordable way to participate in five
separate, professionally managed, diversified investment portfolios with
distinct investment objectives and policies. This prospectus relates only to the
INVESTMENT SHARES and INSTITUTIONAL SHARES of BAYFUNDS BOND PORTFOLIO ("BOND
FUND"), BAYFUNDS SHORT TERM YIELD PORTFOLIO ("SHORT TERM YIELD FUND"), and
BAYFUNDS EQUITY PORTFOLIO ("EQUITY FUND") (individually, a "Fund" and
collectively, the "Funds").
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------

- BAYFUNDS BOND PORTFOLIO SEEKS TO
ACHIEVE HIGH CURRENT INCOME AND CAPITAL
APPRECIATION BY INVESTING, UNDER NORMAL
MARKET AND ECONOMIC CONDITIONS, AT
LEAST 65% OF THE VALUE OF ITS TOTAL
ASSETS IN BONDS. THE FUND WILL MAINTAIN
A DOLLAR-WEIGHTED AVERAGE MATURITY OF
TWELVE YEARS OR LESS.

- BAYFUNDS SHORT TERM YIELD PORTFOLIO
SEEKS A HIGH LEVEL OF CURRENT INCOME
CONSISTENT WITH PRESERVATION OF CAPITAL
BY INVESTING IN A DIVERSIFIED PORTFOLIO
OF HIGH-GRADE DEBT OBLIGATIONS. THE
FUND WILL MAINTAIN A DOLLAR-WEIGHTED
AVERAGE PORTFOLIO MATURITY OF THREE
YEARS OR LESS.

- BAYFUNDS EQUITY PORTFOLIO SEEKS TO PRO-
VIDE LONG-TERM CAPITAL APPRECIATION BY
INVESTING, UNDER NORMAL MARKET AND
ECONOMIC CONDITIONS, AT LEAST 65% OF
ITS ASSETS IN A BROADLY DIVERSIFIED
PORTFOLIO OF EQUITY SECURITIES, WITH
CURRENT INCOME AS A SECONDARY
INVESTMENT CONSIDERATION.
- ----
</TABLE>

As of the date of this prospectus, BayFunds offers shares in two other
portfolios:

- - BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO seeks to provide current income
consistent with stability of principal and liquidity by investing in a
portfolio consisting primarily of short-term U.S. Treasury obligations with
remaining maturities of 397 days or less.

- - BAYFUNDS MONEY MARKET PORTFOLIO seeks to provide current income consistent
with stability of principal and liquidity by investing in a portfolio of money
market instruments with remaining maturities of 397 days or less.

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

BAYFUNDS INCOME AND EQUITY PORTFOLIOS

SUMMARY OF FUND EXPENSES -- INVESTMENT SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SHORT TERM
BOND YIELD EQUITY
FUND FUND FUND
---- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................. None None None
Maximum Sales Load Imposed on Reinvested Dividends (as
a percentage of offering price)...................... None None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds,
as applicable)....................................... None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable).......................................... None None None
Exchange Fee........................................... None None None
</TABLE>

ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
SHORT TERM
BOND YIELD EQUITY
FUND FUND FUND
---- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Management Fee......................................... 0.60% 0.50% 0.70%
12b-1 Fee.............................................. None None None
Total Other Expenses................................... 0.58% 0.62% 0.53%
Shareholder Servicing Fees.................. 0.25% 0.25% 0.25%
Other Expenses.............................. 0.33% 0.37% 0.28%
Total Operating Expenses..................... 1.18% 1.12% 1.23%
</TABLE>

The Annual Operating Expenses for the Bond Fund, Short Term Yield Fund, and
Equity Fund were 1.29%, 1.11%, and 1.30%, respectively, for the fiscal year
ended December 31, 1995. The Annual Operating Expenses in the table above are
based on expenses expected to be incurred during the fiscal year ending December
31, 1996.

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

BAYFUNDS INCOME AND EQUITY PORTFOLIOS

SUMMARY OF FUND EXPENSES -- INVESTMENT SHARES (CONTINUED)

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Bond Fund, Short Term Yield Fund, and
Equity Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Additional Information You
Should Know." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE:
You would pay the following expenses on a $1,000 SHORT
investment assuming (1) 5% annual return and TERM
(2) redemption at the end of each time period. The BOND YIELD EQUITY
Funds charge no redemption fees. FUND FUND FUND
---- ------ ------
<S> <C> <C> <C>
1 Year.............................................................. $ 12 $ 11 $ 13
3 Years............................................................. $ 37 $ 36 $ 39
5 Years............................................................. $ 65 $ 62 $ 68
10 Years............................................................ $143 $136 $149
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

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

BAYFUNDS INCOME AND EQUITY PORTFOLIOS

SUMMARY OF FUND EXPENSES -- INSTITUTIONAL SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SHORT TERM
BOND YIELD EQUITY
FUND FUND FUND
---- ---------- ------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................. None None None
Maximum Sales Load Imposed on Reinvested Dividends (as
a percentage of offering price)...................... None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable).......................................... None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable).......................................... None None None
Exchange Fee........................................... None None None
</TABLE>

ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
SHORT TERM
BOND YIELD EQUITY
FUND FUND FUND
---- ---------- ------
<S> <C> <C> <C>
Management Fee......................................... 0.60% 0.50% 0.70%
12b-1 Fee.............................................. None None None
Total Other Expenses................................... 0.33% 0.37% 0.28%
Total Operating Expenses..................... 0.93% 0.87% 0.98%
</TABLE>

The Annual Operating Expenses for the Bond Fund, Short Term Yield Fund, and
Equity Fund were 1.04%, 0.86%, and 1.05%, respectively, for the fiscal year
ended December 31, 1995. The Annual Operating Expenses in the table above are
based on expenses expected to be incurred during the fiscal year ending December
31, 1996.

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

BAYFUNDS INCOME AND EQUITY PORTFOLIOS

SUMMARY OF FUND EXPENSES -- INSTITUTIONAL SHARES (CONTINUED)

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of Bond Fund, Short Term Yield Fund, and
Equity Fund will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Additional Information You
Should Know." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE:
You would pay the following expenses on a $1,000 SHORT
investment assuming (1) 5% annual return and TERM
(2) redemption at the end of each time period. The BOND YIELD EQUITY
Funds charge no redemption fees. FUND FUND FUND
---- ------ ------
<S> <C> <C> <C>
1 Year.............................................................. $ 9 $ 9 $ 10
3 Years............................................................. $ 30 $ 28 $ 31
5 Years............................................................. $ 51 $ 48 $ 54
10 Years............................................................ $114 $107 $120
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

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

BAYFUNDS INCOME AND EQUITY PORTFOLIOS

FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Trust's
independent auditors. Their report dated February 9, 1996, on the Funds'
financial statements for the year ended December 31, 1995 and on the following
table for the periods presented, is included in the Annual Report to
Shareholders dated December 31, 1995, which is incorporated by reference. This
table should be read in conjunction with the Funds' financial statements and
notes thereto, which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
DIVIDENDS TO
DIVIDENDS TO SHAREHOLDERS
NET ASSET NET REALIZED SHAREHOLDERS DISTRIBUTIONS FROM NET
VALUE, NET AND UNREALIZED TOTAL FROM FROM NET IN EXCESS OF NET REALIZED GAIN
YEAR ENDED BEGINNING OF INVESTMENT GAIN/(LOSS) ON INVESTMENT INVESTMENT INVESTMENT ON INVESTMENT
DECEMBER 31, PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME TRANSACTIONS
- ---------------- ------------ ---------- -------------- ---------- ------------ ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SHARES
BAYFUNDS BOND PORTFOLIO
1993(a) $10.00 0.55 0.24 0.79 (0.55) -- (0.10)
1994 $10.14 0.49 (0.73) (0.24) (0.49) -- --
1995 $ 9.41 0.57 0.90 1.47 (0.57) -- --
BAYFUNDS SHORT TERM YIELD PORTFOLIO
1993(a) $10.00 0.48 (0.09) 0.39 (0.48) -- --
1994 $ 9.91 0.43 (0.76) (0.33) (0.43) -- --
1995 $ 9.15 0.53 0.13 0.66 (0.53) -- --
BAYFUNDS EQUITY PORTFOLIO
1993(a) $10.00 0.14 0.98 1.12 (0.14) -- --
1994 $10.98 0.09 (0.44) (0.35) (0.09) -- --
1995 $10.54 0.07 3.32 3.39 (0.07) 0.00(b) (0.82)
INSTITUTIONAL SHARES
BAYFUNDS BOND PORTFOLIO
1994 $10.14 0.52 (0.73) (0.21) (0.52) -- --
1995 $ 9.41 0.60 0.90 1.50 (0.60) -- --
BAYFUNDS SHORT TERM YIELD PORTFOLIO
1994 $ 9.91 0.45 (0.76) (0.31) (0.45) -- --
1995 $ 9.15 0.55 0.13 0.68 (0.55) -- --
BAYFUNDS EQUITY PORTFOLIO
1994 $10.98 0.11 (0.44) (0.33) (0.11) -- --
1995 $10.54 0.10 3.32 3.42 (0.10) 0.00(b) (0.82)
</TABLE>

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

(a) Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.

(b) Distribution in excess of net investment income was a result of certain book
and tax timing differences. This distribution does not represent a return of
capital for federal income tax purposes, and did not round to a penny.

(d) Computed on an annualized basis.

(e) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(See Notes which are an integral part of the Financial Statements)

Further information about the Funds' performance is contained in the Annual
Report dated December 31, 1995, which can be obtained free of charge.

- ------------------------------------------------------
- ------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET
VALUE, NET EXPENSE NET ASSETS, PORTFOLIO
TOTAL END OF TOTAL INVESTMENT WAIVER/ END OF PERIOD TURNOVER
DISTRIBUTIONS PERIOD RETURN (C) EXPENSES INCOME REIMBURSEMENT (E) (000 OMITTED) RATE
- ------------- --------- ---------- -------- ---------- ----------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(0.65) $ 10.14 7.97% 0.70%(d) 5.84%(d) 0.23%(d) $ 78,080 74%
(0.49) $ 9.41 (2.37%) 1.19% 5.09% -- $ 5,136 134%
(0.57) $ 10.31 16.08% 1.29% 5.80% -- $ 6,757 161%
(0.48) $ 9.91 3.96% 0.60%(d) 5.19%(d) 0.16%(d) $ 173,301 98%
(0.43) $ 9.15 (3.43%) 1.04% 4.42% -- $ 34,993 148%
(0.53) $ 9.28 7.37% 1.11% 5.75% -- $ 21,101 167%
(0.14) $ 10.98 11.28% 0.75%(d) 1.56%(d) 0.24%(d) $ 111,687 81%
(0.09) $ 10.54 (3.23%) 1.26% 0.81% -- $ 28,903 108%
(0.89) $ 13.04 32.24% 1.30% 0.56% -- $ 31,543 76%
(0.52) $ 9.41 (2.14%) 0.99% 5.29% -- $ 56,619 134%
(0.60) $ 10.31 16.36% 1.04% 6.06% -- $ 55,675 161%
(0.45) $ 9.15 (3.19%) 0.80% 4.66% -- $ 56,511 148%
(0.55) $ 9.28 7.64% 0.86% 6.00% -- $ 40,196 167%
(0.11) $ 10.54 (2.98%) 1.02% 1.05% -- $ 78,312 108%
(0.92) $ 13.04 32.59% 1.05% 0.81% -- $ 88,216 76%
</TABLE>

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

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

MATCHING THE FUNDS TO
YOUR INVESTMENT NEEDS
<TABLE>
<S> <C> <C>
- -----------------------------------------------

IF YOU ARE SEEKING HIGH CURRENT INCOME
AND CAPITAL APPRECIATION, THEN THE BOND
FUND MAY BE A SUITABLE INVESTMENT.

IF YOU ARE SEEKING HIGH CURRENT INCOME
AND GREATER PRICE STABILITY THAN A
LONG-TERM BOND FUND PROVIDES, THEN THE
SHORT TERM YIELD FUND MAY BE A SUITABLE
INVESTMENT. THE AVERAGE MATURITY OF THE
FUND'S HOLDINGS WILL BE KEPT TO THREE
YEARS OR LESS IN ORDER TO LIMIT
FLUCTUATIONS IN SHARE PRICE.

IF YOU ARE SEEKING LONG-TERM CAPITAL
APPRECIATION AND CURRENT INCOME IS NOT
YOUR PRIMARY CONSIDERATION, THEN THE
EQUITY FUND MAY BE A SUITABLE INVEST-
MENT.
- ----
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.

Unless indicated otherwise, the investment policies of a Fund may be changed by
the Board of Trustees ("Trustees") without approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.

For additional information about the investment strategies that the Funds may
employ, and certain investment policies mentioned below, please refer to the
"Portfolio Investments" section of this prospectus and the combined Statement of
Additional Information.

BOND FUND

The investment objective of the BOND FUND is high current income and capital
appreciation. Under normal market and economic conditions, the Fund pursues its
investment objective by investing at least 65% of the value of its total assets
in bonds. The Fund intends to maintain a dollar-weighted average portfolio
maturity of twelve years or less.
<TABLE>
<S> <C> <C>
- -----------------------------------------------

THE BOND FUND BUYS ONLY INVESTMENT
GRADE U.S. DOLLAR-DENOMINATED DEBT
OBLIGATIONS.
- ----
</TABLE>

ACCEPTABLE INVESTMENTS. The investment grade debt securities in which the BOND
FUND invests are rated by one or more nationally recognized statistical rating
organizations ("NRSROs") in one of the four highest rating categories at the
time of purchase (e.g., AAA, AA, A or BBB by Standard & Poor's Ratings Group
("S&P"), Duff & Phelps Credit Rating Co. ("D&P"), or Fitch Investor Services,
Inc. ("Fitch"), or Aaa, Aa, A or Baa by Moody's Investor Services, Inc.
("Moody's")). The BOND FUND may purchase commercial paper rated by one or more
NRSROs in their highest category at the time of purchase (e.g., A-1 by S&P,
Prime-1 by Moody's, D-1 by D&P, or F-1 by Fitch). The BOND FUND may also invest
in unrated debt securities that are determined by its investment adviser to be
of comparable quality to securities having such ratings. Acceptable investments
include the following:

- - Government Securities (as defined below);
- - domestic issues of corporate debt obligations;
- - asset-backed securities rated in one of the two highest ratings categories
by an NRSRO, or if unrated, of comparable quality in the judgment of the
adviser;
- - U.S. dollar-denominated debt obligations of foreign issuers;
- - certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings associations and other deposit or thrift institutions;
- - commercial paper;
- - repurchase agreements;
- - money market instruments; and
- - money market mutual funds.

The adviser attempts to manage the BOND FUND'S total performance, which includes
both changes in principal value of the BOND FUND'S portfolio and income earned,
by anticipating opportunities in the capital markets and risks of changes in
market interest rates. When the adviser expects that market interest rates may
decline, which would cause prices of outstanding bonds to rise, it generally
extends the average maturity of the BOND FUND'S portfolio. When the adviser
expects that market interest rates may rise, which would cause prices of
outstanding bonds to decline, it generally shortens the average maturity of the
BOND FUND'S portfolio. Further, the adviser attempts to improve the BOND FUND'S
total return by weighing the relative value of alternative bond issues having
similar maturities in selecting portfolio securities. By actively managing the
BOND FUND'S portfolio in this manner, the adviser seeks to provide capital
appreciation during periods of falling interest rates and protection against
capital depreciation during periods of rising rates.

SHORT TERM YIELD FUND

The investment objective of the SHORT TERM YIELD FUND is a high level of current
income consistent with preservation of capital. Under normal market and economic
conditions, the Fund pursues its investment objective by investing in a
diversified portfolio of high-grade debt obligations, which may include bonds,
notes, debentures, asset-backed and mortgage-backed securities, commercial
paper, bank instruments, and money market instruments. The Fund will maintain a
dollar-weighted average portfolio maturity of three years or less.
<TABLE>
<S> <C> <C>
- -----------------------------------------------

THE SHORT TERM YIELD FUND BUYS ONLY
HIGH-GRADE U.S. DOLLAR-DENOMINATED DEBT
OBLIGATIONS.
- ----
</TABLE>

ACCEPTABLE INVESTMENTS. The high-grade debt obligations in which the SHORT TERM
YIELD FUND invests are rated by one or more NRSROs in one of the three highest
rating categories at the time of purchase (e.g., AAA, AA or A by S&P, D&P, or
Fitch, or Aaa, Aa or A by Moody's). The SHORT TERM YIELD FUND may purchase
commercial paper rated by one or more NRSROs in one of their two highest
categories at the time of purchase (e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2
by Moody's, D-1 or D-2 by D&P, or F-1 or F-2 by Fitch). The SHORT TERM YIELD
FUND may also invest in unrated debt securities that are determined by its
adviser to be of comparable quality to securities having such ratings. The SHORT
TERM YIELD FUND will limit its investment in commercial paper rated in the
second highest rating category by one or more NRSROs to not more than 10% of net
assets.

Acceptable investments include the following:

- Government Securities (as defined below);

- corporate debt obligations, including medium-term notes and variable rate
demand notes;

- asset-backed securities rated in one of the two highest ratings categories
by a NRSRO, or if unrated, of comparable quality in the judgment of the
adviser;

- commercial paper (including Canadian Commercial Paper and Europaper);

- certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings associations and other deposit or thrift institutions;

- medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;

- U.S. dollar-denominated debt obligations of foreign issuers;

- repurchase agreements;

- money market instruments; and

- money market mutual funds.

EQUITY FUND

The investment objective of the EQUITY FUND is long-term capital appreciation.
Current income is a secondary consideration in the selection of investments.
Under normal market and economic conditions, the Fund pursues its investment
objective by investing at least 65% of the value of its total assets in a
broadly diversified portfolio of equity securities. The stock selection process
emphasizes the securities of those companies which the EQUITY FUND'S adviser
believes offer the potential for long-term, above-average capital appreciation.
In making portfolio investments, the adviser assesses characteristics such as
financial condition, earnings momentum, earnings variability, trading liquidity,
market valuation, potential for capital gains, and other investment criteria.
Securities of other companies may be attractive in the pursuit of investment
value across all sectors of the stock market, or by virtue of other economic or
financial factors the adviser deems important in the pursuit of the EQUITY
FUND'S investment objective.

ACCEPTABLE INVESTMENTS. Acceptable investments include the following:

- common stocks of U.S. or foreign companies which are either listed on
domestic or foreign exchanges or traded in over-the-counter markets
(including American Depository Receipts), preferred stock of such companies,
warrants, and securities convertible into or exchangeable for common stock
of such companies;

- stock index futures;

- fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire;

- zero coupon convertible securities;

- repurchase agreements;

- money market instruments; and

- - money market mutual funds.

PORTFOLIO INVESTMENTS

GOVERNMENT SECURITIES. Except as noted under "Temporary Investments," only the
BOND FUND and SHORT TERM YIELD FUND may purchase obligations issued or
guaranteed as to payment of principal and interest by the U.S. government or one
of its agencies or instrumentalities ("Government Securities"). The types of
Government Securities in which these Funds may invest generally include direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds)
and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed by:

- the full faith and credit of the U.S. Treasury;

- the issuer's right to borrow from the U.S. Treasury;

- the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

- the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

- Federal Home Loan Banks;

- Federal Home Loan Mortgage Corporation ("FHLMC");

- Farm Credit Banks;

- The Student Loan Marketing Association; and Federal National Mortgage
Association ("FNMA").

ZERO-COUPON AND STRIPPED TREASURY SECURITIES. The BOND FUND and SHORT TERM
YIELD FUND may invest in zero-coupon and stripped Treasury securities.
Zero-coupon securities are debt obligations which are generally issued at a
discount and payable in full at maturity, and which do not provide for
current payments of interest prior to maturity. Zero-coupon securities
usually trade at a deep discount from their face or par value and are
subject to greater market value fluctuations from changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.

The Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Under the STRIPS program, the Funds will be able to have
beneficial ownership of U.S. Treasury zero-coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidence of ownership of the underlying U.S. Treasury
securities.

When debt obligations have been stripped of their unmatured interest
coupons by the holder, the stripped coupons are sold separately. The
principal or corpus is sold at a deep discount because the buyer receives
only the right to receive a future fixed payment on the security and does
not receive any rights to periodic cash interest payments. Once stripped or
separated, the corpus and coupons may be sold separately. Typically, the
coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.

VARIABLE RATE DEMAND NOTES. The SHORT TERM YIELD FUND may purchase variable rate
demand notes, which are long-term corporate debt instruments that have variable
or floating interest rates and provide the SHORT TERM YIELD FUND with the right
to tender the security for repurchase at its stated principal amount plus
accrued interest. Such securities typically bear interest at a rate that is
intended to cause the securities to trade at par. The interest rate may float or
be adjusted at regular intervals (ranging from daily to annually), and is
normally based on a published interest rate or interest rate index. Many
variable rate demand notes allow the SHORT TERM YIELD FUND to demand the
repurchase of the security
on not more than seven days prior notice. Other notes only permit the SHORT TERM
YIELD FUND to tender the security at the time of each interest rate adjustment
or at other fixed intervals.

ASSET-BACKED SECURITIES. The BOND FUND and SHORT TERM YIELD FUND may purchase
asset-backed securities. Asset-backed securities are created by the grouping of
certain governmental, government related and private loans, receivables and
other lender assets into pools. Interests in these pools are sold as individual
securities. Payments from the asset pools may be divided into several different
tranches of debt securities, with some tranches entitled to receive regular
installments of principal and interest, other tranches entitled to receive
regular installments of interest, with principal payable at maturity or upon
specified call dates, and other tranches only entitled to receive payments of
principal and accrued interest at maturity or upon specified call dates.
Different tranches of securities will bear different interest rates, which may
be fixed or floating. Because the loans held in the asset pool often may be
prepaid without penalty or premium, asset-backed securities are generally
subject to higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods of
declining mortgage interest rates, because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the BOND FUND and the SHORT TERM YIELD FUND receive
from the reinvestment of such prepayments, or any scheduled principal payments,
may be lower than the yield on the original mortgage security. As a consequence,
mortgage securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may also
have less potential for capital appreciation. For certain types of asset pools,
such as collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.

Prepayments may result in a capital loss to the BOND FUND and the SHORT TERM
YIELD FUND to the extent that the prepaid mortgage securities were purchased at
a market premium over their stated principal amount. Conversely, the prepayment
of mortgage securities purchased at a market discount from their stated
principal amount will accelerate the recognition of interest income by the BOND
FUND and the SHORT TERM YIELD FUND, which would be taxed as ordinary income when
distributed to the shareholders.

The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.

NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The BOND FUND and the SHORT TERM
YIELD FUND may invest in non-mortgage related asset-backed securities, including
interests in pools of receivables, such as credit card and accounts receivable
and motor vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are issued by non-governmental entities and carry no
direct or indirect U.S. government guarantee.

Non-mortgage related asset-backed securities present certain risks that are not
presented by mortgage-related asset-backed securities described below.
Primarily, these securities do not have the benefit of the same security
interest in the related collateral. Credit card receivables are generally
unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of asset-backed securities
backed by motor vehicle installment purchase obligations permit the servicer of
such receivables to retain the possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to another
state, such registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.

MORTGAGE-RELATED ASSET-BACKED SECURITIES. The BOND FUND and the SHORT TERM YIELD
FUND may also invest in various mortgage-related asset-backed securities. These
types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities are
issued or guaranteed by U.S. government agencies.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the BOND FUND and the SHORT TERM
YIELD FUND invest are issued by the Government National Mortgage
Association ("GNMA"), FNMA, and FHLMC and are actively traded. The
underlying mortgages which collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration ("FHA") or Veterans
Administration ("VA"), while those collateralizing ARMS issued by FHLMC or
FNMA are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but
may be collateralized by whole loans or private pass-through securities.

The BOND FUND and the SHORT TERM YIELD FUND may invest in CMOs which are
rated AAA by a NRSRO, and which may be: (a) collateralized by pools of
mortgages in which each mortgage is guaranteed as to payment of principal
and interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized
by U.S. government securities; or (c) securities in which the proceeds of
the issuance are invested in mortgage securities and payment of the
principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.

OBLIGATIONS OF FOREIGN ISSUERS. The BOND FUND and the SHORT TERM YIELD FUND may
invest in debt obligations of foreign issuers which are U.S. dollar-denominated
and traded on domestic or foreign exchanges or in the over-the-counter market,
including American Depositary Receipts
("ADRs"). In addition, the EQUITY FUND may invest in debt obligations and equity
securities of foreign issuers which are U.S. dollar-denominated and traded on
domestic or foreign exchanges or, in the over-the-counter market, including
ADRs. Obligations of foreign issuers may include debt obligations of
supranational entities, which include international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, and international banking institutions and related government
agencies. Examples of these include, but are not limited to, the International
Bank for Reconstruction and Development (World Bank), European Investment Bank,
Asian Development Bank and InterAmerican Development Bank. Different risks may
also exist with respect to investments of foreign banks because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Funds' adviser in selecting investments for the Funds. As a matter of practice,
the EQUITY FUND will not invest in the securities of a foreign issuer if the
risks associated with such investment appear substantial. (See the combined
Statement of Additional Information for additional risk disclosure on non-ADR
foreign obligations.)

RESTRICTED AND ILLIQUID SECURITIES. The Funds may invest in restricted
securities. Restricted securities are any securities in which the Funds may
otherwise invest pursuant to their investment objectives and policies, but which
are subject to restriction on resale under federal securities law. Such
restrictions often impact the marketability of the investment. However, the
Funds will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options (in the case of the
EQUITY FUND), and repurchase agreements providing for settlement in more than
seven days after notice, to 15% of their respective net assets.

The Funds may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under federal
securities law and is generally sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Funds through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Funds believe that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Funds intend,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by the adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. In addition, because Section 4(2)
commercial paper is liquid, the Funds intend to not subject such paper to the
limitation applicable to restricted securities.

REPURCHASE AGREEMENTS. Certain securities in which the Funds invest may be
purchased pursuant to repurchase agreements. Repurchase agreements are
arrangements in which banks, broker/dealers, and other recognized financial
institutions sell securities to the Funds and agree at the time of sale to
repurchase them at a
mutually agreed upon time and price. To the extent that the seller does not
repurchase the securities from the Funds, the Funds could receive more or less
than the repurchase price on any sale of such securities.

REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements as a temporary measure for extraordinary or emergency purposes and
not for investment leverage purposes. These transactions are similar to
borrowing cash. In a reverse repurchase agreement, a Fund transfers possession
of a portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.

When effecting reverse repurchase agreements, assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date, marked to market daily, and maintained until the
transaction is settled.

The use of reverse repurchase agreements may enable the Funds to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Funds will be able to avoid selling portfolio instruments at a
disadvantageous time.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase securities
on a when issued or delayed delivery basis. These transactions are arrangements
in which the Funds purchase securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Funds to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Funds may pay more or less than the market value of the
securities on the settlement date.

The Funds may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Funds may realize short-term profits or losses upon the sale of such
commitments.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Funds may lend their portfolio securities on a short-term or long-term basis, or
both, to broker/dealers, banks, or other institutional borrowers of securities.
The Funds will limit the amount of portfolio securities they may lend to not
more than one-third of their respective total assets. The Funds will only enter
into loan arrangements with broker/dealers, banks, or other institutions which
the adviser has determined are creditworthy under guidelines established by the
Trustees and will receive collateral equal to at least 100% of the value of the
securities loaned.

There is the risk that when lending portfolio securities, the securities may not
be available to the Funds on a timely basis and the Funds may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.

TEMPORARY INVESTMENTS. For defensive purposes only, the Funds may also invest in
cash and cash items during times of unusual market conditions and to maintain
liquidity. Cash items may include short-term obligations such as:

- with respect to the BOND FUND and the EQUITY FUND, commercial paper rated
A-1 by S&P, Prime-1 by Moody's D-1 by D&P, or F-1 by Fitch;

- with respect to the SHORT TERM YIELD FUND, commercial paper rated A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, D-1 or D-2 by D&P, or F-1 or F-2 by
Fitch;

- Government Securities; and

- repurchase agreements.
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THE BOND FUND'S DOLLAR-WEIGHTED AVER-
AGE PORTFOLIO MATURITY WILL NOT EXCEED
TWELVE YEARS. THE SHORT TERM YIELD
FUND'S DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY WILL NOT EXCEED
THREE YEARS.
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AVERAGE PORTFOLIO MATURITY. None of the Funds maintain a stable net asset value.
However, to the extent consistent with the BOND FUND'S investment objective of
high current income and capital appreciation, the adviser will seek to limit the
magnitude of fluctuations in the BOND FUND'S net asset value by limiting the
dollar-weighted average maturity of the BOND FUND'S portfolio to twelve years or
less. Similarly, to the extent consistent with the SHORT TERM YIELD FUND'S
investment objective of current income, the adviser will seek to limit the
magnitude of fluctuations in the SHORT TERM YIELD FUND'S net asset value by
limiting the dollar-weighted average maturity of the SHORT TERM YIELD FUND'S
portfolio to three years or less. Securities with shorter maturities generally
have less price movement than securities of comparable quality with longer
maturities. In periods of anticipated rising interest rates, a greater portion
of the assets of the BOND FUND and the SHORT TERM YIELD FUND may be invested in
securities the value of which are believed to be less sensitive to interest rate
changes. However, the prices of fixed income securities fluctuate inversely to
the direction of interest rates.

PORTFOLIO TURNOVER. Although the Funds do not intend to invest for the purpose
of seeking short-term profits, securities in a FUND'S portfolio will be sold
whenever the adviser believes it is appropriate to do so in light of a Fund's
investment objective, without regard to the length of time a particular security
may have been held. The adviser does not anticipate that the annual portfolio
turnover rate will generally exceed 200% for the BOND FUND, 200% for the SHORT
TERM YIELD FUND, or 150% for the EQUITY FUND under normal market conditions. The
high portfolio turnover rates may lead to increased costs and may also result in
higher taxes paid by the Funds' shareholders.

RATINGS. As noted above, the BOND FUND only may invest in debt securities that
are investment grade; that is, rated Baa or higher by Moody's, or BBB or higher
by S&P, D&P, or Fitch, or, if unrated, judged by the adviser to be of comparable
quality. Moody's, S&P, D&P, and Fitch believe that securities rated Baa or BBB,
while of investment grade, have speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal. If an investment grade
security loses its rating or has its rating reduced after the BOND FUND has
purchased it, the BOND FUND is not required to sell the security from its
portfolio; however, the adviser will endeavor to dispose of the security as soon
as practicable thereafter, taking into account existing market conditions.

Downgrades of ratings of debt securities purchased by the SHORT TERM YIELD FUND
and EQUITY FUND will be evaluated on a case by case basis by the adviser. The
adviser will determine whether or not the downgraded security continues to be an
acceptable investment. If not, the security will be sold.

FUTURES AND OPTIONS TRANSACTIONS. The EQUITY FUND may engage in the following
futures and options transactions.

WRITING COVERED OPTIONS. The EQUITY FUND may write (i.e., sell) covered call
options. By writing a call option, the EQUITY FUND becomes obligated during
the term of the option to deliver the securities underlying the option upon
payment of the exercise price.

THE EQUITY FUND MAY ONLY WRITE "COVERED" CALL OPTIONS. This means that so
long as the EQUITY FUND is obligated as the writer of a call option, it
will own the underlying securities subject to the option or, in the case of
call options on U.S. Treasury bills, the EQUITY FUND might own
substantially similar U.S. Treasury bills.

The principal reason for writing call options is to obtain, through a
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The EQUITY FUND receives a premium from
writing a call option which it retains whether or not the option is
exercised. By writing a call option, the EQUITY FUND might lose the
potential for gain on the underlying security while the option is open.
Prior to the exercise of an option, the EQUITY FUND has the right to buy
out the option position at the then prevailing price.

FUTURES CONTRACTS. The EQUITY FUND may purchase and sell stock index futures
contracts to hedge all or a portion of its portfolio against changes in the
price of its portfolio securities, but will not engage in futures transactions
for speculative purposes.

FUTURES AND OPTIONS TRADING MARKETS. Futures and options in which the EQUITY
FUND will trade must be listed on national securities exchanges. Exchanges on
which such options currently are traded are the Chicago Board Options Exchange
and the New York, American, Pacific and Philadelphia Stock Exchanges.

RISKS. When the EQUITY FUND writes a covered call option, the EQUITY FUND
risks not participating in any rise in the value of the underlying
security. When the EQUITY FUND uses futures as a hedging device, there is a
risk that the prices of the securities subject to the futures contract may
not correlate perfectly with the prices of the securities in the EQUITY
FUND'S portfolio. This may cause the futures contract to react differently
than the portfolio securities to market changes. In addition, the adviser
could be incorrect in its expectations about the direction or extent of
market factors, such as interest rate and stock price movements. In these
events, the EQUITY FUND may lose money on the futures contract.

It is not certain that a secondary market for positions in futures
contracts will exist at all times. Although the adviser will consider
liquidity before entering into transactions, there is no assurance that a
liquid secondary market will exist for any particular futures contract at
any point in time. The EQUITY FUND'S ability to establish and close out
futures positions depends on this secondary market.

The EQUITY FUND may not purchase or sell futures contracts if immediately
thereafter the sum of the amount of margin deposits on the EQUITY FUND'S
existing futures positions and premiums paid for related options would
exceed 5% of the market value of the EQUITY FUND'S total assets.

INVESTMENT LIMITATIONS

The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a portfolio instrument for a
percentage of its cash value with an agreement to buy it back on a set date) or
pledge securities except, under certain circumstances, the Funds may borrow
(either directly or through
reverse repurchase agreements) up to one-third of the value of their respective
total assets and pledge up to 15% of the value of those assets to secure such
borrowings.

With respect to 75% of the value of total assets, each Fund will invest no more
than 5% in securities of any one issuer or acquire more than 10% of the
outstanding voting securities of any one issuer, other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by U.S.
government securities.

The above limitations cannot be changed without shareholder approval.

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

SHAREHOLDER MANUAL

PRICING OF SHARES
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THE TERM "NET ASSET VALUE" PER SHARE
REFERS TO THE VALUE OF ONE FUND SHARE.
- ----
</TABLE>

Each Fund's net asset value per share fluctuates. Net asset value per share for
purposes of pricing purchases and redemptions is calculated by dividing the
market value of all securities and other assets belonging to a Fund, less the
liabilities charged to the Fund, by the number of outstanding shares of the
Fund. The net asset value for INVESTMENT SHARES of a Fund may be less than that
of INSTITUTIONAL SHARES of a Fund due to the variance in daily net income
realized by each class as a result of shareholder servicing fees incurred by the
INVESTMENT SHARES. Such variance will reflect only accrued net income to which
the shareholders of a particular class are entitled.

The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day.

WHEN PURCHASES ARE EFFECTIVE. When a purchase order is received in good order
and accepted by a Fund from DST Systems, Inc. (the "Transfer Agent") by 4:00
p.m. (Eastern time) on a Business Day, it will be executed at the net asset
value next determined. The Transfer Agent will not communicate purchase orders
to the Fund until the Shareholder Servicing Agent has received the purchase
price in Federal funds or other immediately available funds. When Shares are
purchased by check, the order is considered received when the check is converted
into Federal funds, normally within two Business Days. BayBanks (as defined
later) acts as the shareholder's agent in depositing checks and converting them
to Federal funds. Texas residents must purchase Shares of the Funds through the
Distributor at 1-800-356-2805.

HOW TO BUY INVESTMENT SHARES
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INVESTMENT SHARES ARE SOLD "NO-LOAD" --
WITHOUT A SALES LOAD. YOUR MINIMUM
INITIAL INVESTMENT IS ONLY $2,500, OR
$500 IF YOU PARTICIPATE IN THE
AUTOMATIC INVESTMENT PROGRAM OR INVEST
THROUGH AN IRA.
- ----
</TABLE>

MINIMUM INVESTMENT. You can become a Fund shareholder with an initial investment
of $2,500, or $500 if you participate in the Automatic Investment Program or
invest through an IRA. You must submit a completed application at the time of
your initial purchase. Subsequent investments must be in amounts of at least
$100, or if you participate in the Automatic Investment Program or invest
through an IRA, the minimum for additional Investment Share purchases is $50.
The Funds may waive any investment minimums from time to time. In addition, the
Funds may reduce or waive investment minimums for investors purchasing through
qualified BayBanks accounts.

The Shareholder Servicing Agent is responsible for prompt transmission of
purchase orders to the Transfer Agent.
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SUBSEQUENT PURCHASES MAY BE MADE BY
PHONE, MAIL, WIRE, OR IN PERSON THROUGH
BAYBANKS OFFICES.
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</TABLE>

BY PHONE. Once you are a Fund shareholder, you may purchase INVESTMENT SHARES by
phone by calling 1-800-BAY-FUND.

You must have previously authorized the specific Fund in writing to accept
telephone requests. If you have not done so, call 1-800-BAY-FUND to receive the
necessary form and information on this Fund feature. Each Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for the losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine. For the protection of investors, all phone
communications may be recorded where not otherwise prohibited by law.

The establishment of certain types of deposit account relationships with
BayBanks may permit the direct deduction of your purchase price from your
BayBanks deposit account. Please call 1-800-BAY-FUND to determine whether your
BayBanks deposit account qualifies.

BY MAIL. If you make your initial purchase by mail, you must send a completed
and signed application and a check payable to the specific Fund and class of
shares, to:

BayFunds
P.O. Box 889
Burlington, MA 01803

You may obtain an application by calling 1-800-BAY-FUND.

You may make subsequent investments in a Fund at any time by sending a check for
a minimum of $100 ($50 if for an IRA) payable to the specific Fund and class of
shares at the following address:

BayFunds
P.O. Box 889
Burlington, MA 01803

You must include either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
enclosed in the Fund mailing or can be obtained by calling 1-800-BAY-FUND, or
(c) a letter stating the amount of the investment, the name of the Fund and
class of shares, the exact name and address of the account, and your account
number.

If the check does not clear, your purchase order will be canceled and you could
be held liable for associated transaction costs.

BY WIRE. If you are a Fund shareholder, you may purchase additional INVESTMENT
SHARES by wire by first notifying BayBank, as agent for the Transfer Agent, by
phone at 1-800-BAY-FUND and then wiring the funds as follows:

BayBank
ABA Number: 0110-0174-2
Attention: Mutual Funds Services
For Credit to: (identify the appropriate Fund -- INVESTMENT SHARES) Account
37153931
Further Credit to: (shareholder name and account number)

CORPORATE CUSTOMERS. Corporate customers of BayBanks interested in purchasing
INVESTMENT SHARES should consult their account relationship managers for
procedures applicable to their accounts or call 1-800-554-3311. This prospectus
should be read in conjunction with any materials provided by BayBanks regarding
such procedures.
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YOU CAN BUY INVESTMENT SHARES CONVEN-
IENTLY THROUGH THE AUTOMATIC INVEST-
MENT PROGRAM.
- ----
</TABLE>

AUTOMATIC INVESTMENT PROGRAM. When you participate in the Automatic Investment
Program, you can purchase additional INVESTMENT SHARES in minimum amounts of
$50. You must previously have authorized in writing the total dollar amount to
be deducted automatically from eligible BayBanks deposit accounts or your
deposit account maintained at a domestic financial institution which is an
automated clearing house member, and the frequency of the deductions. The funds
will be invested in INVESTMENT SHARES of the specified Fund at the net asset
value next determined. The Funds may reduce or waive the investment minimums for
investors purchasing through qualified BayBanks accounts.

RETIREMENT PLANS. BayBanks makes available for purchase Fund INVESTMENT SHARES
for investment by IRAs, rollover IRAs and Simplified Employee Pension Plans. For
details, including minimum investments, application forms and other investment
procedures, call 1-800-BAY-FUND.

HOW TO EXCHANGE INVESTMENT SHARES
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IF YOUR INVESTMENT NEEDS CHANGE, YOU
CAN EASILY EXCHANGE A FUND'S INVESTMENT
SHARES FOR INVESTMENT SHARES OF ANY
OTHER BAYFUNDS PORTFOLIO AT NO CHARGE.
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</TABLE>

BayFunds consists of the Funds, the BAYFUNDS U.S. TREASURY MONEY MARKET
PORTFOLIO and the BAYFUNDS MONEY MARKET PORTFOLIO. As a shareholder, you have
access to the INVESTMENT SHARES of all the portfolios ("Participating Funds") of
BayFunds through an exchange program. You may also purchase BayFunds Shares of
Massachusetts Municipal Cash Trust with redemption proceeds of a BayFunds
Portfolio by calling 1-800-BAY-FUND.

You may exchange INVESTMENT SHARES having a net asset value of at least $100 for
INVESTMENT SHARES of any other Participating Fund in which you have an account.
The minimum initial investment to establish an account in any other
Participating Fund by exchange is $2,500, or $500 if you participate in the
Automatic Investment Program or invest through an IRA. BayFunds does not charge
any exchange fees.

Each exchange is considered a sale of shares of one fund and a purchase of
shares of another fund. Shares submitted for exchange will be redeemed at the
net asset value next determined after receipt of the exchange request by the
Transfer Agent on a Business Day. INVESTMENT SHARES of the Participating Fund to
be acquired will be purchased at the net asset value per share next determined
on a Business Day. Transfers of money between a BayFunds Portfolio and BayFunds
Shares of Massachusetts Municipal Cash Trust will be reflected as a redemption
and purchase on a shareholder's account statement. In a transfer involving the
BayFunds Shares of Massachusetts Municipal Cash Trust, the purchase order will
be placed on the Business Day following the Business Day after which the
redemption order has been executed.

If you do not have an account in the Participating Fund whose INVESTMENT SHARES
you want to acquire, you must establish an account. Prior to any such exchange,
you must receive a copy of the current prospectus of the INVESTMENT SHARES of
the Participating Fund into which an exchange is to be effected. This account
will be registered in the same name and, unless you specify otherwise, will have
the same dividend and distribution payment option as you selected with your
existing account. If the new account registration (name, address, and taxpayer
identification number) is not identical to your existing account, please call
1-800-BAY-FUND for the necessary new account or transfer procedures.

You may find the exchange privilege useful if your investment objectives or
market outlook should change after you invest in any of the INVESTMENT SHARES of
Participating Funds. You may obtain further information on the exchange
privilege and obtain a prospectus by calling 1-800-BAY-FUND.

The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.

BayFunds reserves the right to terminate the exchange privilege at any time on
60 days' notice. Shareholders will be notified if this privilege is terminated.

Depending on the circumstances, an exchange may generate a short-term or
long-term capital gain or loss for federal income tax purposes.

BY PHONE. You may provide instructions for exchanges by telephone between
Participating Funds by calling 1-800-BAY-FUND.

You must have previously authorized the Funds in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the necessary
form and information on this feature. Each Fund uses reasonable procedures
(including a shareholder identity test and sending a written confirmation of
each telephone transaction) to confirm that instructions given by telephone are
genuine. However, a Fund is not responsible for the authenticity of telephone
instructions or for any losses caused by fraudulent or unauthorized telephone
instructions if the Fund reasonably believed that the instructions were genuine.

BY MAIL. You may send a written request for an exchange to:
BayFunds
P.O. Box 889
Burlington, MA 01803

Your written request must include your name and tax identification number; the
name of the specific Fund and class of shares; the dollar amount or number of
INVESTMENT SHARES to be redeemed; the name of the Fund and class of shares in
which shares are to be purchased; and your account number. Your request must be
signed by the registered owner(s) exactly as required by the account
application.

THROUGH BAYBANKS OFFICES. You may place an order to exchange INVESTMENT SHARES
in person through designated BayBanks offices. Exchange orders received through
designated BayBanks offices typically would be received by the Transfer Agent
within two Business Days. For more prompt processing, you should consider
another method, such as "By Phone."

HOW TO REDEEM INVESTMENT SHARES
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WHEN YOU SELL YOUR INVESTMENT
SHARES -- "REDEEM" THEM -- YOU RECEIVE
THE NET ASSET VALUE PER SHARE NEXT
DETERMINED AFTER THE REQUEST IS
RECEIVED BY A FUND IN PROPER FORM.
THERE ARE NO FEES OR OTHER REDEMPTION
CHARGES (EXCEPT FOR REDEMPTIONS BY
WIRE). YOU MAY REDEEM SOME OR ALL OF
YOUR INVESTMENT.
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</TABLE>

Each Fund redeems its INVESTMENT SHARES at the net asset value next determined
after the Fund has received your redemption request from the Transfer Agent in
proper form. Redemption requests can be executed only on Business Days. If your
redemption request is received by the Shareholder Servicing Agent on a
non-Business Day, the Transfer Agent will not communicate your redemption
request to the Fund until the next Business Day.

The Funds ordinarily will make payment for INVESTMENT SHARES redeemed after
proper receipt from the Transfer Agent of the redemption request and of all
documents in proper form within five Business Days. Redemption proceeds may be
credited to an eligible BayBanks deposit account, paid by check, or paid by
wire, as you previously designated in your application.

SIGNATURE GUARANTEES. If you request a redemption for an amount in excess of
$25,000 (no limitation if the proceeds are being credited to your BayBanks
deposit account), a redemption of any amount to be sent to an address other than
your address of record with the Fund, the transfer of the registration of
INVESTMENT SHARES, or a redemption of any amount payable to someone other than
yourself as the shareholder of record, your signature must be guaranteed on a
written redemption request by a trust company or insured commercial bank; an
insured savings association or savings bank; a member firm of a national or
regional stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Transfer Agent has adopted
standards for accepting signature guarantees from the above institutions.
BayFunds may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds do not
accept signatures guaranteed by a notary public. BayFunds and its Transfer Agent
reserve the right to amend these standards at any time without notice. If you
have a question about the
proper form for redemption requests, call 1-800-BAY-FUND.
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YOU MAY REDEEM INVESTMENT SHARES BY
PHONE, MAIL, WIRE, OR THROUGH BAYBANKS
OFFICES.
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</TABLE>

BY PHONE. You may redeem INVESTMENT SHARES by calling 1-800-BAY-FUND. You must
have previously authorized the Fund in writing to accept telephone requests. If
you have not done so, call 1-800-BAY-FUND to receive the necessary form.

In the event of drastic economic or market changes, you may experience
difficulty in redeeming by telephone. If this occurs, you should consider
another method of redemption, such as "By Mail." The Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.

BY MAIL. You may redeem INVESTMENT SHARES by submitting a written request for
redemption to:

BayFunds
P.O. Box 889
Burlington, MA 01803

Your written request must include your name and tax identification number, the
specific Fund's name, the class of shares name, the dollar amount or number of
INVESTMENT SHARES to be redeemed, and your account number. Your request must be
signed by the registered owner(s) exactly as required by the account
application.

BY WIRE. You may receive redemption proceeds of INVESTMENT SHARES by wire by
calling 1-800-BAY-FUND. Redemption proceeds of at least $1,000 will be wired
directly to the domestic commercial bank and account you previously designated
in writing. You are charged a fee for each wire redemption and the fee is
deducted from your redemption proceeds.

Each Fund reserves the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect the Fund. However, the redemption order will be
effected at the net asset value next determined after the redemption request is
received by a Fund from the Transfer Agent in proper form. The Funds also
reserve the right to terminate or modify the "By Wire" or "By Phone" redemption
procedures at any time. In that event, shareholders would be promptly notified.

THROUGH BAYBANKS OFFICES. You may place an order to redeem INVESTMENT SHARES in
person through designated BayBanks offices. Redemption orders received through
designated BayBanks offices typically would be received by the Transfer Agent
within two Business Days. For more prompt processing, you should consider
another method, such as "By Phone."

BACKUP WITHHOLDING. The Internal Revenue Service requires that backup
withholding of 31% apply to any redemption or exchange request on an account
that has not certified its taxpayer identification number ("TIN"). Shareholders
who either have not certified their number or applied for a number should be
aware that backup withholding will apply to any redemption request processed
prior to receipt of a TIN number and certification.

REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR. If any portion of a Fund's
INVESTMENT SHARES to be redeemed represents an investment made with uncollected
funds, the Fund reserves the right to delay payment of proceeds until the
Shareholder Servicing Agent is reasonably cer-
tain that the funds have been collected, which could take up to five Business
Days.

AUTOMATIC WITHDRAWAL PROGRAM. An Automatic Withdrawal Program may be established
for IRA accounts only whereby automatic redemptions are made from the account
and transferred electronically to an eligible BayBanks deposit account or your
deposit account maintained at a domestic financial institution that is an
automated clearing house member. The minimum redemption amount is $100 per
month. Depending upon the amount of the withdrawal payments and the amount of
dividends paid with respect to INVESTMENT SHARES, redemptions may reduce, and
eventually deplete, the shareholder's investment in the Fund. For this reason,
payments under this program should not be considered as yield or income on the
shareholder's investment in the Fund. A shareholder may apply for participation
in this program by calling 1-800-BAY-FUND for further information. If a
shareholder withdraws any funds from the IRA account before reaching age 59 1/2
(except certain withdrawals of excess contributions and regular payments made
over the shareholder's life expectancy), the shareholder will be subject to an
IRS penalty tax of 10% of the taxable amount withdrawn in addition to regular
income taxes on the taxable amount.

HOW TO BUY INSTITUTIONAL SHARES

INSTITUTIONAL SHARES are offered to trusts, fiduciaries and other institutions
(collectively referred to as the "Institution"). The minimum initial investment
by an Institution is $10,000, and subsequent investments must be in amounts of
at least $100. The Funds may waive any investment minimums from time to time. An
Institution will set minimums for its customers.

INSTITUTIONAL SHARES are purchased and redeemed with no sales loads or
redemption fees imposed by the Funds. Depending upon the terms of each customer
account, an Institution may charge the customer account fees for services it
provides, such as automatic investment, cash management, dividend payment
processing, information regarding customer position, and sub-accounting with
respect to customer accounts. Such fees may include compensating balance
requirements or account maintenance fees, or may be based on account assets or
transactions. Customers should obtain information about account services and
fees directly from their Institution before authorizing the purchase of
INSTITUTIONAL SHARES, and this prospectus should be read in conjunction with any
such information.

INSTITUTIONAL SHARES may be purchased in accordance with procedures established
by an Institution in connection with the requirements of its customer accounts.
Procedures applicable to each Institution and each customer account governing
the purchase of INSTITUTIONAL SHARES will differ. Each Institution is
responsible for prompt transmission of purchase orders to the Funds in
accordance with terms of its customer agreements.

Customers should consult their trust account relationship manager at this
Institution for further information and procedures on purchasing INSTITUTIONAL
SHARES. This prospectus should be read in conjunction with any materials
provided by the Institution regarding such procedures.

RETIREMENT PLANS. For information about retirement plan vehicles established by
employers for their employees which are qualified under Section 401(k) and
403(b) of the Internal Revenue Code, call BayBank at 1-800-462-9999, extension
4589 or write to BayBank, Corporate Trust--New Business Department, 7 New
England Executive Park, Burlington, MA 01803.

HOW TO EXCHANGE INSTITUTIONAL SHARES

BayFunds consists of the Funds, the BayFunds U.S. Treasury Money Market
Portfolio and the BayFunds Money Market Portfolio. Institutions
may access all of these portfolios ("Participating Funds") of BayFunds through
an exchange program. Institutions may also purchase BayFunds Shares of
Massachusetts Municipal Cash Trust with redemption proceeds of a BayFunds
Portfolio. A customer of BayBanks may telephone the BayBanks Trust Department
toll-free at 1-800-462-9999. BayBanks Capital Markets customers should call
1-800-554-3311. Participants in Employee Benefits programs should contact their
Plan Administrator.

Procedures will be established by each Institution in connection with the
requirements of its customer accounts and the Participating Funds. Customers
should contact their Institution to obtain further information on exchange
privileges. Prior to any such exchange, the Institution must provide a copy of
the current prospectus of the Participating Fund into which an exchange is to be
effected. The exchange privilege is available to shareholders in any state in
which the Participating Fund's shares being acquired may be sold.

HOW TO REDEEM INSTITUTIONAL SHARES

INSTITUTIONAL SHARES may be redeemed in accordance with procedures established
by an Institution in connection with the requirements of its customer accounts.
Procedures applicable to each Institution and each customer account governing
the redemption of INSTITUTIONAL SHARES will differ. Customers should contact
their Institution for further information. Each Institution is responsible for
transmitting redemption orders promptly to the Funds and crediting customers'
accounts with redemption proceeds on a timely basis.

Redemption orders are effective at the net asset value per share next determined
after proper receipt of the redemption request by the Fund from the Transfer
Agent in proper form. Redemption orders can be executed only on Business Days.
If your redemption request is received by the Transfer Agent on a non-Business
Day, the Transfer Agent will not communicate your redemption request to the Fund
until the next Business Day. Payment for redemption orders received by the
Transfer Agent by 4:00 p.m. (Eastern time) on a Business Day will normally be
wired the next Business Day to the Institution for credit to customer accounts.
INSTITUTIONAL SHARES so redeemed will not be eligible to receive the dividend
declared on the redemption date. Payment for redemption orders received after
4:00 p.m. (Eastern time) or on a non-Business Day will normally be wired in
Federal funds to the Institution for credit to customer accounts on the Business
Day following the Business Day on which the redemption order is effected.

The Funds assess no charges for wiring redemption proceeds. However,
Institutions may charge customer accounts for redemption services. Information
relating to such redemption services and charges, if any, are available from the
Institutions.

The Funds reserve the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in their judgment, an earlier
payment could adversely affect the Funds.

REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR. If any portion of a Fund's
INSTITUTIONAL SHARES to be redeemed represents an investment made with
uncollected funds, the Fund reserves the right to delay payment of proceeds
until the Shareholder Servicing Agent is reasonably certain that the funds have
been collected, which could take up to five Business Days.

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

ADDITIONAL INFORMATION YOU SHOULD KNOW

MINIMUM BALANCE

Due to the high cost of maintaining accounts with low balances, a Fund may
redeem Shares (other than in retirement plan accounts or IRAs) and send the
shareholder the proceeds if, due to shareholder redemptions:

- your INVESTMENT SHARES account balance falls below a minimum value of
$1,000, or

- an Institution's INSTITUTIONAL SHARES account falls below $10,000.

However, before Shares are redeemed to close an account, the shareholder or
Institution will be notified in writing and given 60 days to purchase additional
Shares to meet the minimum balance requirement. The Funds reserve the right to
amend this standard upon 60 days' prior written notice to shareholders. The
Funds also reserve the right to redeem their Shares involuntarily or to make
payment for redemptions in the form of securities if it appears appropriate to
do so in light of their responsibilities under the Investment Company Act of
1940. Customers of Institutions should consult their relevant account agreements
for any applicable balance requirements.

CONFIRMATIONS AND STATEMENTS. Shareholders of INVESTMENT SHARES will receive
confirmations of each purchase, exchange or redemption. Monthly statements are
sent to report transactions such as purchases and redemptions, as well as
dividends paid during the month. However, BayBank IRA customers will receive
quarterly statements for their accounts.

INSTITUTIONAL SHARES will be held of record by the Institutions or in the name
of a nominee of the Institutions. Beneficial ownership of INSTITUTIONAL SHARES
will be recorded by the Institutions and reflected in statements of account
provided by the Institutions to their customers. It is the responsibility of the
Institutions to provide the customers with confirmations and statements of
account with respect to INSTITUTIONAL SHARE transactions made for their accounts
at the Institutions in accordance with procedures established by the
Institutions. Confirmations are sent to the Institutions (at least monthly in
the case of the INCOME FUNDS and at least quarterly in the case of the EQUITY
FUND) to report transactions such as purchases and redemptions as well as
dividends paid.

DIVIDENDS AND DISTRIBUTIONS

Dividends from the net investment income of the BOND FUND and the SHORT TERM
YIELD FUND are declared daily, immediately prior to the 4:00 p.m. (Eastern time)
pricing of the Shares. Dividends of the BOND FUND and the SHORT TERM YIELD FUND
are paid monthly within five Business Days after the end of such calendar month
to all shareholders invested in such Funds on the record date. Dividends from
the EQUITY FUND'S net investment income are declared and paid quarterly within
five Business Days after the end of such calendar quarter to all shareholders
invested in the EQUITY FUND on the record date. Net realized capital gains of
the Funds are distributed at least annually.

Shareholders of INVESTMENT SHARES elect in writing how they wish to receive
dividends and distributions. Such shareholders may choose automatic reinvestment
in additional INVESTMENT SHARES at the net asset value next determined on the
payment dates, automatic credit to an eligible BayBanks deposit account, or
payment by check. If such shareholders fail to select an option, all
distributions will be reinvested in additional INVESTMENT SHARES.

Institutions holding INSTITUTIONAL SHARES may elect to (a) have their dividends
and distributions automatically reinvested in additional INSTI-
TUTIONAL SHARES at the net asset value next determined on the payment dates, (b)
receive their dividends and distributions in cash, or (c) receive a combination
of additional INSTITUTIONAL SHARES and cash. It is expected that customers of an
Institution's automatic investment program will receive all dividends and
distributions in cash credited to their account pursuant to the terms of their
agreement with an Institution; all other customers should contact their
Institution for further information about dividend elections.

The amount of dividends payable to INSTITUTIONAL SHARES of a Fund will be
greater than those payable to its INVESTMENT SHARES by the difference between
any class expenses and the shareholder servicing fees borne by shares of each
respective class of Shares of the Fund. (Currently, there are no differences in
class expenses other than shareholder servicing fees.)

TAX INFORMATION
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THIS DISCUSSION OF TAXES IS FOR GENERAL
INFORMATION ONLY. PLEASE CONSULT YOUR
OWN TAX ADVISER ABOUT YOUR PARTICULAR
SITUATION.
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</TABLE>

FEDERAL INCOME TAX. Each Fund intends to meet requirements of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for any Federal income taxes on income and gains distributed to the
Fund's shareholders. Each Fund will distribute substantially all of its net
investment income and net realized gains at least annually.

Each Fund will be treated as a single, separate entity for Federal income tax
purposes.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional Shares. Distributions
from the Funds' net investment income and short-term capital gains of the BOND
FUND and the SHORT TERM YIELD FUND will be taxed as ordinary income and will not
be eligible for the dividends received deduction available to corporations.
However, the dividends received deduction for corporations will apply to
ordinary income distributions of the EQUITY FUND to the extent the distribution
represents amounts that would qualify for the dividends received deduction to
the EQUITY FUND if the EQUITY FUND were a regular corporation, and to the extent
designated by the EQUITY FUND as so qualifying. These dividends and any
short-term capital gains are taxable as ordinary income. Distributions of net
long-term capital gains will be taxed as such regardless of how long the Shares
have been held.

Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.

PERFORMANCE INFORMATION

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YOU CAN FOLLOW EACH FUND'S PERFORMANCE.
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</TABLE>

From time to time, in advertisements or in reports to shareholders, the total
return and yield performance of the Funds may be quoted and compared to those of
other mutual funds with similar investment objectives and to relevant bond or
equity indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of the Funds may be compared to data prepared by
Lipper Analytical Services, Inc., a widely recog-
nized independent service which monitors the performance of mutual funds.

National financial publications in which total return and yield performance data
are reported may include The Wall Street Journal, The New York Times, Forbes, or
Money magazine. Publications of a local or regional nature, such as The Boston
Globe or The Boston Herald, may also be used in comparing the total return and
yield performance of the Funds.

Total return represents the change, over a specified period of time, in the
value of an investment in Shares after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the net asset value per share of Shares on the last
day of the period. This number is then annualized using semi-annual compounding.
The yield does not necessarily reflect income actually earned by Shares and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.

Yield and total return will be calculated separately for both classes of shares
of the Funds. Expense differences between INVESTMENT SHARES and INSTITUTIONAL
SHARES may affect the performance of each class.

Shares of the Funds are sold without any sales load or other similar
non-recurring charges.

DISTRIBUTION RATE. The Funds may quote non-standardized yield in the form of a
distribution rate.

The BOND FUND calculates its yield daily, as of the date preceding the
calculation, based upon the thirty days ending on the day of the calculation.
This yield is computed by:

- - adding the average daily interest accrued to the average daily discount
earned (including original issue discount) per share on the Fund's
portfolio for that thirty-day period, exclusive of gains or losses on
portfolio instruments;
- - subtracting the average daily provision for expenses per share for the
thirty-day period;
- - multiplying by 365 days; and
- - dividing by the thirty-day average net asset value per share.

The SHORT TERM YIELD FUND calculates its yield daily, as of the date preceding
the calculation, based upon the thirty days ending on the day of the
calculation. This yield is computed by:

- - adding the average daily interest accrued to the average daily original
issue discount earned per share on the Fund's portfolio for that thirty-day
period, exclusive of gains or losses on portfolio instruments, including
short-term capital gains;
- - subtracting the average daily provision for expenses per share for the
thirty-day period;
- - multiplying by the number of days in the current month times twelve; and
- - dividing by the thirty-day average net asset value per share.
The EQUITY FUND calculates its annualized current net yield daily as of the date
preceding the calculation. The calculation is made by:

- - dividing the most recent quarterly dividend (including any short-term
capital gains) times four by
- - the offering price per share for that day.

MANAGEMENT, DISTRIBUTION AND
ADMINISTRATION

BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits
BayFunds to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities. The shares in any one portfolio
may be offered in separate classes. With respect to the INCOME FUNDS and EQUITY
FUND, as of the date of this prospectus, the Trustees have established two
classes of shares, INVESTMENT SHARES and INSTITUTIONAL SHARES. INVESTMENT SHARES
are designed primarily for individuals who purchase the Funds through BayBanks
and its affiliates. INSTITUTIONAL SHARES are offered primarily to trusts,
fiduciaries and other institutions.
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AS A SHAREHOLDER, YOU ARE ENTITLED TO
VOTE ON CERTAIN MATTERS.
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</TABLE>

VOTING RIGHTS. Each Share of a Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All Shares of
each portfolio in BayFunds have equal voting rights except that, in matters
affecting only a particular Fund or class of Shares, only Shares of that
particular Fund or class are entitled to vote.

As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Fund's operation and for the election of Trustees
under certain circumstances. As of February 5, 1996, Slatt & Co., Burlington,
Massachusetts, acting in various capacities for numerous accounts, was the owner
of record of 5,454,378 INSTITUTIONAL SHARES (91%) of the BOND FUND; of 4,348,975
INSTITUTIONAL SHARES(100%) of the SHORT TERM YIELD FUND; and of 6,491,804
INSTITUTIONAL SHARES (95%) of the EQUITY FUND; and therefore, may be deemed to
control the respective Funds within the meaning of the Investment Company Act of
1940, and be able to affect the outcome of certain matters presented for a vote
of shareholders. Trustees may be removed by the Trustees or by shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of
BayFunds' outstanding shares of all portfolios entitled to vote.
<TABLE>
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A BOARD OF TRUSTEES SUPERVISES
BAYFUNDS.
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</TABLE>

BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.

INVESTMENT ADVISER
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ACTING UNDER THE DIRECTION OF THE
TRUSTEES, THE ADVISER MAKES INVESTMENT
DECISIONS FOR THE FUNDS. THE ADVISER
HAS EXTENSIVE INVESTMENT EXPERIENCE AND
IS A SUBSIDIARY OF A LEADING NEW
ENGLAND FINANCIAL SERVICES
ORGANIZATION.
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</TABLE>

Pursuant to an investment advisory contract with BayFunds, investment decisions
for the Funds are made by BayBanks Investment Management, Inc., the Funds'
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Funds
and is responsible for the purchase and sale of portfolio instruments, for which
it receives an annual fee from the Funds.

ADVISORY FEES. The Adviser receives an annual investment advisory fee equal to
.60 of 1% of the average daily net assets of the BOND FUND, .50 of 1% of the
average daily net assets of the SHORT TERM YIELD FUND, and .70 of 1% of the
average daily net assets of the EQUITY FUND. The Adviser has undertaken to
reimburse the Funds, up to the amount of the advisory fee, for operating
expenses in excess of limitations established by
certain states. The Adviser may also voluntarily choose to waive a portion of
its fee or reimburse the Funds for certain other expenses, but reserves the
right to terminate such waiver or reimbursement at any time at its sole
discretion.

ADVISER'S BACKGROUND. The Adviser is a wholly-owned subsidiary of BayBanks,
Inc., a bank holding company organized under the laws of the Commonwealth of
Massachusetts. BayBanks, Inc., through its banking subsidiaries (hereinafter
"BayBanks") and affiliates, offers a full range of financial services to the
public, including depository services, commercial lending, cash management,
brokerage, retail banking, mortgage banking, and investment advisory and trust
services. As part of their regular banking operations, BayBanks may make loans
to public companies. Thus, it may be possible, from time to time, for the Funds
to hold or acquire the securities of issuers which are also lending clients of
BayBanks. The lending relationship will not be a factor in the selection of
securities.

The Adviser is a registered investment adviser and provides investment advisory
services for trust and other managed assets. The Adviser was established as a
separate subsidiary of BayBanks, Inc. in 1985, but its predecessor division and
personnel have been providing investment advisory services to BayBanks'
customers for more than 65 years. As of December 31, 1995, the Trust Division of
BayBank, N.A., a national banking association and an affiliate of the Adviser,
acted as custodian for assets totaling $5.4 billion. Of this amount, the Adviser
managed $1.7 billion of discretionary assets. The Adviser and BayBanks have been
managing commingled funds for over twenty years. At the present time, the
Adviser serves as adviser to 6 such commingled funds with total assets of
approximately $308 million. The Adviser has managed mutual funds since August
1991 and manages approximately $448 million (as of December 31, 1995) in various
BayFunds Portfolios.

BayBank, N.A., an affiliate of the Adviser, through its Capital Markets
Division, manages more than $2.6 billion of assets in the investment portfolios
of BayBanks, Inc. BayBank, N.A. manages approximately $1.1 billion (as of
December 31, 1995) in the BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO.
BayBank, N.A., is the successor to BayBank Boston, N.A., the former adviser to
the BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO. BayBank, N.A. was created in
order to restructure the banking subsidiaries of BayBanks into a single national
bank, effective October 31, 1995.

Investment decisions for BOND FUND, SHORT TERM YIELD FUND, and EQUITY FUND are
made by an investment committee of the Adviser.

On December 12, 1995, BayBanks entered into a definitive Agreement and Plan of
Reorganization, whereby BayBanks, Inc. would be acquired by Bank of Boston
Corp., a bank holding company headquartered in Boston, Massachusetts (the
"Acquisition"). As a result, upon completion of the Acquisition, all existing
subsidiaries of BayBanks, Inc., including the Adviser, would become subsidiaries
of Bank of Boston Corp. The Acquisition is expected to be completed on or before
June 30, 1996, pending approval by both companies' shareholders as well as the
receipt of various regulatory approvals and the completion of other closing
conditions.

Under the provisions of the Investment Company Act of 1940, completion of the
Acquisition would result in an assignment, and therefore automatic termination,
of the Adviser's current investment advisory contract with the Funds (the
"Termination"). Accordingly, prior to the completion of the Acquisition, the
Trustees of the Funds will meet to consider matters relating to the Termination.
It is anticipated that a Special Meeting of Fund Shareholders will be held to
seek, among other things, approval of a new investment advisory contract with
the successor to the Adviser ("New Contract") on behalf of the
Funds. It is anticipated that terms of the New Contract would be substantively
the same as the terms of the present contract, except for the effective date
which, in the case of the New Contract, is expected to be on or before the
consummation of the Acquisition. It is anticipated that shareholders as of a
certain record date in 1996 will receive a proxy statement discussing these
matters in detail, and will be entitled to vote at the Special Meeting.

AUTHORITY TO ACT AS INVESTMENT ADVISER. The Glass-Steagall Act and other banking
laws and regulations presently prohibit a bank holding company registered under
the Bank Holding Company Act of 1956, or any affiliate thereof, from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, and from issuing, underwriting, selling
or distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. The Funds'
investment adviser, (BayBanks Investment Management, Inc.) is subject to such
banking laws and regulations.

The Adviser believes that it may perform the investment advisory services for
the Funds contemplated by its advisory agreement with BayFunds without violating
the Glass-Steagall Act or other applicable banking laws or regulations. Changes
in either federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as further
judicial or administrative decisions or interpretations of present or future
statutes and regulations, could prevent the Adviser from continuing to perform
all or a part of the above services for its customers and/or the Funds. In this
event, changes in the operation of the Funds may occur, including the possible
alteration or termination of any automatic or other Fund share investment and
redemption services then being provided, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
BayBanks Investment Management, Inc. is found) as a result of any of these
occurrences.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state laws.

DISTRIBUTION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

FEDERATED SECURITIES CORP. IS THE
PRINCIPAL DISTRIBUTOR FOR SHARES OF THE
FUNDS.
- ----
</TABLE>

Federated Securities Corp. is the principal distributor (the "Distributor") for
Shares of the Funds. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
Federated Securities Corp. is a subsidiary of Federated Investors.

ADMINISTRATIVE ARRANGEMENTS. The Distributor may pay financial institutions such
as banks, fiduciaries, custodians for public funds, investment advisers, and
broker/dealers to provide certain services to shareholders. These services may
include, but are not limited to, distributing prospectuses and other
information, providing accounting assistance, and communicating or facilitating
purchases and redemptions of Shares. Any fees paid for these services by the
Distributor will be reimbursed by the Adviser and not the Funds.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the administrative capacities described above or
should Congress relax current restrictions on depository institutions, the
Trustees will consider appropriate changes in the administrative services.

ADMINISTRATION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

VARIOUS ORGANIZATIONS PROVIDE SERVICES
TO THE FUNDS.
- ----
</TABLE>

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate the Funds, such as legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified in the following table:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF BAYFUNDS
- ------------------ -------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess
of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.

SHAREHOLDER SERVICING AGENT. BayBank Systems, Inc., Waltham, Massachusetts, is
the Funds' shareholder servicing agent (the "Shareholder Servicing Agent") for
INVESTMENT SHARES. The Funds may pay the Shareholder Servicing Agent a fee based
on the average daily net asset value of INVESTMENT SHARES for which it provides
shareholder services. These shareholder services include, but are not limited
to, distributing prospectuses and other information, providing shareholder
assistance and communicating or facilitating purchases and redemptions of
INVESTMENT SHARES. This fee will be equal to .25 of 1% of a Fund's average daily
net assets of INVESTMENT SHARES for which the Shareholder Servicing Agent
provides services; however, the Shareholder Servicing Agent may choose
voluntarily to waive all or a portion of its fee at any time.

As a subsidiary of BayBanks, Inc., the Shareholder Servicing Agent would also be
affected by the Acquisition described above. It is anticipated that the Trustees
will also consider continuing substantively the same arrangement for shareholder
servicing subsequent to the Acquisition. In any event, a shareholder vote to
continue these services is not required.

CODE OF ETHICS COMPLIANCE

In accordance with industry-wide recommendations as endorsed by the Securities
and Exchange Commission, the Trust, the Adviser and the Distributor have revised
their respective Codes of Ethics governing personal securities trading of
trustees, directors, officers and employees. Generally, the Codes implement
various restrictions on such persons, such as requiring them to preclear their
securities investments; banning their short-term trading; prohibiting them from
investing in private placements without prior written approval; restricting
trading during periods of Fund trading; prohibiting them from receiving gifts
from any person or entity doing business with the Fund; and prohibiting them
from serving as directors of public companies without prior approval. In
addition, the Codes require such persons to report their securities holdings and
trading activity, and may subject them to punishment for violations.

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

ADDRESSES
BAYFUNDS BOND PORTFOLIO AND
BAYFUNDS SHORT TERM YIELD PORTFOLIO,

BAYFUNDS EQUITY PORTFOLIO
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

INVESTMENT ADVISER

BayBanks Investment Management, Inc.
155 Federal Street
Boston, Massachusetts 02110

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
DST Systems, Inc.
210 West 10th Street
Kansas City, Missouri 64105

SHAREHOLDER SERVICING AGENT

BayBank Systems, Inc.
One BayBank Technology Place
Waltham, Massachusetts 02154

CUSTODIAN

The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202

PORTFOLIO ACCOUNTING SERVICES
Federated Administrative Services
Federated Investors Tower
Pittsburgh, PA 15222-3779

COUNSEL TO BAYFUNDS

Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

COUNSEL TO THE INDEPENDENT TRUSTEES

Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036

INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, Pennsylvania 15219

MONEY MARKET
PORTFOLIOS

U.S. Treasury
Money Market Portfolio
Investment Shares/Institutional Shares

Money Market Portfolio
Investment Shares/Trust Shares

PROSPECTUS

BayBank, N.A.
Investment Adviser for U.S. Treasury Money Market Portfolio

BayBanks Investment Management, Inc.
Investment Adviser for Money Market Portfolio

Federated Securities Corp.
Distributor

March 1, 1996
[LOGO] Printed on recycled paper

G00981-02 (2/96)
Z00402

Mutual Funds at BayBank

BayFunds

BAYFUNDS[LOGO]
MONEY MARKET FUNDS
INVESTMENT SHARES,
INSTITUTIONAL SHARES AND TRUST SHARES

PROSPECTUS

The shares offered in this prospectus represent interests in the INVESTMENT
SHARES, INSTITUTIONAL SHARES, and TRUST SHARES ("Shares") of the following money
market portfolios (individually referred to as a "Fund" or collectively as the
"Funds") of BayFunds, an open-end, management investment company (a mutual
fund):

MONEY MARKET FUNDS
- BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO -- INVESTMENT SHARES AND
INSTITUTIONAL SHARES
- BAYFUNDS MONEY MARKET PORTFOLIO -- INVESTMENT SHARES AND TRUST SHARES

The Funds offer a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of securities. INVESTMENT SHARES
of the Funds are sold primarily to individuals who purchase the Funds through
BayBanks and its affiliates. INSTITUTIONAL SHARES of BAYFUNDS U.S. TREASURY
MONEY MARKET PORTFOLIO are sold to BayBank, N.A., its affiliated and
correspondent banks and other institutions investing for their own account and
on behalf of customers maintaining accounts at such banks and institutions.
TRUST SHARES of BAYFUNDS MONEY MARKET PORTFOLIO are sold to trusts, fiduciaries
and institutions. Shareholders can invest, reinvest, or redeem Shares with no
sales loads or redemption fees imposed by the Funds. Shareholders have access to
other portfolios in BayFunds.

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

This prospectus contains the information you should read and know before you
invest in the Funds. Keep this prospectus for future reference.

The Funds have also filed a combined Statement of Additional Information dated
March 1, 1996, with the Securities and Exchange Commission. The information
contained in the combined Statement of Additional Information is incorporated by
reference into this prospectus. To request a copy of the combined Statement of
Additional Information or a paper copy of this prospectus (if you have received
your prospectus electronically) free of charge, shareholders of INVESTMENT
SHARES can call toll-free 1-800-BAY-FUND (1-800-229-3863); shareholders of
INSTITUTIONAL SHARES or TRUST SHARES can call BayBanks Trust Department in
Massachusetts at (617) 273-1700 or toll-free 1-800-462-9999; and BayBanks
Capital Markets customers should call 1-800-554-3311.

- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS

- --------------------------------------------------------------------------------
KEY FACTS

- --------------------------------------------------------------------------------
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS

Investment Objective and Policies............................................. 7

U.S. Treasury Fund....................................................... 7
Money Market Fund........................................................ 7

Portfolio Investments......................................................... 8
Investment Limitations....................................................... 12

- --------------------------------------------------------------------------------
SHAREHOLDER MANUAL

Pricing of Shares............................................................ 13
How to Buy Investment Shares................................................. 13
How to Exchange Investment
Shares.................................................................... 15
How To Redeem Investment
Shares.................................................................... 17
How to Buy Institutional Shares
and/or Trust Shares....................................................... 19
How to Exchange Institutional
Shares and/or Trust Shares................................................ 21
How To Redeem Institutional
Shares and/or Trust Shares................................................ 21

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION YOU SHOULD KNOW

Minimum Balance.............................................................. 23
Dividends and Distributions.................................................. 24
Tax Information.............................................................. 24
Performance Information...................................................... 25
Management, Distribution and
Administration............................................................ 25
Code of Ethics Compliance.................................................... 30

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

KEY FACTS

GENERAL INFORMATION

BayFunds offers you a convenient and affordable way to participate in five
separate, professionally managed, diversified investment portfolios with
distinct investment objectives and policies. This prospectus relates only to the
INVESTMENT SHARES and INSTITUTIONAL SHARES of BAYFUNDS U.S. TREASURY MONEY
MARKET PORTFOLIO ("U.S. TREASURY FUND") and to the INVESTMENT SHARES and TRUST
SHARES of BAYFUNDS MONEY MARKET PORTFOLIO ("MONEY MARKET FUND") (individually, a
"Fund" and collectively, the "Funds").
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------

- BAYFUNDS U.S. TREASURY MONEY MARKET
PORTFOLIO SEEKS TO PROVIDE CURRENT IN-
COME CONSISTENT WITH STABILITY OF
PRINCIPAL AND LIQUIDITY BY INVESTING IN
A PORTFOLIO CONSISTING PRIMARILY OF
SHORT-TERM U.S. TREASURY OBLIGATIONS
WITH REMAINING MATURITIES OF 397 DAYS
OR LESS.
- BAYFUNDS MONEY MARKET PORTFOLIO SEEKS
TO PROVIDE CURRENT INCOME CONSISTENT
WITH STABILITY OF PRINCIPAL AND
LIQUIDITY BY INVESTING IN A PORTFOLIO
OF MONEY MARKET INSTRUMENTS WITH RE-
MAINING MATURITIES OF 397 DAYS OR LESS.
- ----
</TABLE>

As of the date of this prospectus, BayFunds offers shares in three other
portfolios:

- BAYFUNDS BOND PORTFOLIO seeks to achieve high current income and capital
appreciation by investing, under normal market and economic conditions, at
least 65% of the value of its total assets in bonds. The Fund will maintain
a dollar-weighted average maturity of twelve years or less.

- BAYFUNDS SHORT TERM YIELD PORTFOLIO seeks a high level of current income
consistent with preservation of capital by investing in a diversified
portfolio of high-grade debt obligations. This Fund will maintain a
dollar-weighted average portfolio maturity of three years or less.

- BAYFUNDS EQUITY PORTFOLIO seeks to provide long-term capital appreciation by
investing, under normal market and economic conditions, at least 65% of its
assets in a broadly diversified portfolio of equity securities, with current
income as a secondary investment consideration.

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

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
BAYFUNDS MONEY MARKET PORTFOLIO

SUMMARY OF FUND EXPENSES -- INVESTMENT SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
U.S. MONEY
TREASURY MARKET
FUND FUND
---------- ---------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................. None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............................. None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)........... None None
Redemption Fees (as a percentage of amount redeemed,
if applicable).................................................. None None
Exchange Fee...................................................... None None
</TABLE>

ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
U.S. MONEY
TREASURY MARKET
FUND FUND
---------- ---------
<S> <C> <C> <C> <C>
Management Fee.................................................... 0.20% 0.40%
12b-1 Fee......................................................... None None
Total Other Expenses.............................................. 0.43% 0.47%
Shareholder Servicing Fees............................. 0.25% 0.25%
Other Expenses......................................... 0.18% 0.22%
Total Operating Expenses................................ 0.63% 0.87%
</TABLE>

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

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
BAYFUNDS MONEY MARKET PORTFOLIO

SUMMARY OF FUND EXPENSES -- INVESTMENT SHARES (CONTINUED)

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of U.S Treasury Fund and Money Market Fund
Investment Shares will bear, either directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Additional Information You
Should Know." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE:
You would pay the following expenses on a $1,000 investment U.S. MONEY
assuming (1) 5% annual return and (2) redemption at the end TREASURY MARKET
of each time period. The Funds charge no redemption fees. FUND FUND
---------- ---------
<S> <C> <C>
1 Year............................................................... $ 6 $ 9
3 Years.............................................................. $20 $ 28
5 Years.............................................................. $35 $ 48
10 Years............................................................. $79 $107
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

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

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO --
INSTITUTIONAL SHARES
BAYFUNDS MONEY MARKET PORTFOLIO -- TRUST SHARES

SUMMARY OF FUND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
U.S. TREASURY FUND MONEY MARKET
INSTITUTIONAL FUND
SHARES TRUST SHARES
------------------ ------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................... None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................... None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds,
as applicable)......................................... None None
Redemption Fees (as a percentage of amount redeemed,
if applicable)......................................... None None
Exchange Fee............................................. None None
</TABLE>

ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
U.S. TREASURY FUND MONEY MARKET
INSTITUTIONAL FUND
SHARES TRUST SHARES
------------------ ------------
<S> <C> <C>
Management Fee........................................... 0.20% 0.40%
12b-1 Fee................................................ None None
Total Other Expenses..................................... 0.18% 0.22%
Total Operating Expenses....................... 0.38% 0.62%
</TABLE>

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

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO --
INSTITUTIONAL SHARES
BAYFUNDS MONEY MARKET PORTFOLIO -- TRUST SHARES

SUMMARY OF FUND EXPENSES (CONTINUED)

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of U.S. Treasury Fund--Institutional
Shares and Money Market Fund--Trust Shares will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Additional Information You Should Know." Wire-transferred redemptions may
be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE:
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and U.S. TREASURY FUND MONEY MARKET
(2) redemption at the end of each time period. The INSTITUTIONAL FUND
Funds charge no redemption fees. SHARES TRUST SHARES
------------------ ------------
<S> <C> <C>
1 Year................................................. $ 4 $ 6
3 Years................................................ $ 12 $ 20
5 Years................................................ $ 21 $ 35
10 Years............................................... $ 48 $ 77
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

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

BAYFUNDS MONEY MARKET PORTFOLIOS

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Trust's
independent auditors. Their report dated February 9, 1996, on the Funds'
financial statements for the year ended December 31, 1995 and on the following
table for the periods presented, is included in the Annual Report to
Shareholders dated December 31, 1995, which is incorporated by reference. This
table should be read in conjunction with the Funds' financial statements and
notes thereto, which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
YEAR NET ASSET DISTRIBUTIONS NET ASSET
ENDED VALUE, NET FROM NET VALUE, NET EXPENSE NET ASSETS,
DECEMBER BEGINNING OF INVESTMENT INVESTMENT END OF TOTAL INVESTMENT WAIVER/ END OF PERIOD
31, PERIOD INCOME INCOME PERIOD RETURN(E) EXPENSES INCOME REIMBURSEMENT(G)(000 OMITTED)
- --- ------------ ---------- ------------- --------- ---------- -------- ---------- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SHARES
BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
1993(a) $ 1.00 0.02 (0.02) $1.00 2.41% 0.62%(f) 2.59%(f) 0.07%(f) $ 34,694
1994 $ 1.00 0.04 (0.04) $1.00 3.61% 0.64% 3.65% -- $ 142,109
1995 $ 1.00 0.05 (0.05) $1.00 5.40% 0.63% 5.27% -- $ 248,129
BAYFUNDS MONEY MARKET PORTFOLIO
1993(b) $ 1.00 0.03 (0.03) $1.00 2.58% 0.62%(f) 2.60%(f) 0.11%(f) $ 30,746
1994 $ 1.00 0.04 (0.04) $1.00 3.60% 0.83% 3.46% 0.04% $ 57,348
1995 $ 1.00 0.05 (0.05) $1.00 5.23% 0.87% 5.13% -- $ 53,581
INSTITUTIONAL SHARES
BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
1993(a) $ 1.00 0.03 (0.03) $1.00 2.62% 0.35%(f) 2.85%(f) 0.07%(f) $ 502,724
1994 $ 1.00 0.04 (0.04) $1.00 3.87% 0.39% 3.90% -- $ 693,712
1995 $ 1.00 0.06 (0.06) $1.00 5.66% 0.38% 5.51% -- $ 815,449
TRUST SHARES
BAYFUNDS MONEY MARKET PORTFOLIO
1992(c) $ 1.00 0.03 (0.03) $1.00 3.55% 0.48%(f) 4.61%(f) 0.15%(f) $ 280,931
1992(d) $ 1.00 0.02 (0.02) $1.00 2.13% 0.59%(f) 3.13%(f) 0.05%(f) $ 242,935
1993 $ 1.00 0.03 (0.03) $1.00 2.72% 0.59% 2.68% 0.11% $ 168,909
1994 $ 1.00 0.04 (0.04) $1.00 3.75% 0.65% 3.64% 0.04% $ 136,923
1995 $ 1.00 0.05 (0.05) $1.00 5.49% 0.62% 5.40% -- $ 156,552
</TABLE>

- --------------------------------------------------------------------------------
<TABLE>
<C> <S>
(a) Reflects operations for the period from January 29, 1993 (date of initial public investment) to December 31,
1993.
(b) Reflects operations for the period from January 19, 1993 (date of initial public offering) to December 31,
1993.
(c) Reflects operations for the period from August 1, 1991 (date of initial public investment) to April 30, 1992.
During the period from May 16, 1991 (start of business) to August 1, 1991, net investment income aggregating
$0.01 per share ($1,101) was distributed to Federated Administrative Services.
(d) The Fund changed its fiscal year from April 30 to December 31. Reflects operations for the period from May 1,
1992 to December 31, 1992.
(e) Based on net asset value, which does not reflect the sales load or contingent deferred sales charge, if
applicable.
(f) Computed on an annualized basis.
(g) This voluntary expense decrease is reflected in both the expense and net investment income ratios shown above.
</TABLE>

(See Notes which are an integral part of the Financial Statements)

Further information about the Funds' performance is contained in the Annual
Report dated December 31, 1995, which can be obtained free of charge.

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

MATCHING THE FUNDS TO
YOUR INVESTMENT NEEDS
<TABLE>
<S> <C> <C>
- -----------------------------------------------

THE U.S. TREASURY FUND IS DESIGNED FOR
CONSERVATIVE INVESTORS WHO WANT CURRENT
INCOME, LIQUIDITY AND STABILITY OF
PRINCIPAL AS WELL AS THE EXTRA SECURITY
OF A PORTFOLIO INVESTED ONLY IN
SHORT-TERM U.S. TREASURY OBLIGATIONS
AND REPURCHASE AGREEMENTS
COLLATERALIZED BY SUCH OBLIGATIONS.

THE MONEY MARKET FUND IS DESIGNED FOR
CONSERVATIVE INVESTORS WHO WANT CURRENT
INCOME, LIQUIDITY, AND STABILITY OF
PRINCIPAL.

THE FUNDS SEEK TO MAINTAIN A STABLE
$1.00 SHARE PRICE, REFERRED TO AS NET
ASSET VALUE PER SHARE. WHILE THE FUNDS
CANNOT GUARANTEE A STABLE SHARE PRICE,
THE SHORT-TERM NATURE OF THEIR
INVESTMENTS HELPS TO MINIMIZE PRICE
FLUCTUATIONS.
- ----
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by complying with the
various requirements of Rule 2a-7 under the Investment Company Act of 1940 which
regulates money market mutual funds and by following the investment policies
described in this prospectus.

U.S. TREASURY FUND

The investment objective of the U.S. TREASURY FUND is current income consistent
with stability of principal and liquidity. The Fund pursues its investment
objective by investing, under normal market conditions, at least 65% of the
value of its total assets in U.S. Treasury obligations with remaining maturities
of 397 days or less. The average maturity of these securities, computed on a
dollar-weighted basis, will be 90 days or less.

ACCEPTABLE INVESTMENTS. The U.S. TREASURY FUND invests at least 65% of the value
of its total assets in U.S. Treasury obligations. These instruments are issued
by the U.S. government, its agencies, or instrumentalities and are fully
guaranteed as to principal and interest by the United States. They mature in 397
days or less from the date of acquisition, or have a variable rate of interest
adjusted no less frequently than every 397 days, or are purchased pursuant to a
repurchase agreement which provides for repurchase by the seller within 397 days
from the date of acquisition.

MONEY MARKET FUND

The investment objective of the MONEY MARKET FUND is to provide current income
consistent with stability of principal and liquidity. The Fund
pursues its investment objective by investing primarily in a diversified
portfolio of money market instruments with remaining maturities of 397 days or
less. The average maturity of these securities, computed on a dollar-weighted
basis, will be 90 days or less.

ACCEPTABLE INVESTMENTS. The MONEY MARKET FUND invests in high quality money
market instruments that are either rated in the highest short-term rating
category by nationally recognized statistical rating organizations ("NRSROs") or
are of comparable quality to securities having such ratings. Examples of these
instruments include, but are not limited to:

- - domestic issues of corporate debt obligations;
- - commercial paper (including Canadian Commercial Paper and Europaper);
- - certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings associations and other deposit or thrift institutions ("Bank
Instruments");
- - demand master notes;
- - obligations issued or guaranteed as to payment of principal and interest by
the U.S. government or one of its agencies or instrumentalities ("Government
Securities"); and
- - other money market instruments.

The MONEY MARKET FUND invests only in instruments denominated and payable in
U.S. dollars.

PORTFOLIO INVESTMENTS

GOVERNMENT SECURITIES. The types of Government Securities in which the Funds may
invest generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and, with respect to the MONEY MARKET FUND,
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:

- - the full faith and credit of the U.S. Treasury;
- - the issuer's right to borrow from the U.S. Treasury;
- - the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
- - the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:

- - Federal Home Loan Banks;
- - Federal Home Loan Mortgage Corporation;
- - Farm Credit Banks;
- - The Student Loan Marketing Association; and
- - Federal National Mortgage Association.

ZERO-COUPON AND STRIPPED TREASURY SECURITIES. The Funds may invest in
zero-coupon and stripped Treasury securities. Zero-coupon securities are
debt obligations which are generally issued at a discount and payable in
full at maturity, and which do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually trade at a deep discount
from their face or par value and are subject to greater market value
fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest.

The U.S. Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury De-
partment is known as "STRIPS" or "Separate Trading of Registered Interest
and Principal of Securities." Under the STRIPS program, the Funds will be
able to have beneficial ownership of U.S. Treasury zero-coupon securities
recorded directly in the book-entry record-keeping system in lieu of having
to hold certificates or other evidence of ownership of the underlying U.S.
Treasury securities.

REPURCHASE AGREEMENTS. The securities in which the Funds invest may be purchased
pursuant to repurchase agreements. Repurchase agreements are arrangements in
which banks, broker/dealers, and other recognized financial institutions sell
securities to the Funds and agree at the time of sale to repurchase them at a
mutually agreed upon time and price. To the extent that the seller does not
repurchase the securities from the Funds, the Funds could receive more or less
than the repurchase price on any sale of such securities.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Funds purchase securities with payment and delivery scheduled for a
future time. The seller's failure to complete these transactions may cause the
Funds to miss a price or yield considered to be advantageous. Settlement dates
may be a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, the Funds may pay more or less than the market value of the
securities on the settlement date.

The Funds may dispose of a commitment prior to settlement if their investment
advisers deem it appropriate to do so. In addition, the Funds may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Funds may realize short-term profits or losses
upon the sale of such commitments.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
Funds may lend their portfolio securities on a short-term basis to
broker/dealers, banks, or other institutional borrowers of securities. The Funds
will limit the amount of portfolio securities they may lend to not more than
one-third of their respective total assets. The Funds will only enter into loan
arrangements with broker/dealers, banks, or other institutions that their
investment advisers have determined are creditworthy under guidelines
established by the Trustees and will receive collateral equal to at least 100%
of the value of the securities loaned.

There is the risk that when lending portfolio securities, the securities may not
be available to the Funds on a timely basis and the Funds may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bank-
ruptcy or become insolvent, disposition of the securities may be delayed pending
court action.

RESTRICTED AND ILLIQUID SECURITIES. The Funds may invest in restricted
securities. Restricted securities are any securities in which the Funds may
otherwise invest pursuant to their investment objective and policies, but which
are subject to restriction on resale under federal securities law. However, the
Funds will limit investments in illiquid securities, including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, and repurchase agreements providing for settlement
in more than seven days after notice, to 10% of its net assets.

The MONEY MARKET FUND may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the MONEY MARKET FUND, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the MONEY MARKET FUND
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) commercial paper, thus providing liquidity. The MONEY
MARKET FUND believes that Section 4(2) commercial paper and possibly certain
other restricted securities which meet the criteria for liquidity established by
the Trustees are quite liquid. The MONEY MARKET FUND intends, therefore, to
treat the restricted securities which meet the criteria for liquidity
established by the Trustees, including Section 4(2) commercial paper, as
determined by the MONEY MARKET FUND'S investment adviser, as liquid and not
subject to the investment limitation applicable to illiquid securities. In
addition, because Section 4(2) commercial paper is liquid, the MONEY MARKET FUND
intends to not subject such paper to the limitation applicable to restricted
securities.

REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements as a temporary measure for extraordinary or emergency purposes and
not for investment leverage purposes. These transactions are similar to
borrowing cash. In a reverse repurchase agreement, a Fund transfers possession
of a portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future the Funds will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. When effecting reverse repurchase agreements,
assets of the Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date, marked to market
daily, and maintained until the transaction is settled.

During the period any reverse repurchase agreements are outstanding, the Funds
will restrict the purchase of portfolio instruments to money market instruments
maturing on or before the expiration date of the reverse repurchase agreements,
but only to the extent necessary to assure completion of the reverse repurchase
agreements.

BANK INSTRUMENTS. The MONEY MARKET FUND may invest in Bank Instruments which are
either issued by an institution having capital, surplus and undivided profits
over $100 million as of the date of its most recently published financial state-
ments or which are insured by the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF"), both of which are administered by the
Federal Deposit Insurance Corporation ("FDIC"). Bank Instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), and Eurodollar Time Deposits ("ETDs"). The MONEY MARKET FUND
will treat securities that are credit enhanced with a bank's letter of credit as
Bank Instruments.

DEMAND MASTER NOTES. The MONEY MARKET FUND may purchase demand master notes,
which are short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as the MONEY MARKET FUND) payable upon
demand by either party. The notice period for demand typically ranges from one
to seven days, and the party may demand full or partial payment. Many master
notes give the MONEY MARKET FUND the option of increasing or decreasing the
principal amount of the master note on a daily or weekly basis within certain
limits. Demand master notes and other short-term credit arrangements usually
provide for floating or variable rates of interest.

CREDIT ENHANCEMENT. Certain of the MONEY MARKET FUND'S acceptable investments
may be credit-enhanced by a guaranty, letter of credit, or insurance. Any
bankruptcy, receivership, or default of the party providing the credit
enhancement will adversely affect the quality and marketability of the
underlying security.

PUTS AND STANDBY COMMITMENTS. The MONEY MARKET FUND may acquire securities that
are subject to puts and standby commitments to repurchase the securities at
their principal amount (usually with accrued interest) within a fixed period
(usually seven days) following a demand by the MONEY MARKET FUND. The puts and
standby commitments may be issued by the issuer of the underlying securities, a
dealer in the securities or by another third party, and may not be transferred
separately from the underlying security. These arrangements are used to provide
the MONEY MARKET FUND with liquidity and not to protect against changes in the
market value of the underlying securities. Puts that are exercisable even after
a payment default on the underlying security may be treated as a form of credit
enhancement.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The MONEY MARKET FUND may
invest in the securities of other investment companies that are money market
funds having investment objectives and policies similar to its own, but it will
not own more than 3% of the total outstanding voting stock of any such
investment company, invest more than 5% of its total assets in any one such
investment company, or invest more than 10% of its total assets in such other
investment companies in general. The MONEY MARKET FUND will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. The MONEY MARKET
FUND'S adviser will waive its investment advisory fee on assets invested in
securities of open-end investment companies.

INVESTMENT RISKS. The ECDs, ETDs, Yankee CDs, and Europaper which the MONEY
MARKET FUND may purchase are subject to different risks than domestic
obligations of domestic banks or corporations. Examples of these risks include
international economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholding or other taxes on interest income, difficulties in obtaining
or enforcing a judgment against the issuing entity, and the possible impact of
interruptions in the flow of international currency transactions. Different
risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing
these instruments, or their domestic or foreign branches, are not neces-
sarily subject to the same regulatory requirements that apply to domestic banks,
such as reserve requirements, loan limitations, examinations, accounting,
auditing, recordkeeping, and the public availability of information. These
factors will be carefully considered by the MONEY MARKET FUND'S adviser in
selecting investments for the MONEY MARKET FUND.

INVESTMENT LIMITATIONS

The Funds will not:

- borrow money directly or through reverse repurchase agreements (arrangements
in which the Funds sell a portfolio instrument for a percentage of their
cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Funds may borrow money
(either directly or through reverse repurchase agreements) in amounts up to
one-third of the value of their respective total assets and pledge up to 15%
of the value of those assets to secure such borrowings; nor

- with respect to 75% of the value of their respective total assets, invest
more than 5% in securities of any one issuer other than cash, cash items or
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized
by such securities.

The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.

The Funds will not:

- invest more than 10% of their respective net assets in illiquid securities,
including repurchase agreements providing for settlement in more than seven
days after notice.

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

SHAREHOLDER MANUAL

PRICING OF SHARES
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THE TERM "NET ASSET VALUE" PER SHARE
REFERS TO THE VALUE OF ONE FUND SHARE.
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</TABLE>

Each Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. Net asset
value per Share for purposes of pricing purchases and redemptions is calculated
by dividing the value of all securities and other assets belonging to a Fund,
less the liabilities charged to the Fund, by the number of outstanding shares of
the Fund.

Neither Fund can guarantee that its net asset value will always remain at $1.00
per Share.

The net asset value of each Fund is determined at 2:00 p.m. (Eastern time) and
as of the close of trading (normally 4:00 p.m., Eastern time) on the New York
Stock Exchange, Monday through Friday, except on: (i) New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day; and (ii) days during which no Shares are
tendered for redemption and no orders to purchase Shares are received.

The Funds offer Shares only on days on which the New York Stock Exchange and the
Federal Reserve Bank of Boston are open for business ("Business Days"). In
addition to the holidays listed above, other non-Business Days include Martin
Luther King Day, Columbus Day and Veteran's Day. If your purchase order for
Shares is received on a non-Business Day by BayBank Systems, Inc. (the
"Shareholder Servicing Agent") with respect to INVESTMENT SHARES, through
BayBanks (as defined later) with respect to TRUST SHARES, or by DST Systems,
Inc. (the "Transfer Agent") with respect to INSTITUTIONAL SHARES, the order will
not be executed until the next Business Day in accordance with the Distributor's
procedures. The Funds and the Distributor reserve the right to reject any
purchase request. Texas residents must purchase Shares through the Distributor
at 1-800-356-2805.

To allow the Advisers (as defined below) to manage the Funds effectively and to
enhance your chances of being eligible to receive that day's dividend, you are
strongly encouraged to initiate all trades (purchases, redemptions, or
exchanges) as early in the day as possible. In addition, in the case of
purchases, exchanges or redemptions of U.S. TREASURY FUND INSTITUTIONAL SHARES
in excess of $5 million, you are strongly encouraged to notify your BayBank
Account Officer at least one day in advance. On those days when either the
Federal Reserve Bank of Boston or the U.S. Government Bond Market closes early,
or, in an Adviser's judgment, closing early is deemed to be in the best interest
of a Fund's shareholders, the right is reserved to advance the time on that day
by which all transactions (purchases, redemptions, or exchanges) must be
received.

HOW TO BUY INVESTMENT SHARES
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MINIMUM INVESTMENT. You can become a Fund shareholder with an initial investment
of $2,500, or $500 if you participate in the Automatic Investment Program or
invest through an IRA. You must submit a completed and signed application at the
time of your initial purchase. Subsequent
investments must be in amounts of at least $100, or if you participate in the
Automatic Investment Program or invest through an IRA, the minimum for
additional purchases is $50. The Funds may waive any investment minimums from
time to time. In addition, the Funds may reduce or waive investment minimums for
investors purchasing through qualified BayBanks accounts.

WHEN PURCHASES ARE EFFECTIVE. Purchase orders for INVESTMENT SHARES must be
placed with the Shareholder Servicing Agent by 11:30 a.m. (Eastern time) on a
Business Day in order to be eligible to receive dividends declared that day.
Purchase orders received in good order and accepted by the Funds from the
Transfer Agent by 2:00 p.m. (Eastern time) on a Business Day will be executed at
the net asset value next determined and will begin earning dividends that day.
The Transfer Agent will not communicate your purchase order to the Fund until
the Shareholder Servicing Agent has received the purchase price in Federal funds
or other immediately available funds. If your purchase order is received in good
order and accepted by the Funds from the Transfer Agent after 2:00 p.m. (Eastern
time) and prior to 4:00 p.m. (Eastern time), it will be executed at the net
asset value next determined and INVESTMENT SHARES will begin earning dividends
the next Business Day. When you purchase INVESTMENT SHARES by check, the order
is considered received when the check is converted into Federal funds, normally
within two Business Days. The Shareholder Servicing Agent is responsible for the
prompt transmission of purchase orders received in good order to the Transfer
Agent.
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YOU MAY BUY INVESTMENT SHARES BY PHONE,
MAIL, WIRE, OR IN PERSON THROUGH
BAYBANKS OFFICES.
- ----
</TABLE>

BY PHONE. Once you are a Fund shareholder, you may purchase INVESTMENT SHARES by
phone by calling 1-800-BAY-FUND. You must have previously authorized the
specific Fund in writing to accept telephone requests. If you have not done so,
call 1-800-BAY-FUND to receive the necessary form and information on this Fund
feature. Each Fund uses reasonable procedures (including a shareholder identity
test and sending a written confirmation of each telephone transaction) to
confirm that instructions given by telephone are genuine. However, a Fund is not
responsible for the authenticity of telephone instructions or for the losses
caused by fraudulent or unauthorized telephone instructions if the Fund
reasonably believed that the instructions were genuine. For the protection of
investors, all phone communications may be recorded where not otherwise
prohibited by law.

BY MAIL. If you make your initial INVESTMENT SHARES purchase by mail, you must
send a completed and signed application and a check payable to the specific Fund
and INVESTMENT SHARES class, to:

BayFunds
P.O. Box 889
Burlington, MA 01803

You may obtain an application by calling 1-800-BAY-FUND.

You may make subsequent investments in a Fund at any time by sending a check for
a minimum of $100 ($50 if for an IRA) payable to the specific Fund and
INVESTMENT SHARES class at the following address:

BayFunds
P.O. Box 889
Burlington, MA 01803

You must include either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
enclosed in the Fund mailing or can be obtained by calling 1-800-BAY-FUND, or
(c) a letter stating the amount of the investment, the name of the Fund and
INVESTMENT SHARES class, the exact name and address of the account, and your
account number.

If the check does not clear, your purchase order will be canceled and you could
be held liable for associated transaction costs.

BayBanks
ABA Number: 0110-0174-2
Attention: Mutual Funds Services
For Credit to: (identify the appropriate Fund -- INVESTMENT SHARES) Account
37153931
Further Credit to: (shareholder name and account number)

THROUGH BAYBANKS OFFICES. You may place an order to purchase INVESTMENT SHARES
of a Fund in person through designated BayBanks offices. Purchase orders placed
through BayBanks offices typically would be received by the Transfer Agent
within two Business Days. If you want more prompt processing, you should
consider another method, such as "By Phone."
CORPORATE CUSTOMERS. Corporate customers of BayBanks interested in purchasing
Fund INVESTMENT SHARES should consult their account relationship managers for
procedures applicable to their accounts or call 1-800-554-3311. This prospectus
should be read in conjunction with any materials provided by BayBanks regarding
such procedures.
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YOU CAN BUY INVESTMENT SHARES CONVE-
NIENTLY THROUGH THE AUTOMATIC INVEST-
MENT PROGRAM.
- ----
</TABLE>

AUTOMATIC INVESTMENT PROGRAM. When you participate in the Automatic Investment
Program, you can purchase additional Fund INVESTMENT SHARES in minimum amounts
of $50. You must previously have authorized in writing the total dollar amount
to be deducted automatically from eligible BayBanks deposit accounts or your
deposit account maintained at a domestic financial institution which is an
automated clearing house member, and the frequency of the deductions. The funds
will be invested in INVESTMENT SHARES of the specified Fund at the net asset
value next determined. The Funds may reduce or waive the investment minimums for
investors purchasing through qualified BayBanks accounts.

RETIREMENT PLANS. BayBanks makes INVESTMENT SHARES available for purchase by
IRAs, rollover IRAs and Simplified Employee Pension Plans. For details,
including minimum investments, application forms and other investment
procedures, call 1-800-BAY-FUND.

HOW TO EXCHANGE INVESTMENT SHARES
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IF YOUR INVESTMENT NEEDS CHANGE, YOU
CAN EASILY EXCHANGE A FUND'S INVESTMENT
SHARES FOR INVESTMENT SHARES OF ANY
OTHER BAYFUNDS PORTFOLIO AT NO CHARGE.
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</TABLE>

BayFunds consists of the Funds, BayFunds Bond Portfolio, BayFunds Short Term
Yield Portfolio, and BayFunds Equity Portfolio. As an INVESTMENT SHARES
shareholder, you have access to the INVESTMENT SHARES of all the portfolios
("Participating Funds") of BayFunds through an exchange program. You may also
purchase BayFunds Shares of Massachusetts Municipal
Cash Trust with redemption proceeds of a BayFunds Portfolio by calling
1-800-BAY-FUND.

If you do not have an account in the Participating Fund whose INVESTMENT SHARES
you want to acquire, you must establish an account. Prior to any such exchange,
you must receive a copy of the current prospectus of the Participating Fund into
which an exchange is to be effected. This account will be registered in the same
name and, unless you specify otherwise, will have the same dividend and
distribution payment option as you selected with your existing account. If the
new account registration (name, address, and taxpayer identification number) is
not identical to your existing account, please call 1-800-BAY-FUND for the
necessary new account or transfer procedures.

The exchange privilege is available to shareholders in any state in which
INVESTMENT SHARES of the Participating Funds being acquired may be sold.

BayFunds reserves the right to terminate the exchange privilege at any time on
60 days' notice. Shareholders will be notified if this privilege is terminated.

Depending on the circumstances, an exchange may generate a short-term or
long-term capital gain or loss for federal income tax purposes.

BY PHONE. You may provide instructions for exchanges by telephone between
Participating Funds by calling 1-800-BAY-FUND.

BayFunds
P.O. Box 889
Burlington, MA 01803

Your written request must include your name and tax identification number; the
name of the specific Fund and INVESTMENT SHARES; the dollar amount or number of
INVESTMENT SHARES to be redeemed; the name of the fund and class of shares which
are to be purchased; and your account number. Your request must be signed by the
registered owner(s) exactly as required by the account application.

HOW TO REDEEM INVESTMENT SHARES
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Redemption proceeds may be credited to an eligible BayBanks deposit account,
paid by check, or paid by wire, as you previously designated in your
application. Shareholders of a Fund must place redemption orders with the
Shareholder Servicing Agent by 11:30 a.m. (Eastern time) on a Business Day in
order to be eligible to receive redemption proceeds by wire on the day of
redemption. The Funds ordinarily will make payment for INVESTMENT SHARES
redeemed after proper receipt from the Transfer Agent of the redemption request
and of all documents in proper form within one Business Day to an eligible
BayBanks deposit account, within five Business Days if you requested redemption
proceeds by check, or the same day by wire if the Funds receive your redemption
request from the Transfer Agent by 2:00 p.m. (Eastern time) on the day of
redemption. INVESTMENT SHARES of the Funds redeemed and wired the same day will
not receive the dividend declared on the day of redemption.

BayFunds may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds do not
accept signatures guaranteed by a notary public. BayFunds and its Transfer Agent
reserve the right to amend these standards at any time without notice. If you
have a question about the proper form for redemption requests, call
1-800-BAY-FUND.
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YOU MAY REDEEM INVESTMENT SHARES BY
PHONE, MAIL, WIRE, OR THROUGH BAYBANKS
OFFICES. YOU MAY RECEIVE REDEMPTION
PROCEEDS BY WIRE.
- ----
</TABLE>

BY MAIL. You may redeem INVESTMENT SHARES by submitting a written request for
redemption to:

BayFunds
P.O. Box 889
Burlington, MA 01803

Your written request must include your name and tax identification number, the
specific Fund's name, the INVESTMENT SHARES name, the dollar amount or number of
INVESTMENT SHARES to be redeemed, and your account number. Your request must be
signed by the registered owner(s) exactly as required by the account
application.

BACKUP WITHHOLDING. The Internal Revenue Service requires that backup
withholding of 31% apply to any redemption or exchange request on an account
that has not certified its taxpayer identification number ("TIN"). Shareholders
who either have not certified their number or applied for a number should be
aware that
backup withholding will apply to any redemption request processed prior to
receipt of a TIN number and certification.

REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR. If any portion of the Fund's
INVESTMENT SHARES to be redeemed represents an investment made with uncollected
funds, the Funds reserve the right to delay payment of proceeds until the
Shareholder Servicing Agent is reasonably certain that the funds have been
collected, which could take up to five Business Days.

HOW TO BUY INSTITUTIONAL SHARES AND/OR TRUST SHARES

MINIMUM INVESTMENT. U.S. TREASURY FUND INSTITUTIONAL SHARES are sold to BayBank,
N.A., its affiliated and correspondent banks and other institutions investing
for their own account and on behalf of customers maintaining accounts at such
banks and institutions. (BayBank, N.A., and such banks and institutions may be
collectively referred to as the "Institution.") The minimum initial investment
by an Institution is $500,000, and subsequent investments must be in amounts of
at least $100,000. An Institution will set minimums for its customers.

U.S. TREASURY FUND INSTITUTIONAL SHARES are sold with no sales load. However,
depending upon the terms of each customer account, an Institution may charge the
customer account fees for services it provides, such as automatic investment,
cash management, dividend payment processing, information regarding customer
position, and sub-accounting with respect to customer accounts. Such fees may
include compensating balance requirements or account maintenance fees, or may be
based on account assets or transactions. Customers should obtain information
about account services and fees directly from their Institution before
authorizing the purchase of INSTITUTIONAL SHARES, and this prospectus should be
read in conjunction with any such information.

MONEY MARKET FUND TRUST SHARES are sold with no sales load. The minimum initial
investment in TRUST SHARES is $10,000. Subsequent investments must be in amounts
of at least $100. The MONEY MARKET FUND may waive any investment minimums from
time to time.

THROUGH BAYBANKS. INSTITUTIONAL SHARES. An institutional customer of BayBanks
may telephone the BayBanks Trust Department toll-free at 1-800-462-9999.
BayBanks Capital Markets customers should call 1-800-554-3311. Participants in
Employee Benefits programs should contact their Plan Administrator.
INSTITUTIONAL SHARES of the U.S. TREASURY FUND may be purchased in accordance
with procedures established by an Institu-
tion in connection with the requirements of its customer accounts. Procedures
applicable to each Institution and each customer account governing the purchase
of INSTITUTIONAL SHARES of the U.S. TREASURY FUND will differ. For example, such
procedures may include instructions under which a customer's account is "swept"
automatically on a daily basis of collected balances in excess of a minimum
agreed to by an Institution and the customer. The U.S. TREASURY FUND expects
that the Institution will transmit orders on behalf of their customers for the
purchase of INSTITUTIONAL SHARES of the U.S. TREASURY FUND arising from
automatic investment programs within one business day of the time the amounts in
excess of the minimum balances are swept. Customers should consult their account
relationship manager at their Institution for further information and procedures
on purchasing INSTITUTIONAL SHARES of the U.S. TREASURY FUND. This prospectus
should be read in conjunction with any materials provided by the Institution
regarding such procedures.

TRUST SHARES. A customer of BayBanks may telephone the BayBanks Trust Department
toll-free at 1-800-462-9999. Participants in Employee Benefits programs should
contact their Plan Administrator. For the protection of investors, all phone
communications may be recorded where not otherwise prohibited by law.
WHEN PURCHASES ARE EFFECTIVE. Orders by an Institution to purchase INSTITUTIONAL
SHARES received in good order and accepted by the U.S. TREASURY FUND from the
Transfer Agent by 2:00 p.m. (Eastern time) on a Business Day will be executed at
the net asset value next determined and will begin earning dividends that day.
The Transfer Agent will not communicate purchase orders to the U.S. TREASURY
FUND until the Transfer Agent receives Federal funds or other available funds.
Orders by an Institution to purchase INSTITUTIONAL SHARES received in good order
and accepted by the U.S. TREASURY FUND from the Transfer Agent after 2:00 p.m.
(Eastern time) and prior to 4:00 p.m. (Eastern time), will be executed at the
net asset value next determined and INSTITUTIONAL SHARES will begin earning
dividends the next Business Day. Each Institution is responsible for
transmitting purchase orders promptly to the U.S. TREASURY FUND in accordance
with the terms of its customer agreements.

Payment may be made to BayBanks either by check or Federal funds. If a purchase
order for TRUST SHARES is received in good order and accepted by the MONEY
MARKET FUND from the Transfer Agent by 2:00 p.m. (Eastern time) on a Business
Day it will be executed at the net asset value next determined and TRUST SHARES
will begin earning dividends that day. The Transfer Agent will not communicate a
purchase order to the MONEY MARKET FUND until BayBanks has received the purchase
price in Federal funds or other immediately available funds. If a purchase order
is received in good order and accepted by the MONEY MARKET FUND from the
Transfer Agent after 2:00 p.m. (Eastern time) and prior to 4:00 p.m. (Eastern
time), it will be executed at the net asset value next determined and TRUST
SHARES will begin earning dividends the next Business Day. When TRUST SHARES are
purchased by check, the order is considered received when the check is converted
into Federal funds, normally within two Business Days. When payment is made with
Federal funds, it should be wired to BayBanks as agent for the Transfer Agent as
follows: ABA No. 0113-0235-7; Wire Order Number 0110-0174-2; Fiduciary Account
Number 03000-002-298-5. Investors not purchasing through BayBanks should consult
their financial institution for wiring instructions. BayBanks is responsible for
the prompt transmission of purchase orders received in good order to the
Transfer Agent.

RETIREMENT PLANS. For information about retirement plan vehicles established by
employers for
their employees which are qualified under Section 401(k) and 403(b) of the
Internal Revenue Code, call BayBank at 1-800-462-9999, extension 4589 or write
to BayBank, Corporate Trust -- New Business Department, 7 New England Executive
Park, Burlington, MA 01803.

HOW TO EXCHANGE INSTITUTIONAL SHARES AND/OR TRUST SHARES

BayFunds consists of the Funds, BayFunds Bond Portfolio, BayFunds Short Term
Yield Portfolio, and BayFunds Equity Portfolio. Customers may access the
INSTITUTIONAL SHARES or TRUST SHARES of all of these portfolios of BayFunds
("Participating Funds") through an exchange program. In addition, institutions
may purchase BayFunds Shares of Massachusetts Municipal Cash Trust with
redemption proceeds of a BayFunds Portfolio. A customer of BayBanks may
telephone the BayBanks Trust Department toll-free at 1-800-462-9999. BayBanks
Capital Markets customers should call 1-800-554-3311. Participants in Employee
Benefits programs should contact their Plan Administrator. Procedures will be
established by each Institution in connection with the requirements of its
customer accounts and the Participating Funds. Customers should contact their
trust relationship officer or Institution to obtain further information on
exchange privileges. Prior to any such exchange, a customer must receive a copy
of the current prospectus of the Participating Fund into which an exchange is to
be effected.

The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.

HOW TO REDEEM INSTITUTIONAL SHARES AND/OR TRUST SHARES

INSTITUTIONAL SHARES of the U.S. TREASURY FUND may be redeemed in accordance
with procedures established by an Institution in connection with the
requirements of its customer accounts. Procedures applicable to each Institution
and each customer account governing the redemption of INSTITUTIONAL SHARES of
the U.S. TREASURY FUND will differ. Customers should contact their Institution
for further information. Each Institution is responsible for transmitting
redemption orders promptly to the U.S. TREASURY FUND and crediting customers'
accounts with redemption proceeds on a timely basis. The U.S. TREASURY FUND does
not impose any sales loads or redemption fees on redemptions of INSTITUTIONAL
SHARES. The U.S. TREASURY FUND assesses no charges for wiring redemption
proceeds. However, Institutions may charge customer accounts for redemption
services. Information relating to such redemption services and charges, if any,
are available from the Institutions.

The MONEY MARKET FUND redeems TRUST SHARES at their net asset value next
determined after the MONEY MARKET FUND has received the redemption request from
the Transfer Agent in proper form. The MONEY MARKET FUND does not impose any
sales loads or redemption fees on redemptions of TRUST SHARES.

WHEN REDEMPTIONS ARE EFFECTIVE. Redemption orders are effected at the net asset
value per INSTITUTIONAL SHARE next determined after proper receipt of the
redemption request by the U.S. TREASURY FUND from the Transfer Agent in proper
form. Institutions may transmit redemption orders by telephoning the Transfer
Agent. Payment for redemption orders received by the Transfer Agent by 2:00 p.m.
(Eastern time) on a Business Day will be wired the same day to the Institution
for credit to customer accounts that day. INSTITUTIONAL SHARES so redeemed will
not be eligible to receive the dividend declared on the redemption date. Payment
for redemption orders received after 2:00 p.m. (Eastern time) or on a
non-Business Day will normally be wired in Federal funds to the Institution for
credit to customer accounts on the next Business Day. The U.S. TREASURY FUND
reserves the right to wire re-
demption proceeds within five Business Days after receiving the redemption order
if, in its judgment, an earlier payment could adversely affect the U.S. TREASURY
FUND.
Redemption requests for TRUST SHARES can be executed only on Business Days. If a
redemption request is received through BayBanks on a non-Business Day, the
Transfer Agent will not communicate the redemption request to the MONEY MARKET
FUND until the next Business Day.

BY TELEPHONE. A customer of BayBanks may telephone the BayBanks Trust Department
toll-free at 1-800-462-9999. BayBanks Capital Markets customers should call
1-800-554-3311. Participants in Employee Benefits programs should contact their
Plan Administrator. Redemption proceeds may be paid by check or paid by wire.
The MONEY MARKET FUND ordinarily will make payment for TRUST SHARES redeemed
after proper receipt from the Transfer Agent of the redemption request the same
day by wire if the MONEY MARKET FUND receives the redemption request from the
Transfer Agent by 2:00 p.m. (Eastern time) on the day of redemption. TRUST
SHARES redeemed and wired on the same day will not receive the dividend declared
on the day of redemption. Payment for TRUST SHARES of the MONEY MARKET FUND
redeemed by check will be within five Business Days. The MONEY MARKET FUND
reserves the right to wire redemption proceeds within five Business Days after
receiving the order if, in its judgment, an earlier payment could adversely
affect the MONEY MARKET FUND. If at any time the MONEY MARKET FUND shall
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified.

An authorization form permitting the MONEY MARKET FUND to accept telephone
requests must first be completed. Authorization forms and information on this
service are available from BayBanks or (for Texas residents) the Distributor. In
the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered. The MONEY MARKET
FUND uses reasonable procedures (including a shareholder identity test and
sending a written confirmation of each telephone transaction) to confirm that
instructions given by telephone are genuine. However, the MONEY MARKET FUND is
not responsible for the authenticity of telephone instructions or for any losses
caused by fraudulent or unauthorized telephone instructions if the MONEY MARKET
FUND reasonably believed that the instructions were genuine.

BY MAIL. A shareholder who is a customer of BayBanks may redeem TRUST SHARES of
the MONEY MARKET FUND by sending a written request to BayBanks. The written
request should include the shareholder's name, the Fund name, the TRUST SHARES
name, the account number, and the TRUST SHARE or dollar amount requested, and
should be signed by each registered owner exactly as the TRUST SHARES are
registered. For assistance in redeeming by mail, a customer of BayBanks may
telephone the BayBanks Trust Department toll-free at 1-800-462-9999. BayBanks
Capital Markets customers should call 1-800-554-3311. Participants in Employee
Benefits programs should contact their Plan Administrator.

Except for 401(k) plan participants and administrators, shareholders requesting
a redemption of $25,000 or more (no limitation if the proceeds are being
credited to a BayBanks deposit account), a redemption of any amount to be sent
to an address other than that on record with the MONEY MARKET FUND, a transfer
of the registration of TRUST SHARES, or a redemption payable other than to the
shareholder of record, must have signatures on written redemption requests
guaranteed by:

- - a trust company or insured commercial bank;

- - an insured savings association or a savings bank;

- - a member firm of a national or regional stock exchange; or

- - any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Transfer Agent has adopted standards for accepting signature guarantees from
the above institutions. The MONEY MARKET FUND may elect in the future to limit
eligible signature guarantees to institutions that are members of a signature
guarantee program. The MONEY MARKET FUND does not accept signatures guaranteed
by a notary public. The MONEY MARKET FUND and the Transfer Agent reserve the
right to amend these standards at any time without notice.

REDEMPTIONS BEFORE PURCHASE INSTRUMENTS CLEAR. If any portion of a Fund's
INSTITUTIONAL SHARES or TRUST SHARES to be redeemed represents an investment
made with uncollected funds, the Fund reserves the right to delay payment of
proceeds until BayBanks is reasonably certain that the funds have been
collected, which could take up to five Business Days.

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

ADDITIONAL INFORMATION YOU SHOULD KNOW

MINIMUM BALANCE

- $1,000 for INVESTMENT SHARES;

- $100,000 for INSTITUTIONAL SHARES of the U.S. TREASURY FUND; or

- $10,000 for TRUST SHARES of the MONEY MARKET FUND.

However, before Shares are redeemed to close an account, the shareholder or the
Institution, as applicable, will be notified in writing and given 60 days to
purchase additional Shares to meet the minimum balance requirement. The Funds
reserve the right to amend this standard upon 60 days' prior written notice to
shareholders. The Funds also reserve the right to redeem their Shares
involuntarily or to make payment for redemptions in the form of securities if it
appears appropriate to do so in light of their responsibilities under the
Investment Company Act of 1940. Customers of Institutions should consult their
relevant account agreements for any applicable balance requirements.

CONFIRMATIONS AND STATEMENTS. Confirmations are sent at least monthly to the
Institutions or shareholders of record to report transactions such as purchases
and redemptions as well as dividends paid during the month. However, BayBank IRA
customers will receive quarterly statements for their accounts.

INSTITUTIONAL SHARES of the U.S. TREASURY FUND will be held of record by the
Institutions or in the name of a nominee of the Institutions. Beneficial
ownership of INSTITUTIONAL SHARES of the U.S. TREASURY FUND will be recorded by
the Institutions and reflected in statements of account provided by the
Institutions to their customers. It is the responsibility of the Institutions to
provide the customers with confirmations and statements of account with respect
to INSTITUTIONAL SHARES transactions made for their accounts at the Institutions
in accordance with procedures established by the Institutions.

DIVIDENDS AND DISTRIBUTIONS

Dividends from a Fund's net investment income are declared daily to shareholders
of record (normally the Institutions in the case of the U.S. TREASURY FUND)
immediately following the 2:00 p.m. (Eastern time) pricing of shares.

With respect to the INSTITUTIONAL SHARES of the U.S. TREASURY FUND, dividends
are paid monthly within five Business Days after the end of such calendar month.
Institutions may elect to (a) have their dividends and distributions
automatically reinvested in additional INSTITUTIONAL SHARES of the U.S. TREASURY
FUND at the net asset value next determined on the payment dates, (b) receive
their dividends and distributions in cash, or (c) receive a combination of
additional INSTITUTIONAL SHARES of the U.S. TREASURY FUND and cash. It is
expected that customers of an Institution's automatic investment program will
receive all dividends and distributions of the U.S. TREASURY FUND in cash
credited to their account pursuant to the terms of their agreement with an
Institution; all other customers should contact their Institution for further
information about dividend elections.

With respect to the TRUST SHARES of MONEY MARKET FUND, dividends are paid
monthly and will be reinvested on payment dates in additional TRUST SHARES of
the MONEY MARKET FUND unless cash payments are requested by writing to the MONEY
MARKET FUND or BayBanks as appropriate.

The amount of dividends payable to INSTITUTIONAL SHARES of the U.S. TREASURY
FUND and TRUST SHARES of the MONEY MARKET FUND will exceed that of INVESTMENT
SHARES of the corresponding Fund by the difference between class expenses and
shareholder servicing fees borne by shares of each respective class of shares of
the Fund. (Currently, there are no differences in class expenses other than
shareholder servicing fees.)

Neither Fund expects to realize any net long-term capital gains. If for some
extraordinary reason a Fund realizes net long-term capital gains, it will
distribute them at least annually.

TAX INFORMATION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

THIS DISCUSSION OF TAXES IS FOR GENERAL
INFORMATION ONLY. PLEASE CONSULT YOUR
OWN TAX ADVISER ABOUT YOUR PARTICULAR
SITUATION.
- ----
</TABLE>

FEDERAL INCOME TAX. Each Fund intends to meet requirements of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for any Federal income taxes on income and gains distributed to the
Fund's shareholders. Each Fund will distribute
substantially all of its net investment income and net realized gains at least
annually.

Each Fund will be treated as a single, separate entity for Federal income tax
purposes.

Unless otherwise exempt, shareholders are required to pay Federal income tax on
any dividends and other distributions received. This applies whether dividends
and distributions are received in cash or as additional shares. Distributions
from a Fund's net investment income and short-term capital gains will be taxed
as ordinary income and will not be eligible for the dividends received deduction
available to corporations.

Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

PERFORMANCE INFORMATION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

YOU CAN FOLLOW EACH FUND'S PERFORM-
ANCE.
- ----
</TABLE>

From time to time, in advertisements or in reports to shareholders, the total
return and yield performance of the Funds may be quoted and compared to those of
other mutual funds with similar investment objectives and to relevant money
market indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the performance of the Funds may be compared to data prepared by
Lipper Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds.

National financial publications in which total return and yield performance data
are reported include The Wall Street Journal, The New York Times, Forbes, or
Money magazine. Publications of a local or regional nature, such as The Boston
Globe or The Boston Herald, may also be used in comparing the total return and
yield performance of the Funds.

The yield of the Shares represents the annualized rate of income earned on an
investment in the Shares over a seven-day period. It is the annualized dividends
earned during the period on the investment shown as a percentage of the
investment. The effective yield is calculated similarly to the yield, but, when
annualized, the income earned by an investment in the Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.

Total return represents the change, over a specified period of time, in the
value of an investment in the Shares after reinvesting all income distributions.
It is calculated by dividing that change by the initial investment and is
expressed as a percentage.

Yield, effective yield and total return will be calculated separately for
INSTITUTIONAL SHARES of the U.S. TREASURY FUND, TRUST SHARES of the MONEY MARKET
FUND and INVESTMENT SHARES of each of the Funds. Expense differences between
INSTITUTIONAL SHARES of the U.S. TREASURY FUND, TRUST SHARES of the MONEY MARKET
FUND and INVESTMENT SHARES of each of the Funds may affect the performance of
each class.

MANAGEMENT, DISTRIBUTION AND
ADMINISTRATION

BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds to offer
separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one
portfolio may be offered in separate classes. With respect to the Funds, as of
the date of this prospectus, the Trustees have established two classes of
shares, INVESTMENT SHARES and INSTITUTIONAL SHARES of the U.S. TREASURY FUND and
INVESTMENT SHARES and TRUST SHARES of the MONEY MARKET FUND.

INVESTMENT SHARES of the Funds are offered primarily to individuals who purchase
shares through BayBanks and its affiliates. INSTITUTIONAL SHARES of the U.S.
TREASURY FUND are sold to BayBank, N.A., its affiliated and correspondent banks
and other institutions investing for their own account and on behalf of
customers maintaining accounts at such banks and institutions. TRUST SHARES of
the MONEY MARKET FUND are sold to trusts, fiduciaries and institutions.
<TABLE>
<S> <C> <C>
- -----------------------------------------------

AS A SHAREHOLDER, YOU ARE ENTITLED TO
VOTE ON CERTAIN MATTERS.
- ----
</TABLE>

VOTING RIGHTS. Each share of a Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All shares of
each portfolio in BayFunds have equal voting rights except that, in matters
affecting only a particular fund or class, only shares of that particular fund
or class are entitled to vote.

As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Fund's operation and for the election of Trustees
under certain circumstances. As of February 5, 1996, Express & Co., Boston,
Massachusetts, acting in various capacities for numerous accounts, was the owner
of record of 719,660,923 INSTITUTIONAL SHARES (82%) of the U.S. TREASURY FUND
and, therefore, may be deemed to control the U.S. TREASURY FUND within the
meaning of the Investment Company Act of 1940, and be able to affect the outcome
of certain matters presented for a vote of shareholders. As of February 5, 1996,
Slatt & Co., Burlington, Massachusetts, acting in various capacities for
numerous accounts, was the owner of record of 163,437,588 TRUST SHARES (95%) of
the MONEY MARKET FUND and, therefore, may be deemed to control the MONEY MARKET
FUND within the meaning of the Investment Company Act of 1940, and be able to
affect the outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of BayFunds' outstanding
shares of all portfolios entitled to vote.
<TABLE>
<S> <C> <C>
- -----------------------------------------------

A BOARD OF TRUSTEES SUPERVISES
BAYFUNDS.
- ----
</TABLE>

BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.

INVESTMENT ADVISERS
<TABLE>
<S> <C> <C>
- -----------------------------------------------

ACTING UNDER THE DIRECTION OF THE
TRUSTEES, THE ADVISERS MAKE INVESTMENT
DECISIONS FOR THE FUNDS. THE ADVISERS
HAVE EXTENSIVE INVESTMENT EXPERIENCE
AND ARE SUBSIDIARIES OF A LEADING NEW
ENGLAND FINANCIAL SERVICES
ORGANIZATION.
- ----
</TABLE>

Pursuant to investment advisory contracts with BayFunds, investment decisions
for the U.S. TREASURY FUND are made by BayBank, N.A., and investment decisions
for the MONEY MARKET FUND are made by BayBanks Investment Management, Inc., the
Funds' investment advisers (individually referred to as the "Adviser," and
collectively as the "Advisers"), subject to direc-
tion by the Trustees. The Advisers continually conduct investment research and
supervision for the respective Funds and are responsible for the purchase and
sale of portfolio instruments, for which they receive an annual fee from the
respective Fund.

ADVISORY FEES. BayBank, N.A., receives an annual investment advisory fee equal
to .20 of 1% of the U.S. TREASURY FUND's average daily net assets. BayBanks
Investment Management, Inc. receives an annual investment advisory fee equal to
.40 of 1% of the MONEY MARKET FUND's average daily net assets. The Advisers have
undertaken to reimburse the respective Funds, up to the amount of the advisory
fees, for operating expenses in excess of limitations established by certain
states. The Advisers also may voluntarily choose to waive a portion of their
fees or reimburse the Funds for certain other expenses, but reserve the right to
terminate such waiver or reimbursement at any time at their sole discretion.

ADVISERS' BACKGROUND. The Advisers are wholly-owned subsidiaries of BayBanks,
Inc., a bank holding company organized under the laws of the Commonwealth of
Massachusetts. BayBanks, Inc. through its banking subsidiaries (hereinafter
"BayBanks") and affiliates, offers a full range of financial services to the
public, including depository services, commercial lending, cash management,
brokerage, retail banking, mortgage banking, and investment advisory and trust
services. As part of their regular banking operations, BayBanks may make loans
to public companies. Thus, it may be possible, from time to time, for the Funds
to hold or acquire the securities of issuers which are also lending clients of
BayBanks. The lending relationship will not be a factor in the selection of
securities.

BayBank, N.A., Adviser to the U.S. TREASURY FUND, manages approximately $1.1
billion (as of December 31, 1995) in the U.S. TREASURY FUND. BayBank, N.A.,
through its Capital Markets Division, manages more than $2.6 billion of assets
in the investment portfolios of BayBanks, Inc. BayBank, N.A., is the successor
to BayBank Boston, N.A., the former adviser to the U.S. TREASURY FUND. BayBank,
N.A. was created in order to restructure the banking subsidiaries of BayBanks
into a single national bank, effective October 31, 1995.

BayBanks Investment Management, Inc., the Adviser for the MONEY MARKET FUND, is
a registered investment adviser and provides investment advisory services for
trust and other managed assets. BayBanks Investment Management, Inc. was
established as a separate subsidiary of BayBanks, Inc. in 1985, but its
predecessor division and personnel have been providing investment advisory
services to BayBanks' customers for more than 65 years. As of December 31, 1995,
the Trust Division of BayBank, a state-chartered affiliate of BayBanks
Investment Management, Inc., acted as custodian for assets totaling $5.4
billion. Of this amount, BayBanks Investment Management, Inc. managed $1.7
billion of discretionary assets. BayBanks Investment Management, Inc., and
BayBanks have been managing commingled funds for over twenty years. At the
present time BayBanks Investment Management, Inc. serves as adviser to 6 such
commingled funds with total assets of approximately $308 million. BayBanks
Investment Management, Inc. has managed mutual funds since August 1991 and
manages approximately $448 million (as of December 31, 1995) in various BayFunds
Portfolios.

On December 12, 1995, BayBanks entered into a definitive Agreement and Plan of
Reorganization, whereby BayBanks, Inc. would be acquired by Bank of Boston
Corp., a bank holding company headquartered in Boston, Massachusetts (the
"Acquisition"). As a result, upon completion of the Acquisition, all existing
subsidiaries of BayBanks, Inc., including the Advisers, would become
subsidiaries of Bank of Boston Corp. The Acquisition is expected to be completed
on or
before June 30, 1996, pending approval by both companies' shareholders as well
as the receipt of various regulatory approvals and the completion of other
closing conditions.

Under the provisions of the Investment Company Act of 1940, completion of the
Acquisition would result in an assignment, and therefore automatic termination,
of the Advisers' current investment advisory contracts with the Funds (the
"Termination"). Accordingly, prior to the completion of the Acquisition, the
Trustees of the Funds will meet to consider matters relating to the Termination.
It is anticipated that a Special Meeting of Fund Shareholders will be held to
seek, among other things, approval of new investment advisory contracts with the
successors to the Advisers ("New Contracts") on behalf of the Funds. It is
anticipated that the terms of the New Contracts would be substantively the same
as the terms of the present contracts, except for the effective date which, in
the case of the New Contracts, is expected to be on or before the consummation
of the Acquisition. It is anticipated that shareholders as of a certain record
date in 1996 will receive a proxy statement discussing these matters in detail,
and will be entitled to vote at the Special Meeting.

AUTHORITY TO ACT AS INVESTMENT ADVISER. The Glass-Steagall Act and other banking
laws and regulations presently prohibit a bank holding company registered under
the Bank Holding Company Act of 1956, or any affiliate thereof, from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, and from issuing, underwriting, selling
or distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. Each Fund's
investment adviser (BayBanks Investment Management, Inc. and BayBank, N.A., ) is
subject to such banking laws and regulations.

The Advisers believe that they may perform the investment advisory services for
the Funds contemplated by their advisory agreement with BayFunds without
violating the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present or future statutes and regulations, could prevent the
Advisers from continuing to perform all or a part of the above services for
their customers and/or the Funds. If this happens, changes in the operation of
the Funds may occur, including the possible alteration or termination of any
automatic or other Fund share investment and redemption services then being
provided, and the Trustees would consider alternative investment advisers and
other means of continuing available investment services. It is not expected that
Fund shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to BayBanks Investment Management, Inc. and/or
BayBank, N.A., is found) as a result of any of these occurrences.

DISTRIBUTION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

FEDERATED SECURITIES CORP. IS THE
PRINCIPAL DISTRIBUTOR FOR SHARES OF THE
FUNDS.
- ----
</TABLE>

ADMINISTRATION
<TABLE>
<S> <C> <C>
- -----------------------------------------------

VARIOUS ORGANIZATIONS PROVIDE SERVICES
TO THE FUNDS.
- ----
</TABLE>

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate the Funds, such as legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified in the following table:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
MAXIMUM DAILY NET ASSETS
ADMINISTRATIVE FEE OF BAYFUNDS
- ------------------- -------------------------
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess
of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $50,000
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.

SHAREHOLDER SERVICING AGENT. BayBank Systems, Inc., Waltham, Massachusetts, is
the Funds' shareholder servicing agent for INVESTMENT SHARES. The Funds may pay
the Shareholder Servicing Agent a fee based on the average daily net asset value
of INVESTMENT SHARES for which it provides shareholder services. These
shareholder services include, but are not limited to, distributing prospectuses
and other information, providing shareholder assistance and communicating or
facilitating purchases and redemptions of INVESTMENT SHARES. This fee will be
equal to .25 of 1% of the Funds' average daily net assets of INVESTMENT SHARES
for which the Shareholder Servicing Agent provides services; however, the
Shareholder Servicing Agent may choose volun-
tarily to waive all or a portion of its fee at any time.

CODE OF ETHICS COMPLIANCE

In accordance with industry-wide recommendations as endorsed by the Securities
and Exchange Commission, the Trust, the Advisers and the Distributor have
revised their respective Codes of Ethics governing personal securities trading
of trustees, directors, officers and employees. Generally, the Codes implement
various restrictions on such persons, such as requiring them to preclear their
securities investments; banning their short-term trading; prohibiting them from
investing in private placements without prior written approval; restricting
trading during periods of Fund trading; prohibiting them from receiving gifts
from any person or entity doing business with the Fund; and prohibiting them
from serving as directors of public companies without prior approval. In
addition, the Codes require such persons to report their securities holdings and
trading activity, and may subject them to punishment for violations.

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ADDRESSES

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
BAYFUNDS MONEY MARKET PORTFOLIO
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

DISTRIBUTOR

Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

INVESTMENT ADVISER TO
BAYFUNDS MONEY
MARKET PORTFOLIO

BayBanks Investment Management, Inc.
155 Federal Street
Boston, Massachusetts 02110

INVESTMENT ADVISER TO
BAYFUNDS U.S. TREASURY
MONEY MARKET PORTFOLIO

BayBank, N.A.
175 Federal Street
Boston, Massachusetts 02110

TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT

DST Systems, Inc.
210 West 10th Street
Kansas City, Missouri 64105

SHAREHOLDER SERVICING AGENT

BayBank Systems, Inc.
One BayBank Technology Place
Waltham, Massachusetts 02154

CUSTODIAN

The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202

PORTFOLIO ACCOUNTING SERVICES

Federated Administrative Services
Federated Investors Tower
Pittsburgh, PA 15222-3779

COUNSEL TO BAYFUNDS

Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

COUNSEL TO THE INDEPENDENT TRUSTEES

Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036

INDEPENDENT AUDITORS

Ernst & Young LLP
One Oxford Centre
Pittsburgh, Pennsylvania 15219

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BAYFUNDS BOND PORTFOLIO
BAYFUNDS SHORT TERM YIELD PORTFOLIO
BAYFUNDS EQUITY PORTFOLIO
(INVESTMENT AND INSTITUTIONAL SHARES)
(PORTFOLIOS OF BAYFUNDS(R))
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information should be read with the
combined prospectus for BAYFUNDS BOND PORTFOLIO ("BOND FUND"), BAYFUNDS
SHORT TERM YIELD PORTFOLIO ("SHORT TERM YIELD FUND"), and BAYFUNDS EQUITY
PORTFOLIO ("EQUITY FUND") (individually referred to as a "Fund" or
collectively as the "Funds"), dated March 1, 1996. This Statement is not a
prospectus. Customers of BayBanks and its affiliates may request a copy of a
prospectus or a paper copy of this combined Statement of Additional
Information, if you have received it electronically, free of charge by
calling toll free at 1-800-BAY-FUND (1-800-229-3863) for INVESTMENT SHARES.
Customers of BayBanks Trust Department may call (617) 273-1700 in
Massachusetts or toll free 1-800-462-9999 ext. 4589 during normal business
hours for INSTITUTIONAL SHARES. Terms used herein are as defined the
BayFunds Income Portfolios and Equity Portfolio prospectus unless noted
otherwise.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated March 1, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUNDS 1

INVESTMENT OBJECTIVES AND POLICIES OF
THE FUNDS 1

TYPES OF INVESTMENTS 1

BANK INSTRUMENTS 1
OBLIGATIONS OF FOREIGN ISSUERS 1
REPURCHASE AGREEMENTS 1
REVERSE REPURCHASE AGREEMENTS 1
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 2
LENDING OF PORTFOLIO SECURITIES 2
PORTFOLIO TURNOVER 2
WEIGHTED AVERAGE PORTFOLIO MATURITY 2
DURATION 3
MORTGAGE-BACKED ASSET-BACKED
SECURITIES 3
CREDIT FACILITIES 5
CREDIT ENHANCEMENT 5
DEMAND FEATURES 5
CONVERTIBLE SECURITIES 5
WARRANTS 6
STOCK INDEX FUTURES CONTRACTS 6
"MARGIN" IN FUTURES TRANSACTIONS 6
INVESTMENT LIMITATIONS 6
BAYFUNDS MANAGEMENT 9

TRUSTEES AND OFFICERS 9

FUND OWNERSHIP 11
TRUSTEE COMPENSATION 11
TRUSTEE LIABILITY 11
INVESTMENT ADVISORY SERVICES 11

ADVISER TO THE FUNDS 11
ADVISORY FEES 12
BROKERAGE TRANSACTIONS 12

SHAREHOLDER SERVICING ARRANGEMENTS 13

OTHER SERVICES 13

FUND ADMINISTRATION 13
TRANSFER AGENT, DIVIDEND DISBURSING
AGENT AND PORTFOLIO ACCOUNTING
SERVICES 13
CUSTODIAN 13
INDEPENDENT AUDITORS 13
LEGAL COUNSEL 13
PURCHASING SHARES 14

EXCHANGING SECURITIES FOR SHARES OF
THE FUNDS 14
DETERMINING NET ASSET VALUE 14

DETERMINING MARKET VALUE OF SECURITIES
14
EXCHANGE PRIVILEGES 14

REQUIREMENTS FOR EXCHANGE 14

MAKING AN EXCHANGE 14
REDEEMING SHARES 14

REDEMPTION IN KIND 15
ADDITIONAL INFORMATION YOU SHOULD KNOW15

MONTHLY STATEMENTS 15
COMPANION ACCOUNT AVAILABILITY 15
MASSACHUSETTS LAW 15

TAX STATUS 15

THE FUNDS' TAX STATUS 15
TOTAL RETURN 16

YIELD 16

PERFORMANCE COMPARISONS 16

FINANCIAL STATEMENTS 18

APPENDIX 19

GENERAL INFORMATION ABOUT THE FUNDS

The Funds are portfolios of BayFunds, which was established as a Massachusetts
business trust under a Declaration of Trust dated April 1, 1991.
The portfolios of BayFunds are: BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO;
BAYFUNDS MONEY MARKET PORTFOLIO; BAYFUNDS BOND PORTFOLIO; BAYFUNDS SHORT TERM
YIELD PORTFOLIO; and BAYFUNDS EQUITY PORTFOLIO. This combined Statement of
Additional Information relates only to the BOND FUND, the SHORT TERM YIELD
FUND, and EQUITY FUND.
The Funds are offered in two classes of shares, INVESTMENT SHARES and
INSTITUTIONAL SHARES. Collectively, the classes will be referred to as
"Shares."
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS

THE FOLLOWING POLICIES APPLY TO ALL THREE FUNDS.
BANK INSTRUMENTS
The Funds only invest in those bank instruments ("Bank Instruments") which are
either issued by an institution having capital, surplus and undivided profits
over $100 million or insured by the Bank Insurance Fund or the Savings

Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation. Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), Eurodollar Time Deposits ("ETDs") and Canadian Time Deposits.
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of a foreign issuer may present greater risks than investments in
U.S. securities, including higher transaction costs as well as the imposition
of additional taxes by foreign governments. In addition, investments in foreign
issuers may include additional risks associated with less complete financial
information about the issuers, less market liquidity, and political
instability. Future political and economic developments, the possible
imposition of withholding taxes on interest income, the possible seizure or
nationalization of foreign holdings, the possible establishment of exchange
controls, or the adoption of other governmental restrictions, might adversely
affect the payment of principal and interest on obligations of foreign issuers.
As a matter of practice, the Funds will not invest in the obligations of a
foreign issuer if any such risk appears to the Funds' adviser to be
substantial.
REPURCHASE AGREEMENTS
The Funds, their custodian, or sub-custodian will take possession of the
securities subject to repurchase agreements, and these securities will be
marked to market daily. To the extent that the original seller does not
repurchase the securities from a Fund, the Fund could receive more or less than
the repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Funds believe
that, under the regular procedures normally in effect for custody of the Funds'
portfolio securities subject to repurchase agreements, a court of competent

jurisdiction would rule in favor of the Funds and allow retention or
disposition of such securities. The Funds will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Funds' adviser to be creditworthy
pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may engage in when-issued and delayed delivery transactions. These
transactions are made to secure what is considered to be an advantageous price
or yield for the Funds. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Funds
sufficient to make payment for the securities to be purchased are segregated on
the Funds' records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds do not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of their
respective assets.

LENDING OF PORTFOLIO SECURITIES
The collateral received when each Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays a Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
PORTFOLIO TURNOVER
Although the Funds do not intend to invest for the purpose of seeking short-
term profits, securities in a Fund's portfolio will be sold whenever the
adviser believes it is appropriate to do so in light of a Fund's investment
objective, without regard to the length of time a particular security may have
been held.
The adviser does not anticipate that a Fund's annual portfolio turnover rate
will exceed 200% for the BOND FUND or 150% for the EQUITY FUND under normal
market conditions. Although it was expected that the portfolio turnover rate
for SHORT TERM YIELD FUND would not exceed 150% for the year ended December 31,
1995, the actual rate was 167%. The higher portfolio turnover rate was due
primarily to a repositioning of the SHORT TERM YIELD FUND'S investments to
respond to the volatility of short-term interest rates. In addition, the SHORT
TERM YIELD FUND was able to achieve positive results by swapping into
relatively more attractive sectors of the fixed income market as the year
progressed. The anticipated annual rate of portfolio turnover for SHORT TERM
YIELD FUND is generally not expected to exceed 200% in the future.

For the year ended December 31, 1995, the portfolio turnover rates for BOND
FUND, SHORT TERM YIELD FUND, and EQUITY FUND were 161%, 167%, and 76%,
respectively. For the year ended December 31, 1994, the portfolio turnover
rates for BOND FUND, SHORT TERM YIELD FUND, and EQUITY FUND were 134%, 148%,
and 108%, respectively.
THE FOLLOWING POLICIES APPLY TO THE BOND FUND AND SHORT TERM YIELD FUND ONLY.
WEIGHTED AVERAGE PORTFOLIO MATURITY
The BOND FUND and SHORT TERM YIELD FUND will determine their dollar-weighted
average portfolio maturity by assigning a "weight" to each portfolio security
based upon the pro rata market value of such portfolio security in comparison
to the market value of the entire portfolio. The remaining maturity of each
portfolio security is then multiplied by its weight, and the results are added
together to determine the weighted average maturity of the portfolio. For
purposes of calculating their dollar-weighted average portfolio maturity, the
BOND FUND and SHORT TERM YIELD FUND will: (a) treat asset-backed securities as
having a maturity equal to their estimated weighted-average maturity; and (b)
treat variable and floating rate instruments as having a remaining maturity
commensurate with the period remaining until the next scheduled adjustment to
the instrument's interest rate. The average maturity of asset-backed securities
will be calculated based upon assumptions established by the adviser as to the
probable amount of principal prepayments weighted by the period until such
prepayments are expected to be received.

DURATION
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in

the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends on three primary variables:
the security's coupon rate, maturity date, and level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and
interest payments, by the sum of the present values of the cash flows. Certain
debt securities, such as asset-backed securities, may be subject to prepayment
at irregular intervals. The duration of these instruments will be calculated
based upon assumptions established by the investment adviser as to the probable
amount and sequence of principal prepayments.
Mathematically, duration is measured as follows:
Duration = PVCF1(1)/PVTCF + PVCF2(2)/PVTCF + PVCF3(3)/PVTCF + ... +
PVCF4(4)/PVTCF
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the BOND FUND and SHORT
TERM YIELD FUND reinvest the payments and any unscheduled prepayments of
principal received, the BOND FUND and SHORT TERM YIELD FUND may receive a rate

of interest which is actually lower than the rate of interest paid on these
securities ("prepayment risks"). Mortgage-backed and asset-backed securities
are subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage loans or the
collateral supporting asset-backed securities may be prepaid without penalty or
premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are
less likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities. In addition, at the time the BOND FUND and SHORT TERM YIELD FUND
reinvest the payments and any unscheduled prepayments of principal received,
the Funds may receive a rate of interest which is actually lower than the rate
of interest paid on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on credit cards,
thereby reducing the balance due. Most issuers of asset-backed securities
backed by motor vehicle installment purchase obligations permit the servicer of
such receivables to retain possession of the underlying obligations. If the

servicer sells these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Further, if a vehicle is registered in one
state and is then reregistered because the owner and obligor moves to another
state, such reregistration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The BOND FUND and SHORT TERM YIELD FUND may invest in CMOs. Privately-
issued CMOs generally represent an ownership interest in a pool of federal
agency mortgage pass-through securities such as those issued by the
Government National Mortgage Association. The terms and characteristics of
the mortgage instruments may vary among pass-through mortgage loan pools.
The market for such CMOs has expanded considerably since their inception.
The size of the primary issuance market and the active participation in
the secondary market by securities dealers and other investors make
government-related pools highly liquid.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")
REMICs are offerings of multiple class real estate mortgage-backed
securities which qualify and elect treatment as such under provisions of
the Internal Revenue Code. Issuers of REMICs may take several forms, such
as trusts, partnerships, corporations, associations, or segregated pools
of mortgages. Once REMIC status is elected and obtained, the entity is not

subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and a
single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
RESETS OF INTEREST
The interest rates paid on some of the Adjustable Rate Mortgage Securities
("ARMS"), CMOs, and REMICs in which the BOND FUND and SHORT TERM YIELD
FUND invest will be readjusted at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the
one-year, three-year and five-year constant maturity Treasury Note rates,
the three-month Treasury Bill rate, the six-month Treasury Bill rate, the
one-month or three-month London Interbank Offered Rate ("LIBOR") and the
National Median Cost of Funds. Some indices, such as the three-month and
six-month Treasury Bill rate, closely mirror changes in market interest
rate levels. Others tend to lag changes in market rate levels and tend to
have somewhat less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an ARMS will tend to be
less sensitive to interest rate changes than a fixed rate debt security of
the same stated maturity. Hence, ARMS which use indices that lag changes
in market rates should experience greater price volatility than ARMS that
closely mirror the market. Certain residual interest tranches of CMOs may

have adjustable interest rates that deviate significantly from prevailing
market rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event that the BOND
FUND and SHORT TERM YIELD FUND purchase such residual interest mortgage
securities, it will factor in the increased interest and price volatility
of such securities when determining its dollar-weighted average portfolio
maturity.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs and REMICs in
which the BOND FUND and SHORT TERM YIELD FUND invest will frequently have
caps and floors which limit the maximum amount by which the loan rate to
the residential borrower may change up or down: (1) per reset or
adjustment interval; and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the BOND FUND and SHORT TERM
YIELD FUND invest may be affected if market interest rates rise or fall
faster and farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the interest rates
on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the
mortgage securities in which the Funds invest to be shorter than the
maturities stated in the underlying mortgages.

THE FOLLOWING POLICIES APPLY TO THE BOND FUND AND SHORT TERM YIELD FUND ONLY.

CREDIT FACILITIES
Demand notes are borrowing arrangements between a corporation and an
institutional investor (such as the BOND FUND and SHORT TERM YIELD FUND)
payable upon demand by either party. The notice period for demand typically
ranges from one to seven days, and the party may demand full or partial
payment. Revolving credit facilities are borrowing arrangements in which the
lender agrees to make loans up to a maximum amount upon demand by the borrower
during a specified term. As the borrower repays the loan, an amount equal to
the repayment may be borrowed again during the term of the facility. The BOND
FUND and SHORT TERM YIELD FUND may generally acquire a participation interest
in a revolving credit facility from a bank or other financial institution. The
terms of the participation may require the BOND FUND and SHORT TERM YIELD FUND
to make a pro rata share of all loans extended to the borrower and entitles the
BOND FUND and SHORT TERM YIELD FUND to a pro rata share of all payments made by
the borrower. Demand notes and revolving facilities usually provide for
floating or variable rates of interest.
CREDIT ENHANCEMENT
Certain of the BOND FUND'S and SHORT TERM YIELD FUND'S acceptable investments
may be credit enhanced by a guaranty, letter of credit or insurance. The BOND
FUND and SHORT TERM YIELD FUND typically evaluate the credit quality and
ratings of credit enhanced securities based upon the financial condition and
ratings of the party providing the credit enhancement (the "Credit Enhancer"),
rather than the issuer. Generally, the BOND FUND and SHORT TERM YIELD FUND will
not treat credit enhanced securities as having been issued by the Credit
Enhancer for diversification purposes. However, under certain circumstances
applicable regulations may require the BOND FUND and SHORT TERM YIELD FUND to
treat the securities as having been issued by both the issuer and the Credit

Enhancer. The bankruptcy, receivership or default of the Credit Enhancer will
adversely affect the quality and marketability of the underlying security.
DEMAND FEATURES
The BOND FUND and SHORT TERM YIELD FUND may acquire securities that are subject
to puts and standby commitments ("demand features") to purchase the securities
at their principal amount (usually with accrued interest) within a fixed period
following a demand by the BOND FUND and SHORT TERM YIELD FUND. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities or by another third party, and may not be transferred separately
from the underlying security. The bankruptcy, receivership or default by the
issuer of the demand feature, or a default on the underlying security or other
event that terminates the demand feature before its exercise, will adversely
affect the liquidity of the underlying security. Demand features that are
exercisable even after a payment default on the underlying security are treated
as a form of credit enhancement.
THE FOLLOWING POLICIES APPLY TO THE EQUITY FUND ONLY.
The EQUITY FUND's investments include, but are not limited to: common stocks of
domestic and foreign issuers, preferred stocks, warrants, investments in
American Depositary Receipts, stock index futures, corporate bonds, notes,
convertible securities, zero coupon convertible securities, money market
instruments and money market mutual funds.
CONVERTIBLE SECURITIES
The EQUITY FUND may invest in convertible securities.
The EQUITY FUND will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the opinion of
the EQUITY FUND'S adviser, the investment characteristics of the underlying
common shares will assist the EQUITY FUND in achieving its investment
objective. Otherwise the EQUITY FUND may hold or trade convertible securities.

In selecting convertible securities for the EQUITY FUND, the EQUITY FUND's
adviser evaluates the investment characteristics of the convertible security as
a fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the EQUITY FUND's adviser
considers numerous factors, including the economic and political outlook, the
value of the security relative to other investment alternatives, trends in the
determinants of the issuer's profits, and the issuer's management capability
and practices.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at
a discount to their face amount and do not entitle the holder to any
periodic payments of interest prior to maturity. Rather, interest earned
on zero coupon convertible securities accretes at a stated yield until the
security reaches its face amount at maturity. Zero coupon convertible
securities are convertible into a specific number of shares of the
issuer's common stock. In addition, zero coupon convertible securities
usually have put features that provide the holder with the opportunity to
put the bonds back to the issuer at a stated price before maturity.
Generally, the prices of zero coupon convertible securities may be more
sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a portfolio of
a regulated investment company and avoid liability for federal income
taxes, the EQUITY FUND will be required to distribute income accrued with
respect to zero coupon convertible securities which it owns, and may have

to sell portfolio securities (perhaps at disadvantageous times) in order
to generate cash to satisfy these distribution requirements.
WARRANTS
The EQUITY FUND may purchase warrants, which are basically options to purchase
common stock at a specific price (usually at a premium above the market value
of the optioned common stock at issuance). Warrants may have a life ranging
from less than a year to twenty years, or may be perpetual. However, most
warrants have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
STOCK INDEX FUTURES CONTRACTS
As a means of reducing fluctuations in the net asset value of Shares of the
EQUITY FUND, the EQUITY FUND may attempt to hedge all or a portion of its
portfolio by buying and selling stock index futures contracts. The EQUITY FUND
may also write covered call options on portfolio securities to attempt to
increase its current income. The EQUITY FUND will maintain its positions in
securities, option rights, and segregated cash subject to calls until the
options are exercised, closed, or have expired.
Stock index futures contracts are based on indices that reflect the market
value of common stock of the firms included in the indices. An index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to the difference between the value of the

index at the close of the last trading day of the contract and the price at
which the index contract was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the EQUITY FUND does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
EQUITY FUND is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that of
margin in securities transactions in that initial margin in futures
transactions does not involve the borrowing of funds by the EQUITY FUND to
finance the transactions. Initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the EQUITY FUND upon
termination of the futures contract, assuming all contractual obligations have
been satisfied.
A futures contract held by the EQUITY FUND is valued daily at the official
settlement price of the exchange on which it is traded. Each day the EQUITY
FUND pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the EQUITY
FUND but is instead settlement between the EQUITY FUND and the broker of the
amount one would owe the other if the futures contract expired. In computing
its daily net asset value, the Fund will mark to market its open futures
positions.
INVESTMENT LIMITATIONS
THE FOLLOWING LIMITATIONS APPLY TO ALL FUNDS.
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for

clearance of purchases and sales of securities. The deposit or payment by
a Fund of initial or variation margin in connection with financial futures
contracts or related options transactions is not considered the purchase
of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Funds will not issue senior securities except that a Fund may borrow
money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes and then only in amounts
not in excess of one-third of the value of its total assets; provided
that, while borrowings exceed 5% of a Fund's total assets, any such
borrowings will be repaid before additional investments are made. A Fund
will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes.
CONCENTRATION OF INVESTMENTS
Each Fund will not purchase securities which would cause 25% or more of
the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal
activities in the same industry; provided that (a) there is no limitation
with respect to obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities; (b) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of their parents; and
(c) utilities will be divided according to their services. The SHORT TERM
YIELD FUND will consider its investment in instruments issued by foreign
banks and instruments issued by domestic banks to be investments in
separate industries for purposes of concentration.

INVESTING IN COMMODITIES
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the EQUITY FUND may purchase and
sell stock index futures contracts and write covered call options.
INVESTING IN REAL ESTATE
The Funds will not purchase or sell real estate, including limited
partnership interests in real estate, although a Fund may invest in
securities secured by real estate or interests in real estate.
LENDING CASH OR SECURITIES
Each Fund will not lend any of its assets except portfolio securities up
to one-third the value of total assets. This shall not prevent a Fund from
purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by a Fund's investment objective, policies, and limitations, or the
Declaration of Trust.
UNDERWRITING
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, a Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its total
assets at the time of purchase would be invested in the securities of that

issuer. Also, a Fund will not purchase more than 10% of the outstanding
voting securities of any one issuer.
The above investment limitations cannot be changed without approval of the
holders of a majority of the particular Fund's shares. The following
limitations, however, may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material changes in these
limitations become effective.
RESTRICTED SECURITIES
The Funds will not invest more than 10% of the value of their total assets
in securities subject to restrictions on resale under the Securities Act
of 1933, except for certain restricted securities which meet the criteria
for liquidity as established by the Trustees. To comply with certain state
restrictions, the EQUITY FUND will limit its investment in restricted
securities to 5% of its total assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.)
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 15% of the value of their net assets
in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options,
certain restricted securities which have not met the criteria for
liquidity established by the Trustees and non-negotiable time deposits
with maturities over seven days.
PLEDGING ASSETS
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, a Fund may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets at the time of the pledge.

For purposes of this limitation, the purchase of securities on a when-
issued basis is not deemed to be a pledge.
INVESTING IN MINERALS
The Funds will not purchase interests in oil, gas, other mineral
exploration or development programs, or leases, although a Fund may
purchase the publicly traded securities of companies engaging in such
activities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of their total assets in any one
investment company, or invest more than 10% of their total assets in
investment companies in general. A Fund will purchase securities of
closed-end investment companies only in open-market transactions involving
only customary brokerage commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets. It should be noted that investment companies incur
certain expenses, such as management fees, and, therefore, any investment
by a Fund in shares of another investment company would be subject to such
duplicate expenses. A Fund will invest in other investment companies
primarily for the purpose of investing its short-term cash on a temporary
basis. The adviser will waive its investment advisory fee on assets
invested in securities of open-end investment companies.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
BAYFUNDS
The Funds will not purchase or retain the securities of any issuer if the
officers and Trustees of BayFunds or the Funds' adviser owning

individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Funds will not invest more than 5% of the value of their total asset
in securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor. With
respect to asset-backed securities, the BOND FUND and SHORT TERM YIELD
FUND will treat the originator of the asset pool as the company issuing
the securities for purposes of determining compliance with this
limitation.
THE FOLLOWING LIMITATIONS APPLY TO THE EQUITY FUND ONLY.
INVESTING TO EXERCISE CONTROL
The EQUITY FUND will not purchase securities for the purpose of exercising
control over the issuer of securities.
INVESTING IN WARRANTS
The EQUITY FUND will not invest more than 5% of its net assets in
warrants. No more than 2% of the EQUITY FUND'S net assets, to be included
within the overall 5% limit on investments in warrants, may be warrants
which are not listed on the New York Stock Exchange or the American Stock
Exchange.
WRITING COVERED CALL OPTIONS
The EQUITY FUND will not write call options on securities unless the
securities are held in the EQUITY FUND's portfolio or unless the EQUITY
FUND is entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage

resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds have no present intent to borrow money or invest in securities of
other investment companies in excess of 5% of the value of their respective net
assets during the coming fiscal year.
For purposes of its policies and limitations, the Funds consider certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings associations having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
BAYFUNDS MANAGEMENT

TRUSTEES AND OFFICERS
Trustees and Officers are listed with their addresses, principal occupations,
and present positions, including any affiliation with BayBanks Investment
Management, Inc., BayBank , N.A., BayBanks, Inc., Federated Investors,
Federated Securities Corp., and Federated Administrative Services.
Officers and Trustees are listed with their addresses, principal occupations,
and present positions.

Kenneth G. Condon
11 Dudley Road
Sudbury, MA
Birthdate: August 14, 1947

Trustee

Treasurer (since June 1992) and Vice President for Financial Affairs (1984
through present), Boston University; Member, BayBank Trust Advisory Board;

Member, Regional Strategic Planning Committee, BayBanks, Inc.; Director,
Seragen, Inc.; Director, WABU-TV; Trustee and Chairman of the Finance/Audit
Committee, Newbury College; formerly, Director and Member of Audit Committee,
BayBank Harvard Trust Co.; Director and Treasurer of the Boston Chapter of the
Financial Executives Institute.

Robert W. Eisenmenger
92 Woodland Street
Natick, MA
Birthdate: June 30, 1926

Trustee

Consultant; formerly, First Vice President of the Federal Reserve Bank of
Boston, and Executive Director for Priced Services for the Federal Reserve
System; Trustee, Massachusetts Congregational Fund; Trustee and Consultant,
Cape Cod Five Cents Savings Bank.

Sara L. Johnson
30 Eaton Court
Wellesley Hills, MA
Birthdate: November 16, 1951

Trustee

Chief Regional Economist (since 1995) and Principal (since 1992), Director of
Regional Forecasting, Managing Economist for Regional Information Group's

Eastern Regions (1988-1991) and Senior Economist, U.S. Economic Service (1983-
1988), DRI/McGraw Hill.

Ernest R. May
John F. Kennedy School of Government
Cambridge, MA
Birthdate: November 19, 1928

Trustee

Charles Warren Professor of History, Harvard University; Chair, Board of
Visitors, Joint Military Intelligence College; Chair, Board of Control, John
Anson Kittredge Educational Fund; Director, Charles Warren Center for Studies
in American History, Harvard University.

Alvin J. Silk
Graduate School of Business Administration
Harvard University
Soldiers Field Road
Boston, MA
Birthdate: December 31, 1935

Trustee

Co-Chairman, Marketing Area and Lincoln Filene Professor of Business
Administration, Graduate School of Business Administration, Harvard University
(1988- present); formerly, Erwin H. Schell Professor of Management, Sloan
School of Management, Massachusetts Institute of Technology; formerly,
Director, BayBank Systems, Inc.; Trustee, Marketing Science Institute;
Director, Reed and Barton, Inc.

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President and Treasurer

Trustee, Federated Investors; President and/or Trustee of certain investment
companies distributed by Federated Securities Corp.; staff member, Federated
Securities Corp. and Federated Administrative Services.

C. Christine Thomson
Federated Investors Tower
Pittsburgh, PA
Birthdate: September 1, 1957

Vice President and Assistant Treasurer

Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of certain investment companies distributed by Federated Securities
Corp.

Victor R. Siclari
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 17, 1961
Secretary

Corporate Counsel, Federated Investors; formerly, Attorney, Morrison & Foerster
(law firm).

FUND OWNERSHIP
Officers and Trustees own less than 1% of each of the Fund's outstanding
shares.
As of February 5, 1996, the following shareholder owned 5% or more of the
INSTITUTIONAL SHARES of the Funds: Slatt & Co., Burlington, Massachusetts,
owned approximately: 5,454,378 shares (91%) of BOND FUND; 4,348,975 shares
(100%) of SHORT TERM YIELD FUND; and 6,491,804 shares (95%) of EQUITY FUND.
TRUSTEES' COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#

Kenneth G. Condon $ 11,600
Trustee
Robert W. Eisenmenger $ 10,000
Trustee
Sarah L. Johnson $ 10,000
Trustee
Ernest R. May $ 10,000
Trustee
Alvin J. Silk $ 8,750
Trustee
*Information is furnished for the fiscal year ended December 31, 1995.
#The aggregate compensation is provided for the Trust which is comprised of 5
portfolios.
TRUSTEE LIABILITY
BayFunds' Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUNDS
The Funds' investment adviser is BayBanks Investment Management, Inc. (the
"Adviser"). The Adviser is a wholly-owned subsidiary of BayBanks, Inc., a bank
holding company organized under the laws of the Commonwealth of Massachusetts
with a number of bank subsidiaries. Collectively, these bank subsidiaries are
referred to in this Statement of Additional Information as "BayBanks."

The Adviser shall not be liable to BayFunds, the Funds or any shareholder of
the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with BayFunds.
Because of the internal controls maintained by BayBanks to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of BayBanks or its affiliates' lending relationships with an issuer.

ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended December 31, 1995, 1994 and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, the
Adviser earned fees from BOND FUND in the amount of $360,071, $417,260, and
$392,858, respectively, of which $0, $0 and $95,417, respectively, was
voluntarily waived.
For the fiscal years ended December 31, 1995, 1994 and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, the
Adviser earned fees from SHORT TERM YIELD FUND in the amount of $361,786,
$681,886, and $643,201, respectively, of which $0, $0, and $111,229,
respectively, was voluntarily waived.
For the fiscal years ended December 31, 1995, 1994 and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, the
Adviser earned fees from EQUITY FUND in the amount of $783,869, $816,295, and
$560,943, respectively, of which $0, $0, and $133,201, respectively, was
voluntarily waived.

STATE EXPENSE LIMITATION
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's normal operating expenses
(including the investment advisory fee, but not including brokerage
commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2%
per year of the first $30 million of average net assets, 2% per year of
the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will reimburse the Fund for its
expenses over the limitation.
If a Fund's monthly projected operating expenses exceed this expense
limitation, the investment advisory fee paid will be reduced by the amount
of the excess, subject to an annual adjustment. If the expense limitation
is exceeded, the amount to be reimbursed by the Adviser will be limited,
in any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Adviser makes
decisions on portfolio transactions and select brokers and dealers subject to
review by the Trustees. The Adviser may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to
the Funds or to the Adviser and may include: advice as to the advisability of

investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and similar
services.
Research services provided by brokers and dealers may be used by the Adviser or
its affiliates in advising the Funds and other accounts. To the extent that
receipt of these services may supplant services for which the Advisers or their
affiliates might otherwise have paid, it would tend to reduce their expenses.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage
and research services provided.
Although investment decisions for the Funds are made independently from those
of other accounts managed by the Adviser, investments of the type the Funds may
make may also be made by those other accounts. When the Funds and one or more
other accounts managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received
by the Funds or the size of the position obtained or disposed of by the Funds.
In other cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Funds.
On December 31, 1995, BOND FUND owned approximately $999,000 of the securities
of Salomon, Inc., and the SHORT TERM YIELD FUND owned approximately $1,502,000
of the securities of Dean Witter Discover & Co., Inc. and $1,598,000 of the
securities of Smith Barney, Inc.; all of whom are regular brokers of the Funds
that derive more than 15% of gross revenues from securities-related activities.

For the fiscal years ended December 31, 1995, 1994 and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, the
EQUITY FUND paid $57,386, $113,416, and $79,878, respectively, in brokerage
commissions on brokerage transactions.
SHAREHOLDER SERVICING ARRANGEMENTS

Under a Shareholder Services Plan, the Funds may pay a fee to BayBank Systems,
Inc., as shareholder servicing agent, for INVESTMENT SHARES for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balance; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses. For the fiscal year
ended December 31, 1995, BOND FUND, SHORT TERM YIELD FUND, and EQUITY FUND paid
BayBanks Systems, Inc. $15,149, $64,567, and $72,988, respectively, in
shareholder services fees with respect to INVESTMENT SHARES under the
Shareholder Services Plan.
OTHER SERVICES

FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees set
forth in the prospectus.
For the fiscal year ended December 31, 1995, 1994, and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, BOND
FUND incurred costs for administrative fees of $60,548, $73,256, and $74,221,

respectively, of which $0, $0, and $41,156, respectively, was voluntarily
waived. For the fiscal year ended December 31, 1995, 1994, and for the period
from January 29, 1993 (date of initial public investment) to December 31, 1993,
FAS reimbursed BOND FUND $0, $0, and $13,169, respectively.
For the fiscal year ended December 31, 1995, 1994, and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993,
SHORT TERM YIELD FUND incurred costs for administrative fees of $73,121,
$143,915, and $145,120, respectively, of which $0, $0, and $75,217,
respectively, was voluntarily waived. For the fiscal year ended December 31,
1995, 1994, and for the period from January 29, 1993 (date of initial public
investment) to December 31, 1993, FAS reimbursed SHORT TERM YIELD FUND $0, $0,
and $20,605, respectively.
For the fiscal year ended December 31, 1995, 1994, and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993,
EQUITY FUND incurred costs for administrative fees of $112,952, $122,769, and
$90,387, respectively, of which $0, $0, and $46,661, respectively, was
voluntarily waived. For the fiscal year ended December 31, 1995, 1994, and for
the period from January 29, 1993 (date of initial public investment) to
December 31, 1993, FAS reimbursed EQUITY FUND $0, $0, and $13,014,
respectively.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES
DST Systems, Inc., Kansas City, Missouri, is transfer agent for the Shares of
the Funds and dividend disbursing agent for the Funds. The Funds' Transfer
Agent maintains a Share account for each shareholder of record. Share
certificates are not issued.
FAS provides portfolio accounting services for the Funds. Prior to January 16,
1996, Federated Services Company, an affiliate of FAS and subsidiary of
Federated Investors, provided the portfolio accounting services.

CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and
cash of the Funds.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the
Independent Trustees.

PURCHASING SHARES

The procedures for purchasing Shares are explained in the prospectus.
EXCHANGING SECURITIES FOR SHARES OF THE FUNDS
Each Fund may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least $100,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share of the Fund
will be issued for each equivalent amount of securities accepted.

Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other
rights attached to the securities become the property of the Fund, along with
the securities.
DETERMINING NET ASSET VALUE

The net asset value generally changes each day. The days on which the net asset
value is calculated by a Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market value of a Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales of equity securities, according to the
mean between the last closing bid and asked prices, and for bonds and other
fixed income securities as determined by an independent pricing service;
o for unlisted equity securities, the latest mean prices;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or, for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase, at amortized cost; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.

EXCHANGE PRIVILEGES

REQUIREMENTS FOR EXCHANGE
Upon receipt of proper instructions and required supporting documents, Shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other Participating Fund.
Please review the prospectus for further information on the exchange
privileges.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES

Shares of the Funds are redeemed at the next computed net asset value after the
Funds receive the redemption request from the Funds' transfer agent in proper
form. Redemption procedures are explained in the prospectus.
REDEMPTION IN KIND
Although the Funds intend to redeem Shares in cash, they reserve the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Funds to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of a Fund's net asset value
during any 90-day period.

Redemption in kind is not as liquid as cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
ADDITIONAL INFORMATION YOU SHOULD KNOW

MONTHLY STATEMENTS
Shareholders of the Funds who have eligible BayBanks deposit accounts will
receive combined monthly statements containing all information relating to
their deposit accounts and BayFunds transactions.
COMPANION ACCOUNT AVAILABILITY
Certain BayBanks deposit account customers may elect to open a companion
BayFunds account to facilitate BayFunds transactions.
MASSACHUSETTS LAW

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of BayFunds. To protect shareholders,
BayFunds has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of BayFunds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument BayFunds or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for BayFunds'
obligations, BayFunds is required, by its Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, BayFunds will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of BayFunds. Therefore, financial loss resulting from liability as a
shareholder will occur only if BayFunds cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.

TAX STATUS

THE FUNDS' TAX STATUS
Each Fund intends to meet the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for any federal income taxes on income or gains distributed to the
Funds' shareholders. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held,
or deemed held, less than three months;
o diversify its holdings according to certain statutory requirements; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
Each Fund will distribute substantially all of its net investment income and
net realized gains at least annually.
The EQUITY FUND'S transactions in futures contracts and options, and certain
other investments and hedging activities of the EQUITY FUND will be subject to
special tax rules, the effect of which may be to alter the timing and character
of certain income gains and losses realized by the EQUITY FUND. These rules
could, therefore, affect the amount, timing and character of distributions paid
to the EQUITY FUND'S shareholders.
TOTAL RETURN

For the fiscal year ended December 31, 1995, and the period from January 29,
1993 (date of initial public investment) to December 31, 1995, the average
annual total return for the INVESTMENT SHARES of the BOND FUND, was 16.08% and
7.15%, respectively. For the fiscal year ended December 31, 1995 and the period

from December 31, 1993 (date of initial public investment) to December 31,
1995, the average annual total return for the INSTITUTIONAL SHARES of the BOND
FUND was 16.36% and 6.71%, respectively.
For the fiscal year ended December 31, 1995, and the period from January 29,
1993 (date of initial public investment) to December 31, 1995, the average
annual total return for the INVESTMENT SHARES of the SHORT TERM YIELD FUND, was
7.37% and 2.60%, respectively. For the fiscal year ended December 31, 1995 and
the period from December 31, 1993 (date of initial public investment) to
December 31, 1995, the average annual total return for the INSTITUTIONAL SHARES
of the SHORT TERM YIELD FUND was 7.64% and 2.08%, respectively.
For the fiscal year ended December 31, 1995, and the period from January 29,
1993 (date of initial public investment) to December 31, 1995, the average
annual total return for the INVESTMENT SHARES of the EQUITY FUND, was 32.59%
and 13.40%, respectively. For the fiscal year ended December 31, 1995 and the
period from December 31, 1993 (date of initial public investment) to December
31, 1995, the average annual total return for the INSTITUTIONAL SHARES of the
EQUITY FUND was 32.24% and 12.87%, respectively.
Average annual total return for both classes of Shares of each Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of shares owned
at the end of the period by the net asset value per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000, adjusted
over the period by any additional shares, assuming the monthly (for the BOND
FUND and SHORT TERM YIELD FUND) or quarterly (for the EQUITY FUND) reinvestment
of all dividends and distributions.

YIELD

The yield for the thirty-day period ended December 31, 1995 for the BOND FUND,
SHORT TERM YIELD FUND, and EQUITY FUND was 5.12%, 5.03%, and 0.38%,
respectively, for INVESTMENT SHARES, and 5.37%, 5.28%, and 0.64%, respectively,
for INSTITUTIONAL SHARES.
The yield for both classes of Shares of each Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by the Fund over a thirty-day period by the offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each month
over a twelve-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by each Fund because of certain
adjustments required by the Securities and Exchange Commission and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS

The performance of both classes of Shares of each Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity (in the case of the BOND FUND and SHORT TERM
YIELD FUND);
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in a Fund's expenses or a class of shares' expenses; and

o various other factors.
A Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
From time to time, the Funds may advertise the performance of both classes of
Shares compared to similar funds or portfolios using certain indices, reporting
services and financial publications. The Funds may also advertise the
performance of Shares compared to certificates of deposit and savings accounts.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Funds use in advertising may
include the following:
The BOND FUND may compare its performance to:
oLEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.
oLEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; publicly issued, fixed
rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance; and U.S. dollar denominated obligations of foreign

issuers. The average maturity of these bonds approximates ten years. Tracked
by Lehman Brothers, Inc., the index calculates total returns for one month,
three month, twelve month, and ten year periods and year-to-date.
oSALOMON BROTHERS AAA-AA CORPORATE INDEX calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or more
and companies in industry, public utilities, and finance.
The SHORT TERM YIELD FUND may compare its performance to:
oMERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking short-
term U.S. government securities with maturities between 1 and 2.99 years. The
index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
The EQUITY FUND may compare its performance to:
oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (THE "STANDARD
& POOR'S INDEX"), a composite index of common stocks in industry,
transportation, and financial and public utility companies can be used to
compare to the total returns of funds whose portfolios are invested primarily
in common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index. Taxes due
on any of these distributions are not included, nor are brokerage or other
fees calculated, in Standard & Poor's figures.
oDOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations as well as public utility and
transportation companies. The DJIA indicates daily changes in the average
price of stocks in any of its categories. It also reports total sales for
each group of industries. Because it represents the top corporations of
America, the DJIA's index movements are leading economic indicators for the
stock market as a whole.

oRUSSELL 2000 SMALL STOCK INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used to
compare to the total returns of funds whose portfolios are invested primarily
in small capitalization common stocks.
The BOND FUND, SHORT TERM YIELD FUND, and EQUITY FUND may also compare their
performance to:
oLIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. It also produces indices
of larger mutual funds that are intended to track specific fund categories.
Total return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Funds will quote their
Lipper ranking in the applicable category or against a specific Lipper index
in advertising or sales literature.
oBANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank and
thrift institution money market deposit accounts. The rates published in the
index are an average of the personal account rates offered on the Wednesday
prior to the date of publication by ten of the largest banks and thrifts in
each of the five largest Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution and compounding methods
vary. If more than one rate is offered, the lowest rate is used. Rates are
subject to change at any time specified by the institution.

Advertisements and other sales literature for both classes of shares of the
Funds may quote total returns which are calculated on standardized base
periods. These total returns also represent the historic change in the value
of an investment in either class of shares of the BOND FUND and SHORT TERM

YIELD FUNDs based on monthly (quarterly for the EQUITY FUND) reinvestment of
dividends over a specified period of time.
FINANCIAL STATEMENTS

The financial statements for the fiscal year ended December 31, 1995, are
incorporated herein by reference to the Annual Report of the Funds dated
December 31, 1995 (File No 811-6296). You may request a copy of the Annual
Report free of charge by writing the Funds or by calling 1-800-BAY-FUND.

APPENDIX

STANDARD AND POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.

Plus (+) or minus (-): S&P may apply a plus (+) or minus (-) sign to show
relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND RATINGS
AAA--Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds 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.
NR--Not rated by Moody's.

Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH INVESTORS SERVICE, INC. ("FITCH") LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--NR indicates that Fitch does not rate the specific issue.
Plus (+) or Minus (-): 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.

DUFF & PHELPS ("D&P") LONG-TERM DEBT RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A-- Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB-- Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
Plus (+) or Minus (-): 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.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
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 (-) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternative liquidity.

P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.

DUFF & PHELPS SHORT-TERM DEBT RATINGS
D-1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below U.S. Treasury short-term obligations.
D-1-- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2-- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

Cusip 072782881

Cusip 072782402
Cusip 072782808
Cusip 072782501
Cusip 072782873
Cusip 072782303
2092913-B (2/96)

BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO
(INVESTMENT SHARES AND INSTITUTIONAL SHARES)
BAYFUNDS MONEY MARKET PORTFOLIO
(INVESTMENT SHARES AND TRUST SHARES)
(PORTFOLIOS OF BAYFUNDS(R))
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information should be read with the
prospectus for BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO ("U.S. TREASURY
FUND") and BAYFUNDS MONEY MARKET PORTFOLIO ("MONEY MARKET FUND")
(individually referred to as a "Fund" or collectively as the "Funds"), dated
March 1, 1996. This Statement is not a prospectus itself. Customers of
BayBanks and its affiliates may request a copy of a prospectus or a paper
copy of this combined Statement of Additional Information, if it was
received electronically, free of charge by calling toll free at 1-800-BAY-
FUND (1-800-229-3863). Customers of BayBanks Trust Department may call (617)
273-1700 in Massachusetts or toll free 1-800-462-9999 ext. 4589. BayBanks
Capital Markets customers should call 1-800-554-3311. Terms used herein are
as defined by the BayFunds Money Market Portfolios prospectus unless
otherwise noted.
FEDERATED INVESTORS TOWER

PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated March 1, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUNDS 1

INVESTMENT OBJECTIVE AND POLICIES OF THE
FUNDS 1

WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 1
REPURCHASE AGREEMENTS 1
REVERSE REPURCHASE AGREEMENTS 1
LENDING OF PORTFOLIO SECURITIES 1
RATINGS 2
TYPES OF INVESTMENTS 2
CREDIT ENHANCEMENT 2
RESTRICTED AND ILLIQUID SECURITIES 2
INVESTMENT LIMITATIONS 3
REGULATORY COMPLIANCE 5
BAYFUNDS MANAGEMENT 6

TRUSTEES AND OFFICERS 6
FUND OWNERSHIP 8
TRUSTEE COMPENSATION 8
TRUSTEE LIABILITY 8
INVESTMENT ADVISORY SERVICES 8

ADVISERS TO THE FUNDS 8
ADVISORY FEES 9
BROKERAGE TRANSACTIONS 9

SHAREHOLDER SERVICING ARRANGEMENTS 10

OTHER SERVICES 10

FUND ADMINISTRATION 10
TRANSFER AGENT, DIVIDEND DISBURSING
AGENT AND PORTFOLIO ACCOUNTING
SERVICES 10
CUSTODIAN 10
INDEPENDENT AUDITORS 10
LEGAL COUNSEL 10
PURCHASING SHARES 11

CONVERSION TO FEDERAL FUNDS 11
EXCHANGING SECURITIES FOR FUND SHARES11
DETERMINING NET ASSET VALUE 11

USE OF THE AMORTIZED COST METHOD 11
EXCHANGE PRIVILEGES 12

REQUIREMENTS FOR EXCHANGE 12
MAKING AN EXCHANGE 12
REDEEMING SHARES 12

REDEMPTION IN KIND 12
ADDITIONAL INFORMATION YOU SHOULD KNOW12

MONTHLY STATEMENTS 12
COMPANION ACCOUNT AVAILABILITY 12
MASSACHUSETTS LAW 13

TAX STATUS 13

THE FUNDS' TAX STATUS 13
SHAREHOLDERS' TAX STATUS 13
TOTAL RETRUN 13

YIELD 14

EFFECTIVE YIELD 14

PERFORMANCE COMPARISONS 14

FINANCIAL STATEMENTS 15

APPENDIX 16

GENERAL INFORMATION ABOUT THE FUNDS

The Funds are portfolios of BayFunds, which was established as a Massachusetts
business trust under a Declaration of Trust dated April 1, 1991.
The portfolios of BayFunds are: BAYFUNDS U.S. TREASURY MONEY MARKET PORTFOLIO;
BAYFUNDS MONEY MARKET PORTFOLIO; BAYFUNDS BOND PORTFOLIO; BAYFUNDS SHORT TERM
YIELD PORTFOLIO; and BAYFUNDS EQUITY PORTFOLIO. This Statement of Additional
Information relates only to the U.S. TREASURY FUND and MONEY MARKET FUND.
The U.S. TREASURY FUND and MONEY MARKET FUND are offered in two classes of
shares. The U.S. TREASURY FUND is offered in INVESTMENT SHARES and
INSTITUTIONAL SHARES. The MONEY MARKET FUND is offered in INVESTMENT SHARES and
TRUST SHARES. Collectively the classes will be referred to as "Shares."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS

The prospectus for the Funds discusses each Fund's investment objective and the
policies each Fund employs to achieve that objective. The following discussion
supplements the description of the Funds' investment policies in the Funds'
prospectus. The Funds' investment objectives cannot be changed without approval
of shareholders. Unless indicated otherwise, the investment policies described
in the prospectus may be changed by the Board of Trustees ("Trustees") without
the approval of each Fund's shareholders. Shareholders will be notified before
any material changes in these policies become effective.
THE FOLLOWING POLICIES APPLY TO BOTH FUNDS.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may engage in when-issued and delayed delivery transactions. These
transactions are made to secure what is considered to be an advantageous price
or yield for the Funds. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Funds
sufficient to make payment for the securities to be purchased are segregated on

the Funds' records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds do not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of their
respective assets.
REPURCHASE AGREEMENTS
The Funds, their custodian, or sub-custodian will take possession of the
securities subject to repurchase agreements, and these securities will be
marked to market daily. To the extent that the original seller does not
repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Funds believe
that under the regular procedures normally in effect for custody of the Funds'
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Funds and allow retention or
disposition of such securities. The Funds will only enter into repurchase
agreements with banks and other recognized financial institutions such as
broker/dealers which are deemed by the Funds' advisers to be creditworthy
pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.

When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when each Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays a Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
RATINGS
An NRSRO's highest rating category is determined without regard for sub-
categories and gradations. For example, securities rated A-1 or A-1+ by
Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), D-1 or D-1+ by Duff & Phelps Rating Co. ("D&P"), or F-1+ or
F-1 by Fitch Investors Service, Inc. ("Fitch") are all considered rated in the
highest short-term rating category. The Funds will follow applicable
regulations in determining whether a security rated by more than one NRSRO can
be treated as being in the highest short-term rating category. See "Regulatory
Compliance."
THE FOLLOWING POLICIES APPLY TO THE U.S. TREASURY FUND ONLY.
TYPES OF INVESTMENTS
The U.S. TREASURY FUND invests primarily in short-term U.S. Treasury
obligations with remaining maturities of 397 days or less and repurchase

agreements collateralized by such obligations. These may include direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, bonds,
and STRIPs) and obligations issued or guaranteed as to principal and interest
by the U.S. government. Examples of such obligations are:
o Export-Import Bank;
o General Services Administration;
o Government National Mortgage Association; and
o Small Business Administration.
THE FOLLOWING POLICIES APPLY TO THE MONEY MARKET FUND ONLY.
The MONEY MARKET FUND invests primarily in money market instruments with
remaining maturities of 397 days or less and which include, but are not limited
to, commercial paper, demand master notes, domestic and foreign bank
instruments, U.S. government obligations, corporate debt obligations and
repurchase agreements.
BANK INSTRUMENTS
The instruments of domestic banks and savings associations whose deposits
are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund, both of which are administered by the Federal Deposit
Insurance Corporation, such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances, are not necessarily
guaranteed by those organizations. In addition, the Fund may invest in the
following U.S. dollar-denominated instruments:
o Eurodollar Certificates of Deposit which are issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits, which are deposits in foreign branches of
U.S. or foreign banks;
o Canadian Time Deposits, which are deposits issued by branches of major
Canadian banks located in the United States; and

o Yankee Certificates of Deposit, which are certificates of deposit
issued by U.S. branches of foreign banks and held in the United
States.
CREDIT ENHANCEMENT
The MONEY MARKET FUND typically evaluates the credit quality and ratings of
credit-enhanced securities based upon the financial condition and ratings of
the party providing the credit enhancement (the "credit enhancer"), rather than
the issuer. Generally, the MONEY MARKET FUND will not treat credit-enhanced
securities as being issued by the credit enhancer for diversification purposes.
However, under certain circumstances, applicable regulations may require the
MONEY MARKET FUND to treat securities as having been issued by both the issuer
and the credit enhancer.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933. Rule 144A is a non-exclusive safe harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. Rule 144A provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. Rule 144A was expected to further enhance the liquidity
of the secondary market for securities eligible for resale under Rule 144A. The
MONEY MARKET FUND believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities (eligible for resale
under Rule 144A) to the Trustees. The Trustees consider the following criteria
in determining the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
INVESTMENT LIMITATIONS
THE FOLLOWING LIMITATIONS APPLY TO BOTH FUNDS.
SELLING SHORT AND BUYING ON MARGIN
The Funds will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. With respect to U.S.
TREASURY FUND, the deposit or payment of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
PLEDGING ASSETS
The Funds will not mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. In those cases, the Funds may pledge assets
having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of the Funds at the time of
the pledge.
LENDING CASH OR SECURITIES
The Funds will not lend any of their assets, except portfolio securities
up to one-third of the value of their total assets. This shall not prevent
the Funds from purchasing or holding bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Funds' investment objectives, policies, and limitations or the
Declaration of Trust.

INVESTING IN COMMODITIES AND REAL ESTATE
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. The Funds will not purchase or sell real
estate, including limited partnership interests in real estate, although
they may invest in securities of issuers whose business involves the
purchase or sale of real estate or in securities which are secured by real
estate or interests in real estate.
UNDERWRITING
The Funds will not underwrite any issue of securities, except as they may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with their investment
objectives, policies and limitations.
INVESTING IN RESTRICTED SECURITIES
The Funds will not purchase restricted securities if immediately
thereafter more than 5% (for the U.S. TREASURY FUND) or more than 10% (for
the MONEY MARKET FUND) of the net assets of the Fund, as applicable, taken
at market value, would be invested in such securities (except for
commercial paper issued under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which meet the criteria for
liquidity as established by the Trustees.)
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of their total assets, the Funds will not
purchase securities issued by any issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized
by such securities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer. Also, the Funds

will not purchase more than 10% of the outstanding voting securities of
any one issuer.

THE FOLLOWING LIMITATIONS APPLY TO THE U.S. TREASURY FUND ONLY.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The U.S. TREASURY FUND will not issue senior securities except that the
U.S. TREASURY FUND may borrow money directly or through reverse repurchase
agreements as a temporary measure for extraordinary or emergency purposes
and then only in amounts not in excess of one-third of the value of the
U.S. TREASURY FUND'S total assets; provided that, while borrowings exceed
5% of the U.S. TREASURY FUND'S total assets, any such borrowings will be
repaid before additional investments are made. The U.S. TREASURY FUND will
not borrow money or engage in reverse repurchase agreements for investment
leverage purposes.
CONCENTRATION OF INVESTMENTS
The U.S. TREASURY FUND will not purchase securities which would cause 25%
or more of the value of the U.S. TREASURY FUND'S total assets at the time
of purchase to be invested in the securities of one or more issuers
conducting their principal activities in the same industry; provided that
there is no limitation with respect to obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
THE FOLLOWING LIMITATIONS APPLY TO THE MONEY MARKET FUND ONLY.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The MONEY MARKET FUND will not issue senior securities except that the
MONEY MARKET FUND may borrow money directly or through reverse repurchase
agreements in amounts up to one-third of the value of its total assets
including the amounts borrowed. The MONEY MARKET FUND will not borrow

money or engage in reverse repurchase agreements for investment leverage,
but rather as a temporary, extraordinary, or emergency measure or to
facilitate management of the portfolio by enabling the MONEY MARKET FUND
to meet redemption requests when the liquidation of portfolio securities
is deemed to be inconvenient or disadvantageous. The MONEY MARKET FUND
will not purchase any securities while borrowings in excess of 5% of the
value of its total assets are outstanding.
CONCENTRATION OF INVESTMENTS
The MONEY MARKET FUND will not invest more than 25% of the value of its
total assets in any one industry, except it may invest more than 25% of
the value of its total assets in time and demand deposits, certificates of
deposit, and other instruments of domestic banks, and U.S. branches of
foreign banks, or U.S. government obligations, or instruments secured by
these money market instruments, such as repurchase agreements for U.S.
government obligations.
The above investment limitations cannot be changed without shareholder
approval. The Funds do not consider the issuance of separate classes of shares
to involve the issuance of "senior securities" within the meaning of the
investment limitation set forth above. The following limitations, however, may
be changed by the Trustees without shareholder approval. Shareholders will be
notified before any material change in these limitations becomes effective.
THE FOLLOWING LIMITATIONS APPLY TO BOTH FUNDS.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 10% of the value of their net assets
in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, certain restricted
securities determined by the Trustees not to be liquid, and non-negotiable
time deposits with maturities over seven days.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their investment in other investment companies that
are money market funds having investment objectives and policies similar
to their own, to no more than 3% of the total outstanding voting stock of
any such investment company, invest not more than 5% of their total assets
in any one investment company, or invest no more than 10% of their total
assets in investment companies in general. The Funds will purchase
securities of closed-end investment companies only in open market
transactions involving only customary brokers' commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses such as management fees, and,
therefore, any investment by a Fund in shares of another investment
company would be subject to such duplicate expenses. The Funds will invest
in other investment companies primarily for the purpose of investing their
short-term cash on a temporary basis. The advisers will waive their
investment advisory fee on assets invested in securities of open-end
investment companies.
ARBITRAGE TRANSACTIONS
The Funds will not enter into transactions for the purpose of engaging in
arbitrage.
DEALING IN PUTS AND CALLS
The Funds will not invest in puts, calls, straddles, spreads or any
combination of them.
THE FOLLOWING LIMITATIONS APPLY TO THE MONEY MARKET FUND ONLY.
INVESTING IN NEW ISSUERS
The MONEY MARKET FUND will not invest more than 5% of the value of its
total assets in securities of issuers which have records of less than

three years of continuous operations, including the operations of any
predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
BAYFUNDS
The MONEY MARKET FUND will not purchase or retain the securities of any
issuer if the officers and Trustees of BayFunds or the Funds' investment
advisers owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
INVESTING IN MINERALS
The MONEY MARKET FUND will not purchase interests in oil, gas, or other
mineral exploration or development programs or leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds do not expect to borrow money or pledge securities in excess of 5% of
the value of their net assets during the coming fiscal year.
For purposes of its policies and limitations, the Funds consider certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings associations having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
REGULATORY COMPLIANCE
The Funds may follow non-fundamental operating policies that are more
restrictive than their fundamental investment limitations, as set forth in the
prospectus and this Statement of Additional Information, in order to comply
with applicable laws and regulations, including the provisions of and

regulations under the Investment Company Act of 1940. In particular, the Funds
will comply with the various requirements of Rule 2a-7 which regulates money
market mutual funds. For example, with limited exceptions, Rule 2a-7 prohibits
the investment of more than 5% of each Fund's total assets in the securities of
any one issuer, although each Fund's investment limitation only requires such
5% diversification with respect to 75% of its assets. The Funds will invest
more than 5% of each Funds assets in any one issuer only under the
circumstances permitted by Rule 2a-7. The Funds will also determine the
effective maturity of their investments, as well as their ability to consider a
security as having received the requisite short-term ratings by NRSROs,
according to Rule 2a-7. The Funds may change these operational policies to
reflect changes in the laws and regulations without the approval of their
shareholders.
BAYFUNDS MANAGEMENT

Kenneth G. Condon
11 Dudley Road
Sudbury, MA

Birthdate: August 14, 1947

Trustee

Treasurer (since June 1992) and Vice President for Financial Affairs (1984
through present), Boston University; Member, BayBank Trust Advisory Board;
Member, Regional Strategic Planning Committee, BayBanks, Inc.; Director,
Seragen, Inc.; Director, WABU-TV; Trustee and Chairman of the Finance/Audit
Committee, Newbury College; formerly, Director and Member of Audit Committee,
BayBank Harvard Trust Co.; Director and Treasurer of the Boston Chapter of the
Financial Executives Institute.

Robert W. Eisenmenger
92 Woodland Street
Natick, MA
Birthdate: June 30, 1926

Trustee

Sara L. Johnson
30 Eaton Court
Wellesley Hills, MA

Birthdate: November 16, 1951

Trustee

Chief Regional Economist (since 1995) and Principal (since 1992), Director of
Regional Forecasting, Managing Economist for Regional Information Group's
Eastern Regions (1988-1991) and Senior Economist, U.S. Economic Service (1983-
1988), DRI/McGraw Hill.

Ernest R. May
John F. Kennedy School of Government
Cambridge, MA
Birthdate: November 19, 1928

Trustee

Alvin J. Silk
Graduate School of Business Administration

Harvard University
Soldiers Field Road
Boston, MA
Birthdate: December 31, 1935

Trustee

Glen R. Johnson
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 2, 1929

President and Treasurer

C. Christine Thomson
Federated Investors Tower

Pittsburgh, PA
Birthdate: September 1, 1957

Vice President and Assistant Treasurer

Vice President, Federated Administrative Services; Vice President and Assistant
Treasurer of certain investment companies distributed by Federated Securities
Corp.

Victor R. Siclari
Federated Investors Tower
Pittsburgh, PA
Birthdate: November 17, 1961
Secretary

Corporate Counsel, Federated Investors; formerly, Attorney, Morrison & Foerster
(law firm).

FUND OWNERSHIP
Officers and Trustees own less than 1% of each of the Funds' outstanding
shares.
As of February 5, 1996, the following shareholder of record owned 5% or more of
the outstanding INSTITUTIONAL SHARES of U.S. TREASURY FUND: Slatt & Co.,
Burlington, Massachusetts owned approximately 159,729,596 shares (18%); and
Express & Co., Boston, Massachusetts owned approximately 719,660,923 shares
(82%).

As of February 5, 1996, the following shareholder of record owned 5% or more of
the outstanding TRUST SHARES of the MONEY MARKET FUND: Slatt & Co., Burlington,
Massachusetts owned approximately 163,437,588 shares (95%).
TRUSTEES' COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
TRUST TRUST*#

willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISERS TO THE FUNDS
The U.S. TREASURY FUND'S investment adviser is BayBank, N.A. Prior to October
31, 1995, BayBank Boston, N.A. served as the U.S. TREASURY FUND'S adviser. (For
purposes of this Statement of Additional Information, BayBank Boston, N.A. and
BayBank, N.A., may hereinafter collectively be referred to as "BBNA".)
The MONEY MARKET FUND's investment adviser is BayBanks Investment Management,
Inc. ("BBIM").
BBNA and BBIM will collectively be referred to as the "Advisers." The Advisers
are wholly-owned subsidiaries of BayBanks, Inc., a bank holding company
organized under the laws of the Commonwealth of Massachusetts with a number of
bank subsidiaries. Collectively, these bank subsidiaries are referred to in
this Statement of Additional Information as "BayBanks." The Advisers shall not
be liable to BayFunds, the Funds or any shareholder of the Funds for any losses
that may be sustained in the purchase, holding, or sale of any security, or for
anything done or omitted by them, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon them by their contracts with BayFunds.
Because of the internal controls maintained by BayBanks to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of BayBanks or its affiliates' lending relationships with an issuer.
ADVISORY FEES
For their advisory services, the Advisers receive an annual investment advisory
fee as described in the prospectus.

For the fiscal year ended December 31, 1995, 1994, and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, BBNA
earned fees from U.S. TREASURY FUND in the amount of $1,978,781, $1,428,354,
and $851,157, respectively, none of which were voluntarily waived.
For the fiscal years ended December 31, 1995, 1994, and 1993, BBIM earned fees
from MONEY MARKET FUND of $869,240, $818,942, and $893,521, respectively, of
which $0, $86,926, and $192,825, respectively, was voluntarily waived.
STATE EXPENSE LIMITATION
The Advisers have undertaken to comply with the expense limitation
established by certain states for investment companies whose shares are
registered for sale in those states. If a Fund's normal operating expenses
(including the investment advisory fee, but not including brokerage
commissions, interest, taxes, and extraordinary expenses) exceed 2-1/2%
per year of the first $30 million of average net assets, 2% per year of
the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, each of the Advisers has agreed to reimburse
the Funds for its expenses over the limitation up to the amount of the
advisory fee.
If a Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by an Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
This arrangement is not part of the advisory contracts and may be amended
or rescinded in the future.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Advisers look for prompt execution of the order at a favorable
price. In working with dealers, the Advisers will generally use those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. The Advisers make
decisions on portfolio transactions and select brokers and dealers subject to
review by the Trustees. The Advisers may select brokers and dealers who offer
brokerage and research services. These services may be furnished directly to
the Funds or to the Advisers and may include: advice as to the advisability of
investing in securities; security analysis and reports; economic studies;
industry studies; receipt of quotations for portfolio evaluations; and similar
services.
Research services provided by brokers and dealers may be used by the Advisers
in advising the Funds and other accounts. To the extent that receipt of these
services may supplant services for which the Advisers or their affiliates might
otherwise have paid, it would tend to reduce expenses. The Advisers exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship
to the value of the brokerage and research services provided.
On December 31, 1995, MONEY MARKET FUND owned approximately $8,780,000 of the
securities of Dean Witter Discover & Co.; $9,622,000 of the securities of
Merrill Lynch & Co.; $3,241,000 of the securities of Smith Barney, Inc.; and
$5,000,000 of the securities of Bear, Sterns & Co., Inc., all of whom are the
Fund's regular brokers that derive more than 15% of gross revenues from
securities-related activities.

Although investment decisions for the Funds are made independently from those
of other accounts managed by the Advisers, investments of the type the Funds
may make may also be made by those other accounts. When the Funds and one or
more other accounts managed by the Advisers are prepared to invest in, or
desire to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Advisers to be
equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the Funds or the size of the position obtained or
disposed of by the Funds. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Funds.
SHAREHOLDER SERVICING ARRANGEMENTS

Under a Shareholder Services Plan, the Fund may pay a fee to BayBank Systems,
Inc., as shareholder servicing agent for INVESTMENT SHARES, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balance; answering routine client inquiries; and assisting clients in changing
dividend options, account designations, and addresses. For the period ended
December 31, 1995, U.S. TREASURY FUND and MONEY MARKET FUND paid BayBanks
Systems, Inc. $497,414 and $136, 565 respectively, in shareholder services fees
with respect to INVESTMENT SHARES under the Shareholder Services Plan.

OTHER SERVICES

FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for fees as
described in the prospectus.
For the fiscal year ended December 31, 1995, 1994, and for the period from
January 29, 1993 (date of initial public investment) to December 31, 1993, the
U.S. TREASURY FUND incurred costs for administrative fees of $997,552,
$750,678, and $478,865, respectively, of which $0, $0, and $238,788,
respectively, was voluntarily waived. For the fiscal years ended December 31,
1995, 1994, and for the period from January 29, 1993 (date of initial public
investment) to December 31, 1993, FAS reimbursed $0, $0, and $59,801,
respectively, to U.S. TREASURY FUND. For the fiscal years ended December 31,
1995, 1994, and 1993, the MONEY MARKET FUND incurred costs for administrative
service fees of $219,346, $215,486, and $263,548, respectively, of which $0,
$0, and $15,149, respectively, was voluntarily waived.
For the fiscal years ended December 31, 1995, 1994, and 1993, FAS reimbursed
$0, $0, and $48,336, respectively, to MONEY MARKET FUND.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTING SERVICES
DST Systems, Inc., Kansas City, Missouri, is transfer agent for the Shares of
the Funds and dividend disbursing agent for the Funds. The Funds' Transfer
Agent maintains a Share account for each shareholder of record of INVESTMENT
SHARES of the Funds and of TRUST SHARES of the MONEY MARKET FUND. Share
certificates are not issued.
FAS provides portfolio accounting services for the Funds. Prior to January 16,
1996, Federated Services Company, an affiliate of FAS and subsidiary of
Federated Investors, provided the portfolio accounting services.

PURCHASING SHARES

The procedures for purchasing Shares are explained in the prospectus.
CONVERSION TO FEDERAL FUNDS
It is the Funds' policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
Federal funds or be converted into Federal funds. BayBanks acts as the
shareholder's agent in depositing checks and converting them to Federal funds.
EXCHANGING SECURITIES FOR FUND SHARES
Each Fund may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least $100,000.

Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other
rights attached to the securities become the property of the Fund, along with
the securities.
DETERMINING NET ASSET VALUE

The Funds attempt to stabilize the value of a Share at $1.00. The days on which
net asset value is calculated by the Funds are described in the prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Funds' use of the amortized cost method of valuing portfolio instruments
depends on their compliance with Rule 2a-7 (the "Rule") promulgated by the SEC
under the Investment Company Act of 1940. Under the Rule, the Trustees must
establish procedures reasonably designed to stabilize the net asset value per
share, as computed for purposes of distribution and redemption, at $1.00 per
share, taking into account current market conditions and the Funds' investment
objectives.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based
upon available indications of market value. The Trustees will decide what,

if any, steps should be taken if there is a difference of more than .5 of
1% between the two values. The Trustees will take any steps they consider
appropriate (such as redemption in kind or shortening the average
portfolio maturity) to minimize any material dilution or other unfair
results arising from differences between the two methods of determining
net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Funds limit their investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. In purchasing
shares of other investment companies, the Trustees will review each
company's stated investment policies for consistency with Rule 2a-7. The
Rule also requires the Funds to maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Funds.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Funds will invest
their available cash to reduce the average maturity to 90 days or less as
soon as possible.
The Funds may attempt to increase yield by trading portfolio securities to
take advantage of short-term market variations. This policy may, from time
to time, result in high portfolio turnover. Under the amortized cost
method of valuation, neither the amount of daily income nor the net asset

value is affected by any unrealized appreciation or depreciation of the
portfolio.
In periods of declining interest rates, the indicated daily yield on
Shares of the Funds computed by dividing the annualized daily income on
the Funds' portfolios by the net asset value computed as above may tend to
be higher than a similar computation made by using a method of valuation
based upon market prices and estimates.
In periods of rising interest rates, the indicated daily yield on Shares
of the Funds computed the same way may tend to be lower than a similar
computation made by using a method of calculation based upon market prices
and estimates.
EXCHANGE PRIVILEGES

REQUIREMENTS FOR EXCHANGE
Upon receipt of proper instructions and required supporting documents, shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other Participating Fund.
Please review the prospectus for further information on the exchange
privileges.
MAKING AN EXCHANGE
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
REDEEMING SHARES

The Funds redeem Shares at the next computed net asset value after the Funds
receive the redemption request from the Funds' transfer agent in proper form.
Redemption procedures are explained in the prospectus.

REDEMPTION IN KIND
Although the Funds intend to redeem Shares in cash, they reserve the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Trustees determine to be fair and
equitable.
BayFunds has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Funds to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of the net asset value of the
respective class during any 90-day period.
Redemption in kind is not as liquid as cash redemption. If redemption is made
kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
ADDITIONAL INFORMATION YOU SHOULD KNOW

MONTHLY STATEMENTS
Shareholders of the Funds who have eligible BayBanks deposit accounts will
receive combined monthly statements containing all information relating to
their deposit account(s) and BayFunds transactions.
COMPANION ACCOUNT AVAILABILITY
Certain BayBanks deposit account customers may elect to open a companion
BayFunds account to facilitate BayFunds transactions.
MASSACHUSETTS LAW

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of BayFunds. To protect shareholders,

BayFunds has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of BayFunds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument BayFunds or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for BayFunds'
obligations, BayFunds is required, by its Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, BayFunds will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of BayFunds. Therefore, financial loss resulting from liability as a
shareholder will occur only if BayFunds cannot meet its obligations to
indemnify shareholders and pay judgments against them from its assets.
TAX STATUS

THE FUNDS' TAX STATUS
The Funds intend to meet the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for Federal income taxes on income and gains distributed to Fund
shareholders. To qualify for this treatment, a Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held,
or deemed held, less than three months;
o diversify its holdings according to certain statutory requirements; and
o distribute to its shareholders at least 90% of its taxable and tax-exempt
income earned during the year.
The Funds will distribute substantially all of their net investment income and
net realized gains at least annually.

SHAREHOLDERS' TAX STATUS
Shareholders are subject to Federal income tax on dividends and any short-term
capital gains received as cash or additional shares. No portion of any income
dividend paid by a Fund is eligible for the dividends received deduction
available to corporations. These dividends and any short-term capital gains are
taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by a Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If for
some extraordinary reason a Fund realizes net long-term capital gains, it
will distribute them at least once every 12 months.
TOTAL RETURN

For the fiscal year ended December 31, 1995 and for the period from January 29,
1993 (date of initial public investment) to December 31, 1995, the average
annual total return for INVESTMENT SHARES of U.S. TREASURY FUND was 5.40% and
3.90%, respectively. For the fiscal year ended December 31, 1995 and for the
period from January 29, 1993 (date of initial public investment) to December
31, 1995, the average annual total return for INSTITUTIONAL SHARES of U.S.
TREASURY FUND was 5.66% and 4.15%, respectively.
For the fiscal year ended December 31, 1995 and for the period from January 19,
1993 (date of initial public investment) to December 31, 1995, the average
annual total return for INVESTMENT SHARES of MONEY MARKET FUND was 5.23% and
3.86%, respectively. For the fiscal year ended December 31, 1995 and for the
period from April 19, 1991 (date of initial public investment) to December 31,
1995, the average annual total return for TRUST SHARES of MONEY MARKET FUND was
5.49% and 4.05%, respectively.

Average annual total return for both classes of Shares of each Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of shares owned
at the end of the period by the net asset value per share at the end of the
period. The number of shares owned at the end of the period is based on the
number of shares purchased at the beginning of the period with $1,000, adjusted
over the period by any additional shares, assuming the monthly reinvestment of
all dividends and distributions.
YIELD

The yields for the seven day period ended December 31, 1995 were 5.16% and
5.41% for INVESTMENT SHARES and INSTITUTIONAL SHARES of U.S. TREASURY FUND,
respectively.
The yields for the seven day period ended December 31, 1995 were 4.98% and
5.23% for INVESTMENT SHARES and TRUST SHARES of MONEY MARKET FUND,
respectively.
The Funds calculate their yield for both classes of Shares daily, based upon
the seven days ending on the day of the calculation, called the "base period."
This yield is computed by:
o determining the net change in the value of a hypothetical account with a
balance of one share at the beginning of the base period, with the net
change excluding capital changes but including the value of any additional
shares purchased with dividends earned from the original one share and all
dividends declared on the original and any purchased shares;
o dividing the net change in the account's value by the value of the account
at the beginning of the base period to determine the base period return;
and

o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, the performance will be reduced for those shareholders paying
those fees.
EFFECTIVE YIELD

The effective yields for the seven day period ended December 31, 1995 were
5.29% and 5.56% for INVESTMENT SHARES and INSTITUTIONAL SHARES of U.S. TREASURY
FUND, respectively.
The effective yields for the seven day period ended December 31, 1995 were
5.11% and 5.37% for INVESTMENT SHARES and TRUST SHARES of MONEY MARKET FUND,
respectively.
The effective yield for both classes of Shares of each Fund is computed by
compounding the unannualized base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
PERFORMANCE COMPARISONS

The performance of both classes of Shares of each Fund depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in a Fund's or of either class of its Shares expenses; and
o the relative amount of a Fund's cash flow.

From time to time the Funds may advertise their performance of both classes of
Shares compared to similar funds or portfolios.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Funds use in advertising may
include:
oLIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund categories by
making comparative calculations using total return. It also produces indices
of larger mutual funds that are intended to track specific fund categories.
Total return assumes the reinvestment of all income dividends and capital
gains distributions, if any. From time to time, the Funds will quote their
Lipper ranking in the applicable category or against a specific Lipper index
in advertising or sales literature.
oBANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading banks
and thrift institution money market deposit accounts. The rates published in
the index are an average of the personal account rates offered on the
Wednesday prior to the date of publication by ten of the largest banks and
thrifts in each of the five largest Standard Metropolitan Statistical Areas.
Account minimums range upward from $2,500 in each institution and compounding
methods vary. If more than one rate is offered, the lowest rate is used.
Rates are subject to change at any time specified by the institution.
oDONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of money
market funds on a weekly basis and through its Money Market Insight

publication reports monthly and year-to-date investment results for the same
money funds.
Advertisements and other sales literature for both classes of shares of either
Fund may refer to total return. Total return is the historic change in the
value of an investment in either Funds' classes of shares based on the monthly
reinvestment of dividends over a specified period of time.
FINANCIAL STATEMENTS

The financial statements for the fiscal year ended December 31, 1995, are
incorporated herein by reference to the Annual Report of the Funds dated
December 31, 1995 (File No. 811-6296). You may request a copy of the Annual
Report free of charge by writing the Funds or by calling 1-800-BAY-FUND.

APPENDIX

STANDARD AND POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. Capacity to pay interest and repay principal is extremely
strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
FITCH INVESTORS SERVICE, INC., BOND RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA."
DUFF & PHELPS ("D&P") LONG-TERM DEBT RATINGS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
STANDARD AND POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS
P-1--Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

FITCH INVESTORS SERVICE, INC., SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated F-
1+.

F-2--Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as the F-1+ and F-1 ratings.
DUFF & PHELPS SHORT-TERM DEBT RATINGS
D-1+--Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below U.S. Treasury short-term obligations.
D-1-- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2-- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

Cusip 072782204
Cusip 072782105
Cusip 072782709
Cusip 072782600