ARK FUNDS/MA, 485APOS, 1997-11-26

ARK FUNDS/MA
485APOS, 1997-11-26

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<PAGE> 1

As filed with the Securities and Exchange Commission on November 26, 1997

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ x ]
File No. 33-53690

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 16 [ x ]

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ x ]
File No. 811-7310

Amendment No. 14 [ x ]

ARK Funds
(Exact Name of Registrant as Specified in Charter)

One Freedom Valley Drive
Oaks, PA 19456
(Address of Principal Executive Office)

Registrant's Telephone Number
1-610-676-1000

Ms. Kathryn L. Stanton
Vice President and Secretary
ARK Funds
One Freedom Valley Drive
Oaks, PA 19456
(Name and Address of Agent for Service)

Copies to:
Alan C. Porter, Esq.
Piper & Marbury L.L.P.
1200 Nineteenth St., N.W.
Washington, D.C. 20036

It is proposed that this filing will become effective:

( ) immediately upon filing pursuant to paragraph (b)
( ) on August 31, 1997 pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
( ) on (date) pursuant to paragraph (a)(2)
(x ) 75 days after filing pursuant to paragraph (a)(2)
( ) on (date) pursuant to paragraph (a)(2)

<PAGE> 2

Declaration Pursuant to Rule 24f-2

The Registrant hereby elects to register an indefinite number of shares of
beneficial interest of its Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Value Equity Portfolio and International Equity Selection Portfolio
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Registrant has previously elected to register an indefinite number of shares of
beneficial interest of its U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Tax-Free Money Market Portfolio, Short-Term
Treasury Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio,
Maryland Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio, Balanced
Portfolio, Equity Income Portfolio, Equity Index Portfolio, Blue Chip Equity
Portfolio, Mid-Cap Equity Portfolio, Stock Portfolio, Capital Growth Portfolio,
Special Equity Portfolio and International Equity Portfolio pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
Registrant's fiscal year ended April 30, 1997 was filed on June 25, 1997.

<PAGE> 3
ARK FUNDS: RETAIL CLASS

U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MONEY MARKET PORTFOLIO
TAX-FREE MONEY MARKET PORTFOLIO
SHORT-TERM TREASURY PORTFOLIO
SHORT-TERM BOND PORTFOLIO
U.S. GOVERNMENT BOND PORTFOLIO
INTERMEDIATE FIXED INCOME PORTFOLIO
INCOME PORTFOLIO
MARYLAND TAX-FREE PORTFOLIO
PENNSYLVANIA TAX-FREE PORTFOLIO
BALANCED PORTFOLIO
EQUITY INCOME PORTFOLIO
EQUITY INDEX PORTFOLIO
BLUE CHIP EQUITY PORTFOLIO
MID-CAP EQUITY PORTFOLIO
VALUE EQUITY PORTFOLIO
STOCK PORTFOLIO
CAPITAL GROWTH PORTFOLIO
SMALL-CAP PORTFOLIO
INTERNATIONAL EQUITY SELECTION PORTFOLIO
INTERNATIONAL EQUITY PORTFOLIO

CROSS REFERENCE SHEET

Form N-1A Item Number

<TABLE>
<CAPTION>
Part A Prospectus Caption
<S> <C>
1 .........................Cover Page
2 .........................Fees and Expenses
3 a,b......................Financial Highlights
c.........................Performance
4 a(i).....................General Information
a(ii),b,c.................Investment Objectives and Policies; Risks
to Consider
5 a,b,c,d,e,f..............Management of the Fund
g.........................Portfolio Transactions and Valuation
5A.........................*
6 a........................General Information
b,c,d.....................*
e.........................General Information
f,g.......................Portfolio Transactions and Valuation; Tax Matters
h.........................General Information
7 a........................Purchases, Exchanges and Redemptions
b(i),(ii).................Portfolio Transactions and Valuation
b(iii,iv,v),c.............*
d.........................Purchases, Exchanges and Redemptions
e, f(i),(ii)..............Management of the Fund
f(iii)....................*
8 .........................Purchases, Exchanges and Redemptions
9 .........................*
</TABLE>

* Not applicable.
<PAGE> 4

ARK FUNDS -- RETAIL CLASS

- --------------------------------------------------------------------------------
PROSPECTUS

JANUARY , 1998

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

<TABLE>
<S> <C>
* U.S. Treasury Money Market Portfolio * U.S. * Equity Income Portfolio * Equity
Government Money Market Portfolio * Money Index Portfolio * Blue Chip Equity
Market Portfolio * Tax-Free Money Market Portfolio * Mid-Cap Equity Portfolio
Portfolio * Short-Term Treasury Portfolio * Value Equity Portfolio * Stock
* Short-Term Bond Portfolio * U.S. Government Portfolio * Capital Growth Portfolio *
Bond Portfolio * Intermediate Fixed Income Small-Cap Portfolio * International
Portfolio * Income Portfolio * Maryland Tax- Equity Selection Portfolio
Free Portfolio * Pennsylvania Tax-Free * International Equity Portfolio
Portfolio * Balanced Portfolio
</TABLE>

AN INVESTMENT IN A MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY MONEY MARKET PORTFOLIO
WILL MAINTAIN A STABLE NET ASSET VALUE PER SHARE OF $1.00.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, FIRST NATIONAL BANK OF MARYLAND OR ANY DEPOSITARY
INSTITUTION, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTING IN THE
SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.

This Prospectus is designed to provide you with information that you should know
before investing. Please read and retain it for future reference. A Statement of
Additional Information dated January , 1998, Annual Report (including
financial statements for the fiscal year ended April 30, 1997) and Semi-Annual
Report (including financial statements for the six months ended October 31, 1997
(unaudited)) have been filed with the Securities and Exchange Commission and are
incorporated herein by reference. The Statement of Additional Information,
Annual Report and Semi-Annual Report, and additional information about the
classes of shares not offered through this Prospectus, is available upon request
without charge by calling 1-800-ARK-FUND.

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

<TABLE>
<S> <C>
Summary....................................... 2
Fees and Expenses............................. 4
Financial Highlights.......................... 8
Investment Objectives and Policies............ 10
Additional Investment Policies and
Limitations................................. 21
Risks to Consider............................. 22
Performance................................... 24
Portfolio Transactions and Valuation.......... 25
Purchases, Exchanges and Redemptions.......... 26
Management of the Fund........................ 35
Tax Matters................................... 40
General Information........................... 41
Appendix...................................... 42
</TABLE>

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 5

SUMMARY
- --------------------------------------------------------------------------------

The Fund is an open-end management investment company composed of
separately managed diversified and non-diversified portfolios. This Prospectus
provides information with respect to Retail Class shares of the portfolios
listed below (the "Portfolios" or a "Portfolio"). The Intermediate Fixed Income
Portfolio, Mid-Cap Equity Portfolio and Stock Portfolio are not currently
offering Retail Class shares.

U.S. TREASURY MONEY MARKET PORTFOLIO, U.S. GOVERNMENT MONEY MARKET
PORTFOLIO, MONEY MARKET PORTFOLIO and TAX-FREE MONEY MARKET PORTFOLIO -- seek to
maximize current income and provide liquidity and security of principal. Each
money market Portfolio seeks to maintain a constant net asset value per share of
$1.00.

SHORT-TERM TREASURY PORTFOLIO -- seeks to provide current income with a
secondary objective of stability of principal by investing in instruments which
are issued or guaranteed as to principal and interest by the U.S. government.

SHORT-TERM BOND PORTFOLIO -- seeks to provide current income by investing
primarily in investment grade debt securities, U.S. government securities, and
mortgage-backed and asset-backed securities while maintaining a dollar-weighted
average portfolio maturity of one to three years.

U.S. GOVERNMENT BOND PORTFOLIO -- seeks to provide current income, with a
secondary objective of capital growth consistent with reasonable risk, by
investing primarily in securities which are issued or guaranteed as to payment
of principal and interest by the U.S. government or its agencies or
instrumentalities while maintaining a dollar-weighted average portfolio maturity
of three to ten years.

INTERMEDIATE FIXED INCOME PORTFOLIO -- seeks to provide current income
consistent with the preservation of capital by investing primarily in
intermediate-term fixed-income securities.

INCOME PORTFOLIO -- seeks to provide a high level of current income, with a
secondary objective of capital growth consistent with reasonable risk, by
investing primarily in a broad range of fixed-income securities.

MARYLAND TAX-FREE PORTFOLIO -- seeks to provide high current income that is
free from federal income tax and the Maryland state and county income taxes by
investing primarily in investment-grade municipal securities.

PENNSYLVANIA TAX-FREE PORTFOLIO -- seeks to provide high current income
that is free from federal and Pennsylvania state income taxes by investing
primarily in investment-grade municipal securities.

BALANCED PORTFOLIO -- seeks to provide long-term total returns from both
capital appreciation and current income by investing in a diversified portfolio
of stocks, debt securities, and cash equivalents.

EQUITY INCOME PORTFOLIO -- seeks to provide a moderate level of current
income and growth of capital by investing primarily in high-quality,
income-producing common stocks.

EQUITY INDEX PORTFOLIO -- seeks to provide investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock Price
Index.

BLUE CHIP EQUITY PORTFOLIO -- seeks to provide long-term capital
appreciation by investing primarily in equity securities of established, large
capitalization companies.

MID-CAP EQUITY PORTFOLIO -- seeks to provide long-term capital appreciation
by investing primarily in equity securities of medium-sized companies.

VALUE EQUITY PORTFOLIO -- seeks to provide growth of principal by investing
primarily in the equity securities of high quality companies.

STOCK PORTFOLIO -- seeks to provide long-term capital appreciation by
investing primarily in common stocks.

2
<PAGE> 6

CAPITAL GROWTH PORTFOLIO -- seeks to achieve long-term capital appreciation
by investing primarily in common stock and securities convertible into common
stock.

SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO) -- seeks to provide
capital appreciation by investing in securities of companies believed by the
adviser to be "special equities".

INTERNATIONAL EQUITY SELECTION PORTFOLIO -- seeks to provide long-term
capital appreciation by investing primarily in shares of other mutual funds, the
portfolios of which consist primarily of equity securities of non-U.S. issuers.

INTERNATIONAL EQUITY PORTFOLIO -- seeks to provide long-term capital growth
by investing primarily in foreign equity securities.

INVESTMENT ADVISERS, DISTRIBUTOR AND ADMINISTRATOR. Allied Investment
Advisors, Inc. serves as investment adviser to each Portfolio other than the
International Equity Portfolio which is managed by AIB Investment Managers
Limited. SEI Investments Distribution Co. serves as the distributor of the
Portfolios' shares and SEI Fund Resources serves as the Fund's administrator.
See "Management of the Fund".

PURCHASE, EXCHANGE AND REDEMPTION OF SHARES. Investors may purchase Retail
Class shares of the Portfolios at their net asset value plus the applicable
sales charge through qualified securities brokers or financial institutions
("Investment Professionals"). No sales charges are imposed on shares of the
money market Portfolios and the Short-Term Treasury Portfolio. Shares of a
Portfolio may be exchanged for shares of another Portfolio. Shareholders may
redeem all or any portion of their shares at the net asset value next determined
after the Fund's transfer agent has received the redemption request. See
"Purchases, Exchanges and Redemptions".

RISKS TO CONSIDER. As with any investment, investing in any of the
Portfolios involves certain risks and there is no assurance that a Portfolio
will achieve its investment objective. By itself no Portfolio constitutes a
balanced investment plan. See "Risks to Consider".

SHAREHOLDER INQUIRIES. Any questions or communications regarding the
Portfolios can be directed to the Fund at 1-800-ARK-FUND.

3
<PAGE> 7

FEES AND EXPENSES
- --------------------------------------------------------------------------------

The expense summary format below was developed for use by all mutual funds
to help you make your investment decisions. You should consider this expense
information along with other important information, including each Portfolio's
investment objectives, performance (if any) and financial highlights.

<TABLE>
<CAPTION>
RETAIL CLASS
---------------------------------------------------------
U.S.
TREASURY U.S. GOVERNMENT MONEY TAX-FREE
MONEY MARKET MONEY MARKET MARKET MONEY MARKET
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........... None None None None
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)........................................ None None None None
Maximum Contingent Deferred Sales Charge........ None None None None
Exchange Fee.................................... None None None None
Redemption Fee.................................. None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)(1)................ .19% .14% .11% .09%
12b-1 Fees...................................... .25% .25% .25% .25%
Shareholder Services Fee (after waiver)(2)...... .06% .06% .06% .06%
Other Expenses (after waivers)(3)............... .18% .18% .18% .20%
- -----------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(4)..... .68% .63% .60% .60%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for each Portfolio and the advisory fees shown reflect those voluntary
waivers. The adviser reserves the right to terminate its fee waivers at any
time in its sole discretion. Absent such waivers, the advisory fee for each
Portfolio would be .25%.

(2) A portion of the shareholder service fee is being waived for all Portfolios.
Absent such waivers, the shareholder services fee would be .15%.

(3) Other expenses are estimated based on amounts incurred during the previous
fiscal year and include all expenses except nonrecurring account fees,
brokerage commissions and other capital items, and advisory, 12b-1 and
shareholder services fees. A portion of the shareholder services fees is
being waived for the Portfolios.

(4) Absent the voluntary fee waivers described above, total operating expenses
for Retail Class shares of the U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio, Money Market Portfolio and Tax-Free Money
Market Portfolio would be .83%, .83%, .83% and .85%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Portfolio......................... 7 22 38 85
U.S. Government Money Market Portfolio....................... 6 20 35 79
Money Market Portfolio....................................... 6 19 33 75
Tax-Free Money Market Portfolio.............................. 6 19 33 75
</TABLE>

The example assumes that all dividends and distributions are reinvested and that
the amounts listed under "Total Operating Expenses" remain the same in the years
shown. The example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than shown.

4
<PAGE> 8

<TABLE>
<CAPTION>
RETAIL CLASS
--------------------------------------------------------------------------------------
SHORT- SHORT- U.S. INTERMEDIATE
TERM TERM GOVERNMENT FIXED MARYLAND PENNSYLVANIA
TREASURY BOND BOND INCOME INCOME TAX-FREE TAX-FREE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................... None 4.50%* 4.50%* -- 4.50%* 4.50%* 4.50%*
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price)..... None None None -- None None None
Maximum Contingent Deferred Sales
Charge............................ None None None -- None None None
Exchange Fee........................ None None None -- None None None
Redemption Fee...................... None None None -- None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net
assets)
Advisory Fees (after waivers)(1).... .35% .70% .66% .45% .51% .49% .65%
12b-1 Fees (after waivers)(2)....... .25% .25% .25% .00% .25% .25% .25%
Shareholder Services Fee (after
waiver)(3)........................ .00% .00% .00% .00% .00% .00% .00%
Other Expenses (after waivers)(4)... .20% .06% .06% .23% .20% .23% .23%
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after
waivers)(5)....................... .80% % % .68% .96% .97% 1.13%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ Retail Class shares of this Portfolio are not currently being offered.

* A portion of the sales load of 4.50% is currently being waived so that share
purchases will be subject to a maximum sales load of 3.00%. These waivers
may be discontinued at any time.

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for the Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Intermediate Fixed Income Portfolio, Income
Portfolio, Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio
and the advisory fees shown reflect those voluntary waivers. The adviser
reserves the right to terminate its fee waivers at any time in its sole
discretion. Absent such waivers, the advisory fees for the Short-Term
Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio would be .80%, .75%,
.75%, .60%, .60%, .65% and .65%, respectively.

(2) The Fund's distributor has agreed to waive, on a voluntary basis, a portion
or all its distribution fees for the Portfolios. Absent such waivers, the
distribution fees would be .40% for the Short-Term Treasury Portfolio, .30%
for the Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio and % for the
Short-Term Bond Portfolio and U.S. Government Bond Portfolio.

(3) A portion of the shareholder services fee is being waived for all
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(5) Absent the voluntary fee waivers described above, the total operating
expenses for Retail Class shares of the Short-Term Treasury Portfolio,
Short-Term Bond Portfolio, U.S. Government Bond Portfolio, Intermediate
Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio would be 1.55%, %, %, 1.28%, 1.25%,
1.33% and 1.33%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

An investor in Retail Class shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, (2) redemption at the end of
each time period and (3) imposition of a 3% sales charge:

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Short-Term Treasury Portfolio.......................... 38 55 73 126
Short-Term Bond Portfolio..............................
U.S. Government Bond Portfolio.........................
Intermediate Fixed Income Portfolio.................... 37 51 67 112
Income Portfolio....................................... 40 60 81 144
Maryland Tax-Free Portfolio............................ 40 60 82 145
Pennsylvania Tax-Free Portfolio........................ 41 65 90 163
</TABLE>

5
<PAGE> 9

<TABLE>
<CAPTION>
RETAIL CLASS
---------------------------------------------
EQUITY EQUITY BLUE CHIP
BALANCED INCOME INDEX EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 4.75%* 4.75%* 4.75%* 4.75%*
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None None None
Maximum Contingent Deferred Sales Charge.................... None None None None
Exchange Fee................................................ None None None None
Redemption Fee.............................................. None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)(1)............................ .56% .64% .06% .60%
12b-1 Fees (after waivers)(2)............................... .25% .25% .25% .25%
Shareholder Services Fee (after waiver)(3).................. .00% .00% .00% .00%
Other Expenses(after waivers)(4)............................ .21% .23% .14% .17%
- -----------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(5)................. 1.02% 1.12% .45% 1.02%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(+) Retail Class shares of this Portfolio are not currently being offered.

* A portion of the sales load of 4.75% is currently being waived so that share
purchases will be subject to a maximum sales load of 3.00%. These waivers
may be discontinued at any time.

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for the Balanced Portfolio, Equity Income Portfolio, Equity Index Portfolio
and Blue Chip Equity Portfolio and the advisory fees shown reflect those
voluntary waivers. The adviser reserves the right to terminate its fee
waivers at any time in its sole discretion. Absent such waivers, the
advisory fees for the Balanced Portfolio, Equity Income Portfolio, Equity
Index Portfolio and Blue Chip Equity Portfolio would be .65%, .70%, .20% and
.70%, respectively.

(2) The Fund's distributor has agreed to waive, on a voluntary basis, a portion
or all of its distribution fees for the Portfolios. Absent such waivers, the
distribution fees would be .40% for the Balanced Portfolio, Equity Income
Portfolio and Equity Index Portfolio, and .55% for the Blue Chip Equity
Portfolio.

(3) A portion of the shareholder service fee is being waived for all Portfolios.
Absent such waivers, the shareholder services fee would be .15%.

(4) Other expenses are estimated based on amounts incurred during the previous
fiscal year and include all expenses except nonrecurring account fees,
brokerage commissions and other capital items, and advisory, 12b-1 and
shareholder services fees. The Fund's administrator has agreed to waive, on
a voluntary basis, .10% of its fee for the Equity Index Portfolio. Absent
such waiver, other expenses for the Equity Index Portfolio would be .24%.

(5) Absent the voluntary fee waivers described above, total operating expenses
for Retail Class shares of the Balanced Portfolio, Equity Income Portfolio,
Equity Index Portfolio and Blue Chip Equity Portfolio would be 1.41%, 1.48%,
1.03%, and 1.57%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Balanced Portfolio........................................... 40 61 85 151
Equity Income Portfolio...................................... 41 65 90 162
Equity Index Portfolio....................................... 34 44 -- --
Blue Chip Equity Portfolio................................... 40 61 85 151
</TABLE>

6
<PAGE> 10

<TABLE>
<CAPTION>
RETAIL CLASS
------------------------------------------------------------------------------------------
INTERNATIONAL
MID-CAP VALUE CAPITAL EQUITY INTERNATIONAL
EQUITY EQUITY STOCK GROWTH SMALL-CAP SELECTION EQUITY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO+ PORTFOLIO PORTFOLIO+ PORTFOLIO PORTFOLIO++ PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................. -- 4.75%* -- 4.75%* 4.75%* 1.50% 4.75%*
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering price).... -- None -- None None None None
Maximum Contingent Deferred Sales
Charge........................... -- None -- None None None None
Exchange Fee....................... -- None -- None None None None
Redemption Fee..................... -- None -- None None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net
assets)
Advisory Fees (after waivers)(1)... .74% .87% .60% .65% .79% .55% .38%
12b-1 Fees (after waivers)(2)...... .00% .25% .00% .25% .25% .25% .00%
Shareholder Services Fee (after
waiver)(3)....................... .00% .00% .00% .00% .00% .00% .00%
Other Expenses (after waivers)(4)... .30% .--% .25% .26% .39% .26% 1.17%
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after
waivers)(5)...................... 1.04% .--% .85% 1.16% 1.43% 1.06% 1.55%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ Retail Class shares of this Portfolio are not currently being offered.

++ Formerly Special Equity Portfolio.

* A portion of the sales load of 4.75% is currently being waived so that share
purchases will be subject to a maximum sales load of 3.00%. These waivers
may be discontinued at any time.

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for the Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock Portfolio,
Capital Growth Portfolio, Small-Cap Portfolio and International Equity
Selection Portfolio; the adviser to the International Equity Portfolio has
agreed to waive, on a voluntary basis, a portion of its fee (and, if
necessary, to reimburse other expenses) in order to limit the Portfolio's
expense ratio to 1.55%, the advisory fees shown reflect those voluntary
waivers. The advisers reserve the right to terminate its fee waivers at any
time in its sole discretion. Absent such waivers, the advisory fees for the
Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock Portfolio, Capital
Growth Portfolio, Small-Cap Portfolio, International Equity Selection
Portfolio and International Equity Portfolio would be .80%, 1.00%, .70%,
.70%, .80%, .65% and .80%, respectively.

(2) The Fund's distributor has agreed to waive, on a voluntary basis, a portion
or all its distribution fees for the Portfolios. Absent such waivers, the
distribution fees would be .40% for the Mid-Cap Equity Portfolio, Capital
Growth Portfolio, Small-Cap Portfolio and International Equity Portfolio,
.55% for the Stock Portfolio and % for the Value Equity Portfolio and
International Equity Selection Portfolio.

(3) A portion of the shareholder services fee is being waived for all
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(5) Absent the voluntary fee waivers described above, the total operating
expenses for Retail Class shares of the Mid-Cap Equity Portfolio, Value
Equity Portfolio, Stock Portfolio, Capital Growth Portfolio, Small-Cap
Portfolio, International Equity Selection and International Equity Portfolio
would be 1.65%, %, 1.65%, 1.51%, 1.74%, % and 2.52%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Mid-Cap Equity Portfolio..................................... 40 62
Stock Portfolio.............................................. 38 56
Capital Growth Portfolio..................................... 41 66 92 167
Value Equity Portfolio.......................................
Small-Cap Portfolio.......................................... 44 74 106 196
International Equity Selection Portfolio.....................
International Equity Portfolio............................... 48 85 125 235
</TABLE>

7
<PAGE> 11

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table provides information about the financial history of the
Retail Class of each Portfolio (excluding Portfolios which as of October 31,
1997 did not offer Retail Class shares). The table expresses the information in
terms of a single share outstanding throughout the year or period. The
information has been audited by KPMG Peat Marwick LLP, independent auditors for
the Fund. Their report on the financial statements and financial highlights for
the year ended April 30, 1997 is included in the Annual Report. The information
for the six months ended October 31, 1997 (unaudited) is included in the
Semi-Annual Report. The Annual Report and the Semi-Annual Report are
incorporated by reference into the Statement of Additional Information. The
table should be read in conjunction with the Portfolios' financial statements
and the notes thereto which may be obtained free of charge from the Fund.

For a Share Outstanding Throughout the Year or Period Ended April 30,

<TABLE>
<CAPTION>
Realized Distri-
and butions Ratio of
Net Unrealized from Distri- Net Net Expenses
Asset Gains or Net butions Asset Assets to
Value, Net (Losses) Invest- from Value, End of Average
Beginning Investment on ment Capital End of Total Period Net
of Period Income Investments Income Gains Period Return+ (000) Assets
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------
1997a
1997 $ 1.00 0.05 -- (0.05) -- $ 1.00 4.71% $ 13,673 0.64%
1996(1) 1.00 0.02 -- (0.02) -- 1.00 1.82 8,758 0.55*
- -------------------
MONEY MARKET PORTFOLIO
- -------------------
1997a
1997 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.03% $128,693 0.59%
1996 1.00 0.05 -- (0.05) -- 1.00 5.44 104,703 0.58
1995 1.00 0.05 -- (0.05) -- 1.00 4.69 51,081 0.45
1994(2) 1.00 -- -- -- -- 1.00 0.42 12 1.16*
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
1997a
1997 $ 1.00 0.03 -- (0.03) -- $ 1.00 3.01% $ 16,495 0.55%
1996 1.00 0.03 -- (0.03) -- 1.00 3.53 16,179 0.34
1995 1.00 0.03 -- (0.03) -- 1.00 2.74 2,491 0.75
1994(3) 1.00 -- -- -- -- 1.00 0.20 50 1.25*
- ------------------------
SHORT-TERM TREASURY PORTFOLIO
- ------------------------
1997a
1997(4) $ 9.95 0.27 0.03 (0.28) (0.01) $ 9.96 3.39% $ 22,937 0.67%*
- -------------
INCOME PORTFOLIO
- -------------
1997a
1997 $ 9.91 0.59 0.01 (0.57) -- $ 9.94 6.32% $ 4,102 0.89%
1996 9.72 0.60 0.19 (0.60) -- 9.91 8.14 4,184 1.02
1995 9.62 0.55 0.05 (0.47) (0.03) 9.72 6.45 296 1.23
1994(5) 9.69 0.02 (0.06) (0.03) -- 9.62 (0.41) 30 1.72*
- -----------------------
MARYLAND TAX-FREE PORTFOLIO
- -----------------------
1997a
1997(6) $ 9.96 0.13 (0.07) (0.15) -- $ 9.87 0.63% $ 7,997 0.91%*
- ---------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
- ---------------------------
1997a
1997(6) $ 10.01 0.13 (0.07) (0.15) -- $ 9.92 0.60% $ 1,177 0.87%*
- ---------------
BALANCED PORTFOLIO
- ---------------
1997a
1997 $ 11.35 0.28 0.56 (0.28) (0.51) $11.40 7.66% $ 6,164 0.96%
1996 10.04 0.31 1.68 (0.31) (0.37) 11.35 20.23 3,323 1.09
1995 10.15 0.27 0.05 (0.24) (0.19) 10.04 3.33 549 1.26
1994(7) 10.62 0.01 (0.43) (0.05) -- 10.15 (3.95) 166 1.86*
- ---------------------
BLUE CHIP EQUITY PORTFOLIO
- ---------------------
1997a
1997(8) $ 10.33 0.16 2.06 (0.16) (0.01) $12.38 21.74% $ 13,211 0.86%*

<CAPTION>
Ratio
Investment Expenses
Income to Average
to Net
Average Assets Portfolio Average
Net (Excluding Turnover Commission
Assets Waivers) Rate Rate**
---------
<S> <C> <C> <C> <C>
- ------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- ------------
1997a
1997 4.62% 0.83% -- --
1996(1) 4.71* 0.86* -- --
- ------------
MONEY MARKET PORTFOLIO
- ------------
1997a
1997 4.92% 0.83% -- --
1996 5.25 0.77 -- --
1995 4.88 0.97 -- --
1994(2) 2.26* 592.55* -- --
- ------------
TAX-FREE MONEY MARKET PORTFOLIO
- ------------
1997a
1997 2.97% 0.84% -- --
1996 3.33 0.90 -- --
1995 2.68 2.94 -- --
1994(3) 1.20* 32.17* -- --
- ------------
SHORT-TERM TREASURY PORTFOLIO
- ------------
1997a
1997(4) 5.07%* 0.91%* 147.86% --
- ------------
INCOME PORTFOLIO
- ------------
1997a
1997 5.96% 1.09% 271.60% --
1996 5.54 1.37 107.33 --
1995 5.66 27.63 73.00 --
1994(5) 3.95* 55.35* 20.00 --
- ------------
MARYLAND TAX-FREE PORTFOLIO
- ------------
1997a
1997(6) 4.70%* 1.10%* 11.13% --
- ------------
PENNSYLVANIA TAX-FREE PORTFOLIO
- ------------
1997a
1997(6) 4.65%* 1.12%* 32.76% --
- ------------
BALANCED PORTFOLIO
- ------------
1997a
1997 2.56% 1.19% 124.22% .0673
1996 2.51 1.55 107.56 --
1995 2.83 5.80 81.00 --
1994(7) 1.36* 15.08* 37.00 --
- ------------
BLUE CHIP EQUITY PORTFOLIO
- ------------
1997a
1997(8) 1.29%* 1.25%* 46.91% .0727
</TABLE>

8
<PAGE> 12

<CAPTION>
Ratio
Investment Expenses
Income to Average
to Net
Average Assets Portfolio Average
Net (Excluding Turnover Commission
Assets Waivers) Rate Rate**
---------
<S> <C> <C> <C> <C>
- ------------
CAPITAL GROWTH PORTFOLIO
- ------------
1997a
1997 0.74% 1.30% 246.14% .0692
1996 1.05 1.65 578.57 --
1995 0.86 9.73 182.00 --
1994(7) (0.27)* 30.78* 41.00 --
- ------------
SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- ------------
1997a
1997(8) (0.13)%* 1.21%* 704.41% .0678
- ------------
INTERNATIONAL EQUITY PORTFOLIO
- ------------
1997a
1997(9) 0.16%* 2.50%* 26.65% .0381
(a) For the six months ended October 31, 1997 (unaudited).
* Annualized
** Average commission rate paid per share for security
purchases and sales during the period. Presentation of
the rate is only required for fiscal years beginning
after September 1, 1995.
+ Total return for the retail class does not include the
one time sales charge
(1) Commenced operations on December 15, 1995.
(2) Commenced operations on March 2, 1994.
(3) Commenced operations on March 15, 1994.
(4) Commenced operations on September 9, 1996.
(5) Commenced operations on April 12, 1994.
(6) Commenced operations on January 2, 1997.
(7) Commenced operations on March 9, 1994.
(8) Commenced operations on May 16, 1996.
(9) Commenced operations on November 1, 1996.
</TABLE>

As of the date of this Prospectus, the Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Value Equity Portfolio and International Equity
Selection Portfolio had not yet commenced operations.

9
<PAGE> 13

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

The Fund consists of separate investment portfolios with a variety of
investment objectives and policies. A Portfolio's investment adviser is
responsible for providing a continuous investment program in accordance with its
investment objective and policies. Except for its investment objective and those
policies identified as fundamental, the investment policies of a Portfolio are
not fundamental and may be changed by the Board of Trustees of the Fund without
shareholder approval.

The investment objectives and policies of the Portfolios are set forth
below. Additional information regarding the types of securities in which the
Portfolios may invest and certain investment transactions is provided in the
Appendix to this Prospectus. Additional information regarding the investment
policies of the Portfolios and a complete listing of each Portfolio's investment
limitations is contained in the Statement of Additional Information.

MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------

The U.S. TREASURY MONEY MARKET PORTFOLIO, U.S. GOVERNMENT MONEY MARKET
PORTFOLIO, MONEY MARKET PORTFOLIO and TAX-FREE MONEY MARKET PORTFOLIO invest in
high-quality, short-term, U.S. dollar-denominated instruments determined by the
adviser to present minimal credit risks in accordance with guidelines adopted by
the Board of Trustees. The Portfolios seek to maintain a net asset value per
share of $1.00, limit their investments to securities with remaining maturities
of 397 days or less, and maintain a dollar-weighted average maturity of 90 days
or less. Estimates may be used in determining a security's maturity for purposes
of calculating average maturity. An estimated maturity can be substantially
shorter than a stated final maturity.

Although the Portfolios' policies are designed to help maintain a stable
$1.00 share price, all money market instruments can change in value when
interest rates or issuers' creditworthiness change, or if an issuer or guarantor
of a security fails to pay interest or principal when due. If these changes in
value were large enough, a Portfolio's share price could fall below $1.00. In
general, securities with longer maturities are more vulnerable to price changes,
although they may provide higher yields.

The investment objective of the U.S. TREASURY MONEY MARKET PORTFOLIO is to
maximize current income and provide liquidity and security of principal by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government and thus constitute direct obligations of the
United States. As a non-fundamental operating policy, the Portfolio invests 100%
of its total assets in U.S. Treasury bills, notes and bonds, and limits its
investments to U.S. Treasury obligations that pay interest which is specifically
exempt from state and local taxes under federal law.

The investment objective of the U.S. GOVERNMENT MONEY MARKET PORTFOLIO is
to maximize current income and provide liquidity and security of principal by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government or any of its agencies or instrumentalities
("U.S. Government Securities"), or in repurchase agreements backed by such
instruments. As a non-fundamental policy, the Portfolio invests 100% of its
assets in U.S. Government Securities and in repurchase agreements backed by such
instruments. The Portfolio normally may not invest more than 5% of its total
assets in the securities of any single issuer (other than the U.S. government).
Under certain conditions, however, the Portfolio may invest up to 25% of its
total assets in first-tier securities of a single issuer for up to three days.

10
<PAGE> 14

NRSROs or, if only one such rating organization has assigned a rating, such
single organization. The Portfolio may also acquire unrated securities
determined by the adviser to be comparable in quality to rated securities in
accordance with guidelines adopted by the Board of Trustees. The Portfolio may
invest in U.S. dollar-denominated obligations of U.S. banks and foreign branches
of U.S. banks ("Eurodollars"), U.S. branches and agencies of foreign banks
("Yankee dollars"), and foreign branches of foreign banks. See the Appendix for
more information. The Portfolio may also invest more than 25% of its total
assets in certain obligations of domestic banks and normally may not invest more
than 5% of its total assets in the securities of any single issuer (other than
the U.S. government). Under certain conditions, however, the Portfolio may
invest up to 25% of its total assets in first-tier securities of a single issuer
for up to three days.

The investment objective of the TAX-FREE MONEY MARKET PORTFOLIO is to
provide a high level of interest income by investing primarily in high-quality
municipal obligations that are exempt from federal income taxes. The Portfolio
attempts to invest 100% of its assets in securities exempt from federal income
tax (not including the alternative minimum tax), and maintains a fundamental
policy that at least 80% of its income will, under normal market conditions, be
exempt from federal income tax, including the federal alternative minimum tax.
The Portfolio invests in high-quality, short-term municipal securities but may
also invest in high-quality, long-term fixed, variable, or floating rate
instruments (including tender option bonds) which have demand features or
interest rate adjustment features that result in interest rates, maturities, and
prices similar to short-term instruments. The Portfolio's investments in
municipal securities may include tax, revenue, or bond anticipation notes;
tax-exempt commercial paper; general obligation or revenue bonds (including
municipal lease obligations and resource recovery bonds); and zero coupon bonds.
At least 95% of the assets of the Portfolio will be invested in securities that
have received the highest rating assigned by any two NRSROs or, if only one such
rating organization has assigned a rating, such single organization. The
Portfolio may also acquire unrated securities determined by the adviser to be of
comparable quality in accordance with guidelines adopted by the Board of
Trustees.

The adviser anticipates that the Tax-Free Money Market Portfolio will be as
fully invested as is practicable in municipal obligations. However, the
Portfolio reserves the right for temporary defensive purposes to invest without
limitation in taxable Money Market Instruments. There may be occasions when, as
a result of maturities of portfolio securities or sales of Portfolio shares, or
in order to meet anticipated redemption requests, the Portfolio may hold cash
which is not earning income.

The Tax-Free Money Market Portfolio may invest up to 25% of its net assets
in a single issuer's securities. The Portfolio may invest any portion of its
assets in industrial revenue bonds ("IRBs") backed by private companies, and may
invest up to 25% of its total assets in IRBs related to a single industry. The
Portfolio also may invest 25% or more of its total assets in tax-exempt
securities whose revenue sources are from similar types of projects (e.g.,
education, electric utilities, health care, housing, transportation, water,
sewer, and gas utilities). There may be economic, business or political
developments or changes that affect all securities of a similar type. Therefore,
developments affecting a single issuer or industry, or securities financing
similar types of projects, could have a significant effect on the Portfolio's
performance.

11
<PAGE> 15

SHORT-TERM TREASURY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the SHORT-TERM TREASURY PORTFOLIO is to provide
current income, with a secondary objective of stability of principal, by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government.

The Portfolio invests 100% of its total assets in instruments which are
issued or guaranteed by the U.S. government and thus constitute direct
obligations of the United States, and in repurchase agreements backed by such
instruments. As a non-fundamental policy, the Portfolio will invest 100% of its
total assets in U.S. Treasury bills, notes and bonds, and will limit its
investments to U.S. Treasury obligations that pay interest that is specifically
exempt from state and local taxes under federal law.

The Portfolio has no restriction on maturity; however, it normally invests
in short-term securities and maintains a dollar-weighted average maturity of
approximately two years. The average maturity of the Portfolio's investments
will vary depending on market conditions. In making investment decisions for the
Portfolio, the adviser will consider factors in addition to current yield,
including preservation of capital, the potential for realizing capital
appreciation, maturity and yield to maturity. The adviser will monitor the
Portfolio's investments in particular securities in response to its appraisal of
changing economic conditions and trends, and may sell securities in anticipation
of a market decline or purchase securities in anticipation of a market rise.

SHORT-TERM BOND PORTFOLIO

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

The investment objective of the SHORT-TERM BOND PORTFOLIO is to provide
current income. The Portfolio will invest primarily in investment grade debt
securities, U.S. government securities, and mortgage-backed and asset-backed
securities. In addition, the Portfolio may invest in taxable municipal
obligations. Under normal market conditions, the Portfolio will invest at least
65% of its assets in bonds. The Portfolio will attempt to maintain a
dollar-weighted average portfolio maturity of one to three years.

The securities in which the Portfolio invests include, but are not limited
to: U.S. government securities; corporate obligations; mortgage-backed
securities; asset-backed securities; and Money Market Instruments. The Portfolio
may also invest up to 5% of its total assets in lower-quality debt securities,
sometimes referred to as "junk bonds."

U.S. GOVERNMENT BOND PORTFOLIO

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

The investment objective of the U.S. GOVERNMENT BOND PORTFOLIO is to
provide current income. Under normal market conditions, the Portfolio will
invest at least 65% of the value of its total assets in securities which are
issued or guaranteed as to payment of principal and interest by the U.S.
government or its agencies or instrumentalities. For purposes of this 65%
policy, the Portfolio will consider collateralized mortgage obligations issued
by U.S. government agencies or instrumentalities to be U.S. government
securities. The remaining 35% of the Portfolio's assets may be invested in any
of the securities discussed below. In addition, the Portfolio may invest in
taxable municipal obligations. The Portfolio will attempt to maintain a
dollar-weighted average portfolio maturity of three to ten years.

The securities in which the Portfolio invests include, but are not limited
to: U.S. government securities; mortgage-backed securities; asset-backed
securities; corporate obligations; and Money Market Instruments. The Portfolio
may also invest up to 5% of its total assets in lower-quality debt securities,
sometimes referred to as "junk bonds."

12
<PAGE> 16

INTERMEDIATE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the INTERMEDIATE FIXED INCOME PORTFOLIO is to
provide current income consistent with the preservation of capital by investing
primarily in intermediate-term fixed-income securities.

The Portfolio may invest in income-producing securities of all types,
including bonds, notes, mortgage securities, government and government agency
obligations, zero coupon securities, convertible securities, foreign securities,
indexed securities, and asset-backed securities. The Portfolio normally will
invest in investment-grade debt securities (including convertible securities)
and unrated securities determined by the adviser to be of comparable quality.
The Portfolio may also invest up to 5% of its total assets in lower-quality debt
securities, sometimes referred to as "junk bonds". Common stocks acquired
through the exercise of conversion rights or warrants, or the acceptance of
exchange or similar offers, ordinarily will not be retained by the Portfolio. An
orderly disposition of these stocks will be effected consistent with the
judgment of the Adviser as to the best price available.

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in fixed-income securities. The Portfolio has no
restriction on maturity; however, it normally invests in intermediate-term
securities and maintains a dollar-weighted average maturity of three to ten
years. The average maturity of the Portfolio's investments will vary depending
on market conditions. In making investment decisions for the Portfolio, the
adviser will consider factors in addition to current yield, including
preservation of capital, the potential for realizing capital appreciation,
maturity and yield to maturity. The adviser will monitor the Portfolio's
investments in particular securities or in types of debt securities in response
to its appraisal of changing economic conditions and trends, and may sell
securities in anticipation of a market decline or purchase securities in
anticipation of a market rise.

INCOME PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the INCOME PORTFOLIO is to provide a high level
of current income, with a secondary objective of capital growth consistent with
reasonable risk, by investing primarily in a broad range of fixed-income
securities.

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in fixed-income securities. The Portfolio may
invest in income-producing securities of all types, including bonds, notes,
mortgage securities, government and government agency obligations, zero coupon
securities, convertible securities, foreign securities, indexed securities, and
asset-backed securities. The Portfolio normally will invest in investment-grade
debt securities (including convertible securities) and unrated securities
determined by the adviser to be of comparable quality. The Portfolio may also
invest up to 5% of its total assets in lower-quality debt securities, sometimes
referred to as "junk bonds". Common stocks acquired through exercise of
conversion rights or warrants or acceptance of exchange or similar offers
ordinarily will not be retained by the Portfolio. An orderly disposition of
these stocks will be effected consistent with the judgment of the adviser as to
the best price available.

The average maturity of the Portfolio's investments will vary depending on
market conditions. In making investment decisions for the Portfolio, the adviser
will consider factors in addition to current yield, including preservation of
capital, the potential for realizing capital appreciation, maturity and yield to
maturity. The adviser will monitor the Portfolio's investments in particular
securities or in types of debt securities in response to its appraisal of
changing economic conditions and trends, and may sell securities in anticipation
of a market decline or purchase securities in anticipation of a market rise.

MARYLAND TAX-FREE PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the MARYLAND TAX-FREE PORTFOLIO is to provide
high current income that is free from federal income tax and the Maryland state
and county income taxes.

13
<PAGE> 17

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in Maryland municipal securities. In addition, as
a matter of fundamental policy, the Portfolio's assets will be invested during
periods of normal market conditions so that at least 80% of its income will not
be subject to federal income tax, including the federal alternative minimum tax.

The Portfolio normally invests primarily in investment-grade debt
securities (and unrated securities determined by the adviser to be of comparable
quality), but may also invest up to 5% of its total assets in lower-quality debt
securities, sometimes referred to as "junk bonds". The Portfolio has no
restriction on maturity; however, it normally invests in intermediate- and
long-term bonds and maintains a dollar-weighted average maturity of seven to ten
years. The average maturity of the Portfolio's investments will vary depending
on market conditions.

If you are subject to the federal alternative minimum tax, you should note
that the Portfolio may invest some of its assets in municipal securities issued
to finance private activities. The interest from these investments is a
tax-preference item for purposes of the tax.

The adviser normally invests the Portfolio's assets according to its
investment strategy and does not expect to invest in federally or state taxable
obligations. However, the Portfolio reserves the right to invest without
limitation in short-term instruments, to hold a substantial amount of uninvested
cash, and to invest more than normally permitted in taxable obligations for
temporary, defensive purposes.

PENNSYLVANIA TAX-FREE PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the PENNSYLVANIA TAX-FREE PORTFOLIO is to
provide high current income that is free from federal and Pennsylvania state
income taxes.

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in Pennsylvania municipal securities. In addition,
as a matter of fundamental policy, the Portfolio's assets will be invested
during periods of normal market conditions so that at least 80% of its income
will not be subject to federal income tax, including the federal alternative
minimum tax.

The Portfolio invests primarily in investment-grade debt securities (and
unrated securities determined by the adviser to be of comparable quality), but
also may invest up to 5% of its total assets in lower-quality debt securities,
sometimes referred to as "junk bonds". The Portfolio has no restriction on
maturity; however, it normally invests in intermediate- and long-term bonds and
maintains a dollar-weighted average maturity of seven to ten years. The average
maturity of the Portfolio's investments will vary depending on market
conditions.

BALANCED PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the BALANCED PORTFOLIO is to seek long-term
total returns from both capital appreciation and current income by investing in
a diversified portfolio of stocks, debt securities, and cash equivalents.

14
<PAGE> 18

securities) and unrated securities determined by the adviser to be of comparable
quality, but may also invest up to 5% of its total assets in lower-quality debt
securities, referred to as "junk bonds". The average maturity of the Portfolio's
debt obligations will vary depending on market conditions. The adviser may
adjust the Portfolio's investments based on its interpretation of underlying
economic, financial, and security trends. The adviser's ability to make such
adjustments successfully will depend on its ability to predict market trends.
The Portfolio maintains at least 25% of its total assets in fixed-income
securities.

The Portfolio emphasizes long-term total return from capital appreciation
and current income. Although it is not a policy of the Portfolio to engage in
short-term trading, the adviser may dispose of securities without regard to the
length of time they are held if it believes such action will benefit the
Portfolio. Although the adviser will consider the potential for income in
selecting investments for the Portfolio, the Portfolio is generally not intended
to achieve a level of income comparable to fixed-income portfolios.

EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the EQUITY INCOME PORTFOLIO is to provide a
moderate level of current income and growth of capital by investing primarily in
high-quality, income-producing common stocks.

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of common stocks which, in general, have above-average dividend yields
relative to the stock market as measured by the Standard & Poor's 500 Composite
Stock Price Index. Under normal circumstances, at least 65% of the value of the
Portfolio's total assets will be invested in dividend-paying common stocks. The
Portfolio may invest up to 35% of its total assets in other types of securities,
including preferred stock, which may be convertible into common stock, and
investment-grade debt securities (including convertible debt securities) and
unrated securities determined by the adviser to be of comparable quality. The
Portfolio may invest up to 5% of its total assets in lower-quality debt
securities, sometimes referred to as "junk bonds".

The adviser considers many factors when evaluating a security for
investment by the Portfolio, including the company's current financial strength
and relative value. Although the adviser will consider the potential for income
in selecting investments for the Portfolio, the Portfolio is generally not
intended to achieve a level of income comparable to fixed-income portfolios. The
adviser may adjust the Portfolio's investments based on its interpretation of
underlying economic, financial, and security trends; however, the adviser's
ability to make such adjustments successfully will depend on its ability to
predict market trends.

EQUITY INDEX PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the Equity Index Portfolio is to provide
investment results that correspond to the performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500").

The Portfolio invests at least 65% of total assets in common stocks
included in the S&P 500. The Portfolio's adviser believes that the Portfolio's
objective can best be achieved by investing in the common stocks of
approximately 250 to 500 of the companies included in the S&P 500, depending
upon the size of the Portfolio.

Standard & Poor's designates the stocks included in the S&P 500 on a
statistical basis. A particular stock's weighting in the S&P 500 is based on its
total market value (that is, its market price per share times the number of
shares outstanding) relative to the total market value of all stocks included in
the S&P 500. From time to time, Standard & Poor's may add or delete stocks to or
from the S&P 500. Inclusion of a particular stock in the S&P 500 does not imply
any opinion by Standard & Poor's as to its merits as an investment, nor is
Standard & Poor's a sponsor of or in any way affiliated with the Portfolio or
the Fund.

15
<PAGE> 19

The Portfolio is managed by utilizing a computer program that identifies
which stocks should be purchased or sold in order to replicate, as closely as
practicable, the composition of the S&P 500. The Portfolio includes a stock in
the order of its weighting in the S&P 500, starting with the most heavily
weighted stock. Thus, the proportion of the Portfolio's assets invested in a
stock or industry closely approximates the percentage of the S&P 500 represented
by that stock or industry. Portfolio turnover is expected to be well below that
of actively managed mutual funds.

Although the Portfolio will not duplicate the performance of the S&P 500
precisely, it is anticipated that there will be a close correlation between the
Portfolio's performance and that of the S&P 500 in both rising and falling
markets. The Portfolio will attempt to achieve a correlation of at least 95%,
without taking into account expenses of the Portfolio. A perfect correlation
would be indicated by a figure of 100%, which would be achieved if the
Portfolio's net asset value, including the value of its dividends and capital
gains distributions, increased or decreased in exact proportion to changes in
the S&P 500. The Portfolio's ability to replicate the performance of the S&P 500
may be affected by, among other things, changes in securities markets, the
manner in which Standard & Poor's calculates the S&P 500, and the amount and
timing of cash flows into and out of the Portfolio. Although cash flows into and
out of the Portfolio will affect the Portfolio's ability to replicate the S&P
500's performance as well as its portfolio turnover rate, investment adjustments
will be made, as practicable, to account for these circumstances. The Board of
Trustees will monitor the targeted correlation of the Portfolio and, in the
event that it is not achieved, will consider alternative methods for replicating
the composition of the S&P 500.

The Portfolio also may invest up to 20% of its total assets in stock index
futures contracts, options on stock indices, options on stock index futures, and
index participation contracts based on the S&P 500. The Portfolio will not
invest in these types of contracts and options for speculative purposes, but
rather to maintain sufficient liquidity to meet redemption requests, to increase
the level of Portfolio assets devoted to replicating the composition of the S&P
500, and to reduce transaction costs. These types of contracts and options and
certain associated risks are described in the Appendix to this Prospectus and in
the Statement of Additional Information.

BLUE CHIP EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the BLUE CHIP EQUITY PORTFOLIO is to achieve
long-term appreciation by investing primarily in equity securities of
established, large capitalization companies. The Portfolio is expected to
produce current income consistent with its primary objective.

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of common stocks of established, large capitalization companies. The
adviser may also seek capital appreciation on behalf of the Portfolio by
investing up to 35% of its total assets in other types of securities, including
preferred stock and debt securities, securities convertible into common stock
and asset-backed securities. The Portfolio normally invests in investment-grade
debt securities (including convertible securities) and unrated securities
determined by the adviser to be of comparable quality, but may also invest up to
5% of its total assets in lower-quality debt securities, sometimes referred to
as "junk bonds".

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in equity securities of companies with operating
histories of ten years or more and market capitalizations in excess of $5
billion which the adviser considers to be leaders in their respective markets.
The median market capitalization of the stocks included in the S&P 500 is
approximately $5 billion. It is expected that the companies in which the
Portfolio invests will be based primarily in the United States, and will be
recognized market leaders with strong financial positions. The Portfolio will
invest in securities that the adviser believes offer above-average growth
potential based on their fundamental strength. The adviser considers many
factors when evaluating the overall quality of a security for investment by the
Portfolio, including a company's current financial strength and relative value.

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MID-CAP EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the MID-CAP EQUITY PORTFOLIO is to provide
long-term capital appreciation by investing primarily in equity securities of
medium-sized companies.

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of common stocks of medium-sized companies. Under normal
circumstances, at least 80% of the value of the Portfolio's total assets will be
invested in equity securities of companies with a market capitalization of $500
million to $8 billion. Companies with market capitalizations in this range are
considered "mid cap" and are represented by the Standard & Poor's MidCap 400
Index. As of June 30, 1997, the market capitalizations of the companies included
in the S&P 400 ranged from $300 million to $11 billion. The companies in which
the Portfolio invests are typically well established but have not reached full
maturity and may offer significant growth potential. The adviser will seek to
identify companies which have above-average trends in sales and earnings and
whose valuation by the market is relatively low or unrecognized.

Assets not invested in equity securities of medium-sized companies as
described above may be invested in equity securities of larger, more established
companies or in investment-grade fixed-income securities (and unrated securities
determined by the adviser to be of comparable quality).

VALUE EQUITY PORTFOLIO

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

The investment objective of the VALUE EQUITY PORTFOLIO is to provide growth
of principal. The Portfolio pursues its objective by investing primarily in the
equity securities of high quality companies. Emphasis is placed on stocks where
the market price of the stock appears low when compared to present and/or future
earnings cash flow.

The Portfolio's investment approach is based on the conviction that, over
the long term, the economy will continue to expand and develop and that this
economic growth will be reflected in the growth of the revenues and earnings of
publicly-held corporations. Under normal market conditions, the Portfolio
intends to invest at least 65% of its total assets in equity securities of U.S.
companies. In most market conditions, the stocks comprising the Portfolio's
assets will exhibit traditional value characteristics, such as higher than
average sales growth, higher than average return on equity, above average free
cash flow, and stocks of companies with high return on their invested capital.

The securities in which the Portfolio invests include, but are not limited
to: common stocks; convertible securities; securities of foreign issuers traded
on the New York or American Stock Exchanges or in the over-the-counter market,
including American Depositary Receipts ("ADRs"); futures and options; U.S.
government securities; corporate obligations; mortgage-backed securities; and
Money Market Instruments.

STOCK PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the STOCK PORTFOLIO is to provide long-term
capital appreciation by investing primarily in common stocks.

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of common stocks. The adviser will seek to identify growth-oriented
companies for investment by the Portfolio, including market leaders in various
industries. Under normal circumstances, at least 65% of the value of the
Portfolio's total assets will be invested in common stocks.

Assets not invested in common stocks as described above may be invested in
other equity securities (including preferred stock), convertible securities, or
investment-grade debt securities (and unrated securities determined by the
adviser to be of comparable quality).

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<PAGE> 21

CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of CAPITAL GROWTH PORTFOLIO is to provide
long-term capital appreciation. The Portfolio is expected to produce modest
dividend or interest income. This income will be incidental to the Portfolio's
primary objective.

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of primarily common stocks and securities convertible into common
stock. The adviser may also seek capital appreciation on behalf of the Portfolio
by investing up to 35% of its total assets in other types of securities,
including preferred stock, debt securities, asset-backed securities and indexed
securities. Debt securities (including convertible securities) in which the
Portfolio invests will normally be investment grade or unrated securities
determined by the adviser to be of comparable quality. The Portfolio may,
however, invest up to 5% of its total assets in lower-quality debt securities,
sometimes referred to as "junk bonds".

It is the Portfolio's policy to invest in the securities of both
well-known, established companies and smaller, less-well-known companies. The
Portfolio will invest in securities that the adviser believes offer
above-average growth potential based on their fundamental strength. The adviser
considers many factors when evaluating the overall quality of a security for
investment by the Portfolio, including a company's current financial strength,
earnings momentum, and relative value.

SMALL-CAP PORTFOLIO

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

The investment objective of the SMALL-CAP PORTFOLIO (formerly Special
Equity Portfolio) is to provide capital appreciation by investing primarily in
securities of companies believed by the adviser to be "special equities".

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in "special equities" which include equity
securities of: (1) a company with a market capitalization of $1.2 billion or
less at the time of investment and deemed by the adviser to have above-average
growth potential; or (2) a company experiencing a "special situation"; that is,
an unusual and possibly non-repetitive development taking place in the company.
The Portfolio will invest in securities that the adviser believes offer
above-average growth potential based on their fundamental strength.

A "special situation" may involve one or more of the following
characteristics:

- a technological advance or discovery, the offering of a new or unique
product or service, or changes in consumer demand or consumption
forecasts.

- changes in the competitive outlook or growth potential of an industry or
a company within an industry, including changes in the scope or nature of
foreign competition or the development of an emerging industry.

- new or changed management, or material changes in management policies or
corporate structure.

- significant economic or political occurrences abroad, including changes
in foreign or domestic import and tax laws or other regulations.

- other events, including natural disasters, favorable litigation
settlements, or a major change in demographic patterns.

In seeking capital appreciation, the Portfolio may also invest in
securities of companies that are not special equities, but which have valuable
fixed assets and whose securities are believed by the adviser to be undervalued
in relation to their assets, earnings, or growth potentials.

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<PAGE> 22

of all types and quality if the adviser believes that investing in these
securities will result in capital appreciation. The Portfolio may invest up to
35% of its total assets in lower-quality debt securities, sometimes referred to
as "junk bonds". The Portfolio may invest up to 35% of its total assets in
foreign securities of all types and may enter into forward currency contracts
for the purpose of managing exchange rate risks and to facilitate transactions
in foreign securities. The Portfolio may purchase or engage in indexed
securities, illiquid instruments, loans and other direct debt instruments,
options and futures contracts, repurchase agreements, securities loans,
restricted securities, swap agreements, warrants, real estate-related
instruments and zero coupon bonds. See "Risks to Consider", the Appendix to this
Prospectus and the Statement of Additional Information for more information.

The Portfolio spreads investment risk by limiting its holdings in any one
company or industry. The adviser may use various investment techniques to hedge
the Portfolio's risks, but there is no guarantee that these strategies will work
as intended. The adviser normally invests the Portfolio's assets according to
its investment strategy. The Portfolio expects to be fully invested under most
market conditions. However, the Portfolio reserves the right to invest without
limitation in preferred stocks and investment-grade debt instruments for
temporary, defensive purposes when, in the adviser's judgment, a more
conservative approach to investment is desirable.

INTERNATIONAL EQUITY SELECTION PORTFOLIO

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

The investment objective of the INTERNATIONAL EQUITY SELECTION PORTFOLIO is
to provide long-term capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in shares of other mutual funds (the
"underlying funds"), the portfolios of which consist primarily of equity
securities of non-U.S. issuers. Under normal market conditions, and as an
investment policy, the Portfolio will invest at least 65% of its total assets in
underlying funds that are international equity funds. However, as an operational
policy, the Portfolio anticipates investing substantially all of its assets in
international equity funds. International equity funds are those which invest
primarily in equity securities of companies located in three or more countries
outside the United States. The adviser will attempt to identify and select a
varied portfolio of international equity funds which presents the greatest
long-term capital growth potential based on the adviser's analysis of many
factors. The selection of international equity funds may include international
equity funds that invest primarily in emerging markets or focus their
investments on geographic regions (provided they invest in at least three
countries other than the United States). The adviser will first assess the
relative attractiveness of individual countries, geographic regions, and/or
emerging markets. After identifying the most and least attractive countries,
regions or markets, consideration will be given to the expected returns and
risks before deciding whether to invest in funds that overweight and underweight
certain countries, regions or markets. The selection of underlying funds also
involves an initial peer group screening process which assesses fund investment
style, investment objectives and policies, and fund management. Rankings of
certain independent rating services are also considered. Potential underlying
funds which, in the adviser's view, meet these criteria will then be subject to
further evaluation of investment policies, historic total return, size,
volatility and operating expenses over various time periods. Also, on a
macroeconomic level, a fund's geographical diversification is also considered.
The underlying funds may be subject to more, less, the same or different
investment restrictions than the Portfolio, and the adviser will consider these
similarities and differences when making investment decisions.

The 1940 Act currently provides that the Portfolio may not purchase the
securities of an underlying fund if, as a result, the Portfolio together with
any of its affiliates would own more than 3% of the total outstanding securities
of that underlying fund. Thus, the Portfolio's ability to invest in shares of
certain underlying funds could be restricted and the adviser may have to select
alternative investments. By investing in the Portfolio, investors bear not only
the Portfolio's total operating expenses, but the operating expenses of the
underlying funds as well. An investor in the Portfolio should recognize that
investments may be made directly in underlying funds and that, by investing in
underlying funds indirectly through the Portfolio, investors will bear not only
a proportionate share of

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<PAGE> 23

the expenses of the Portfolio, but also, indirectly, similar expenses of the
underlying funds including distribution expenses and sales charges. Finally,
investors should recognize that, as a result of the Portfolio's policies of
investing in other mutual funds, investors may receive taxable capital gains
distributions to a greater extent than would be the case if an investment were
made directly in the underlying funds.

Assets not invested in international equity funds may be invested in
underlying funds other than international equity funds, such as global funds
(funds that invest primarily in securities of issuers throughout the world,
including the United States), individual country funds and domestic equity and
debt funds to the extent consistent with the Portfolio's objective of long-term
capital appreciation. As described in more detail below, the Portfolio may also
make direct investments in the securities held by these underlying funds,
including, but not limited to: domestic and foreign equity securities (such as
equity or debt securities of foreign issuers traded on the New York or American
Stock Exchanges or in the over-the-counter market in the form of sponsored or
unsponsored ADRs, Global Depositary Receipts ("GDRs"), and European Depositary
Receipts ("EDRs") (collectively, "Depositary Receipts"); fixed income
securities, which include preferred stock, bonds, notes, or other debt
securities of U.S. and foreign companies or governments; short-term debt
securities, including U.S. Treasury bills and other short-term U.S. government
securities, commercial paper, certificates of deposit and bankers' acceptances;
warrants; and unit investment trusts. The Portfolio and underlying funds may
also invest in variable rate demand notes, invest in restricted securities,
invest up to 15% of their net assets in illiquid securities, engage in
repurchase agreements, when-issued and delayed delivery transactions and forward
commitments, invest in foreign currency exchange transactions (including forward
foreign currency exchange transactions), enter into futures contracts and
foreign currency futures contracts and trade in options on foreign currencies,
stock index and financial futures contracts, portfolio securities and stock
indices. The Portfolio and the underlying funds may also lend their portfolio
securities, and borrow for investment purposes.

The underlying funds may also be authorized to invest up to 100% of their
respective assets in the securities of foreign issuers and engage in foreign
currency transactions (including forward foreign currency exchange transactions)
with respect to these investments; invest primarily in either the securities of
emerging market countries or in the securities of a single country; invest 35%
or more of their respective assets in high yield securities (i.e., "junk
bonds"); invest in warrants; sell securities short; engage in leveraged
borrowing; and enter into interest rate swaps, currency swaps, and other types
of swap agreements such as caps, collars, and floors. The Portfolio will not
concentrate its assets (i.e., invest 25% or more of its total assets) in any one
industry but may invest its assets in underlying funds that concentrate their
investments in a single industry. See "Risks to Consider," the Appendix to this
Prospectus and the Statement of Additional Information for more information.

Although the Portfolio will normally invest in open-end, management
investment companies, or "mutual funds," it also may invest in closed-end
management investment companies and/or unit investment trusts. Unlike open-end
funds that offer and sell their shares at net asset value plus any applicable
sales charge, the shares of closed-end funds and unit investment trusts may
trade at a market value that represents a premium, discount or spread to net
asset value.

For temporary defensive purposes (up to 100% of total assets) and to
maintain liquidity (up to 35% of total assets), the Fund may invest in
short-term Money Market Instruments.

INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the INTERNATIONAL EQUITY PORTFOLIO is to
provide long-term capital growth. Dividend income is incidental to the
Portfolio's primary objective.

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in foreign equity securities. The Portfolio
invests in companies in at least three countries other than the United States.
The Portfolio's investments will be primarily focused on those equity securities
of well-established companies with large market capitalizations.

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<PAGE> 24

When allocating the Portfolio's investments among geographic regions and
individual countries, the adviser considers various factors such as prospects
for relative economic growth, expected levels of inflation, anticipated interest
rate movements, government policies influencing business conditions and the
outlook for currency relationships. The adviser expects that the Portfolio's
investments will focus mainly on countries which are included in the Morgan
Stanley Capital International Europe, Australia, Far East index (the "EAFE
index"), although other geographical regions, such as Latin America, South
Africa, Central and Eastern Europe, and emerging Asian markets are also
permitted. The risks of investing in foreign securities are heightened when
investing in emerging markets. See "Risks to Consider -- Foreign Securities".
The countries that make up the EAFE index include, but are not limited to:
United Kingdom, Ireland, France, Germany, Switzerland, the Netherlands, Italy,
Spain, Belgium, Sweden, Norway, Finland, Denmark, Austria, Japan, Australia, New
Zealand, Hong Kong, Malaysia and Singapore. It is not the objective of the
Portfolio to replicate the EAFE index. The Portfolio may also invest in
investment-grade convertible debt securities (and unrated securities determined
by the adviser to be of comparable quality), and may purchase U.S. government
securities and indexed securities.

The value of the Portfolio's investments, and the value of dividends and
interest earned by the Portfolio, may be significantly affected by changes in
currency exchange rates. The Portfolio's adviser will endeavor, through
appropriate hedging and currency management strategies, to mitigate the possible
impact of weaknesses in foreign currencies. Some foreign currency values may be
volatile and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets which could adversely
affect the Portfolio. If the adviser increases the Portfolio's exposure to a
foreign currency and its value falls, the adviser's strategy may result in
increased losses to the Portfolio. Similarly, if the adviser hedges the
Portfolio's exposure to a foreign currency and its value subsequently rises, the
Portfolio will lose the opportunity to participate in the currency's
appreciation.

ADDITIONAL INVESTMENT POLICIES AND LIMITATIONS
- --------------------------------------------------------------------------------

GOVERNMENT SECURITIES. Government Securities include U.S. Treasury bills,
notes and bonds, and obligations issued by federal agencies such as the
Export-Import Bank of the United States, the General Services Administration,
the Government National Mortgage Association, and the Small Business
Administration. Obligations issued or guaranteed as to principal and interest by
U.S. government agencies or instrumentalities include instruments issued by the
Federal Home Loan Bank, Federal Farm Credit Bank and Federal National Mortgage
Association.

MONEY MARKET INSTRUMENTS. Money Market Instruments include but are not
limited to: U.S. Government Securities; custodial receipts evidencing future
interest or principal payments on U.S. Government Securities; obligations of
domestic or foreign banks, including bankers' acceptances, time deposits and
certificates of deposit ("CDs"); commercial paper (including variable and
floating rate instruments); corporate obligations; and asset-backed securities
and indexed securities -- each with 397 days or less remaining to maturity. For
temporary defensive purposes, the non-money-market Portfolios may invest all or
a portion of their assets in Money Market Instruments.

INVESTMENT GRADE SECURITIES. Investment grade securities are securities
which have been rated Baa or higher by Moody's Investors Service, Inc.
("Moody's") or BBB or higher by Standard & Poor's Ratings Group ("S&P"), or
which have equivalent ratings by other NRSROs. Securities rated Baa or BBB may
be regarded as having speculative characteristics. See the Statement of
Additional Information for a description of the various rating categories.

INVESTMENT LIMITATIONS. Each of the Portfolios has adopted certain
investment limitations. The principal investment limitations of the Portfolios
are summarized below. A complete listing is contained in the Statement of
Additional Information. With the exception of 3(b), these limitations are
fundamental policies and may only be changed with shareholder approval.

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1. Each Portfolio (other than the Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio) may not, with respect to 75% of its assets,
invest more than 5% of the total market value of its assets in the securities of
any one issuer (other than the U.S. government) if as a result, (a) more than 5%
of its total assets would be invested in the securities of that issuer, or (b)
it would hold more than 10% of the issuer's outstanding voting securities.
(Under applicable regulations, a money market Portfolio may not invest more than
5% of its total assets in securities of a single issuer unless the securities
are first-tier securities.)

2. Each Portfolio (other than the Money Market Portfolio) may not purchase
a security (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities) if, as a result, more than 25% of its
total assets would be invested in securities of a particular industry. The Money
Market Portfolio may invest 25% or more of its assets in obligations of domestic
banks.

3. A Portfolio (a) may borrow money from a bank for temporary or emergency
purposes or by engaging in reverse repurchase agreements, but not in an amount
exceeding 33 1/3% of its total assets; and (b) will not purchase securities when
borrowings (including reverse repurchase agreements) exceed 5% of its total
assets.

4. A Portfolio may not make a loan if more than 33 1/3% of its assets would
be lent to other parties. Only the Short-Term Treasury Portfolio, Intermediate
Fixed Income Portfolio and Income Portfolio currently intend to lend portfolio
securities.

OTHER POLICIES. The Appendix to this Prospectus contains additional
information concerning certain securities in which the Portfolios may invest and
transactions in which they may engage. See the Statement of Additional
Information for a complete listing of the Portfolios' investment policies and
limitations and more detailed information about the Portfolios' investments.

RISKS TO CONSIDER
- --------------------------------------------------------------------------------

An investment in any of the Portfolios involves certain risks. These risks
include the following:

FIXED-INCOME SECURITIES. The market value of fixed-income securities will
change in response to interest rate changes and other factors. During periods of
falling interest rates, the value of outstanding fixed-income securities
generally rises. Conversely, during periods of rising interest rates, the value
of such securities generally declines. Moreover, while securities with longer
maturities tend to produce higher yields, the prices of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates. Changes by recognized agencies in the credit rating
of any fixed-income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of portfolio securities will not necessarily affect cash income
derived from those securities but will affect the net asset value of the
Portfolio's shares.

Bonds rated Baa by Moody's or BBB by S&P, or with equivalent ratings by
other NRSROs, may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. Debt securities rated lower than Baa by Moody's or BBB by S&P, or with
equivalent ratings by other NRSROs, (sometimes referred to as "junk bonds") have
poor protection against default in payment of principal and interest. These
securities are often considered to be speculative and involve greater risk of
loss or price changes due to changes in the issuer's capacity to pay. Market
prices of lower-rated debt securities may fluctuate more than those of
higher-rated securities, and may decline significantly in periods of general
economic difficulty which may follow rising interest rates. Unrated securities
are not necessarily of lower quality than rated securities, but they may not be
attractive to as many buyers.

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issued to raise money for various public purposes, including general purpose
financing for state and local governments as well as financing for specific
projects or public facilities. Municipal securities may be backed by the full
taxing power of a municipality or by the revenues from a specific project or the
credit of a private organization. Some municipal securities are insured by
private insurance companies, while others may be supported by letters of credit
("LOCs") furnished by domestic or foreign banks.

Issuers or financial intermediaries which provide demand features or
standby commitments often support their ability to buy securities on demand by
obtaining LOCs or other guarantees from banks. LOCs also may be used as credit
supports for other types of municipal instruments. The adviser may rely upon its
evaluation of a bank's credit in determining whether to purchase an instrument
supported by an LOC. In evaluating a foreign bank's credit, the adviser will
consider whether adequate public information about the bank is available and
whether the bank may be subject to unfavorable political or economic
developments, currency controls, or other governmental restrictions that might
affect the bank's ability to honor its credit commitment.

Yields on municipal obligations depend on a variety of factors, including
the general conditions of the money markets and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Municipal obligations with longer
maturities tend to produce higher yields and generally are subject to
potentially greater price fluctuations than obligations with shorter maturities.

EQUITY SECURITIES GENERALLY. Investments in equity securities are subject
to market risks which may cause their prices to fluctuate. Accordingly, the
Portfolios investing in equity securities may be more suitable for long-term
investors who can bear the risk of short-term fluctuations. Changes in the value
of portfolio securities will not necessarily affect income derived from those
securities but will affect the net asset value of the Portfolio's shares. Equity
securities held by a Portfolio may not perform well during certain market cycles
and may not respond to general market movements to the same extent as other
securities.

SMALLER-CAPITALIZATION COMPANIES. The Small-Cap Portfolio (formerly
Special Equity Portfolio) emphasizes investments in companies with
relatively-small market capitalizations and other Portfolios may invest in such
companies to the extent permitted by their investment policies. The equity
securities of smaller-capitalization companies frequently have experienced
greater price volatility than those of larger-capitalization companies, and they
may be expected to do so in the future. Their reliance on limited product lines,
markets, financial resources, or other factors may make smaller companies more
susceptible to setbacks and downturns. As a result, their stock prices may be
particularly volatile. In addition, investing in securities involving a "special
situation" bears the risk that the situation will not develop as favorably as
expected, or that it may deteriorate. For example, a merger with favorable
implications may be blocked, an industrial development may not enjoy anticipated
market acceptance, or a bankruptcy may not be as favorably resolved as had been
expected.

FOREIGN SECURITIES. Investing in the securities of foreign issuers
involves special risks not typically associated with investing in U.S.
companies. These risks include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
which could affect U.S. investment in foreign countries, and potential
restrictions on the flow of international capital and currencies. Foreign
issuers may also be subject to less government regulation than U.S. companies.
Moreover, the dividends and interest payable on foreign securities may be
subject to foreign withholding taxes, thus reducing the net amount of income
available for distribution to a Portfolio's shareholders. Further, foreign
securities often trade with less frequency and volume than domestic securities
and, therefore, may exhibit greater price volatility. Investing in emerging
markets involves special considerations (in addition to those relating to
foreign investments generally) which include, among others, greater political
uncertainty, an economy's dependence on revenues from particular commodities or
on international

23
<PAGE> 27

aide or development assistance, currency transfer restrictions, a limited number
of potential buyers for securities, and delays and disruptions in securities
settlement procedures. Changes in foreign exchange rates will affect, favorably
or unfavorably, the value of those securities which are denominated or quoted in
currencies other than the U.S. dollar.

NON-DIVERSIFICATION. Investing in the Maryland Tax-Free Portfolio or
Pennsylvania Tax-Free Portfolio, which are non-diversified Portfolios, may
entail greater risk than investing in a diversified Portfolio because the
concentration in securities of relatively-fewer issuers could result in greater
fluctuation in the total market value of the Portfolio's holdings. Any economic,
political or regulatory developments affecting the value of the securities the
Portfolio holds could have a greater impact on the total value of its holdings
than would be the case if the securities were diversified among more issuers.

Maryland tax-free securities include obligations issued by the State of
Maryland or its counties, municipalities, authorities or other subdivisions. The
performance of these securities is closely tied to economic and political
conditions in the state. Maryland's rate of economic growth has been slower in
the early 1990s than it had been during the 1980s. State revenues in recent
years have been less than expected and, because Maryland's constitution requires
a balanced budget, expenditures have been cut. While the ratings assigned to
Maryland municipal investments indicate that Maryland and its principal
subdivisions and agencies are overall in satisfactory economic health, there can
be no assurance that this will continue or that particular bond issues may not
be adversely affected by changes in state or local economic or political
conditions.

Pennsylvania's economy is based on a mixture of manufacturing, mining,
trade, medical and health services, education and financial institutions.
Pennsylvania's continued dependence on manufacturing, mining, steel and coal,
however, has made the state vulnerable to cyclical fluctuations, foreign imports
and environmental concerns. Pennsylvania's population and per capita income have
been increasing slightly over the past five years, and its employment and
unemployment rates have generally not been significantly different over the past
five years from that of the United States. Pennsylvania is engaged in certain
litigation matters which are described in the Statement of Additional
Information.

OTHER CONSIDERATIONS. Certain other investments and investment techniques
permitted for the Portfolios pose special risks in addition to those described
above. See the Appendix to this Prospectus and the Statement of Additional
Information for more information.

By itself no Portfolio constitutes a balanced investment plan. There is no
assurance that a Portfolio will achieve its investment objective. Changes in the
values of a Portfolio's investments will generally not affect the income derived
from them; however, they may affect the Portfolio's share price. The yield and
total return of the Portfolios will fluctuate. The money market Portfolios seek
to maintain a stable net asset value per share of $1.00 but there is no
assurance that they will be able to do so. The share price of the
non-money-market Portfolios will fluctuate and investors may have a gain or loss
when redeeming shares.

Investors should review the investment objective and policies of a
Portfolio and carefully consider their ability to assume the risks involved in
purchasing its shares.

PERFORMANCE
- --------------------------------------------------------------------------------

The performance of each class of shares of a Portfolio may be quoted in
advertising in terms of yield, effective yield or total return. In addition, a
tax-equivalent yield may be quoted for shares of the Tax-Free Money Market
Portfolio, Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio. All
types of performance are based on historical results and are not intended to
indicate future performance.

The YIELD of shares of a Portfolio is calculated by dividing the net
investment income earned by the shares over a 7-day period (for the money market
Portfolios) or a 30-day period (for other

24
<PAGE> 28

Portfolios), by the average number of shares entitled to receive dividends and
expressing the result as an annualized percentage rate based on each share price
at the end of the 7- and 30-day periods, respectively. The EFFECTIVE YIELD is
calculated similarly, but assumes that the income earned from the investment is
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment. Because yield accounting
methods differ from the methods used for other accounting purposes, the yields
of shares of the Portfolios may not equal their respective distribution rates,
the income paid to your account or the income reported in the financial
statements of the Retail Class of the relevant Portfolio.

A TAX-EQUIVALENT YIELD shows the approximate taxable yield that would have
to be earned before taxes to equal a tax-free yield. A tax-equivalent yield is
calculated by dividing the shares' tax-exempt yield by the result of one minus a
stated federal and/or state tax rate. If only a portion of a Portfolio's income
was tax-exempt, only that portion is adjusted in the calculation.

TOTAL RETURN is based on the overall dollar or percentage change in value
of a hypothetical investment in a class and assumes that all distributions are
reinvested. A CUMULATIVE TOTAL RETURN reflects a class' performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN reflects the hypothetical
annually compounded return that would have produced the same cumulative total
return if a class' performance had been constant over the entire period. Because
average annual total returns tend to smooth out variations in a class' return,
it should be recognized that they are not the same as actual year-by-year
results. When a class of a Portfolio quotes an average annual return covering a
period of less than one year, the calculation assumes that the performance will
remain constant for the rest of the year. Since this may or may not occur,
average annual returns should be viewed as hypothetical rather than actual
performance figures.

Each Portfolio may periodically compare its performance to the performance
of other mutual funds tracked by mutual-fund rating services, broad groups of
comparable mutual funds, or unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs. Certain Portfolios may advertise performance that includes
results from periods in which the Portfolio's assets were managed in a
non-registered predecessor vehicle. The classes of shares of a Portfolio have
different sales charges and other expenses that may affect performance.

For additional performance information, please contact your Investment
Professional or call 1-800-ARK-FUND to request a Statement of Additional
Information and Annual Report.

PORTFOLIO TRANSACTIONS AND VALUATION
- --------------------------------------------------------------------------------

Subject to the general supervision of the Board of Trustees, a Portfolio's
adviser is responsible for placing orders for securities transactions for the
Portfolios. Transactions in debt securities are expected to occur primarily with
issuers, underwriters or major dealers acting as principals. Such transactions
are normally effected on a net basis and do not involve payment of brokerage
commissions. Transactions involving equity securities will normally be conducted
through brokerage firms entitled to receive commissions for effecting such
transactions. The Portfolios have no obligation to enter into securities
transactions with any particular dealer, issuer, underwriter or other entity. In
placing orders for the Portfolios, it is the policy of the advisers to obtain
the most favorable execution. Where such execution may be obtained from more
than one broker or dealer, securities transactions may be directed at higher
commission rates to those who provide research, statistical and other
information to the adviser. If more than one account managed by an adviser is
purchasing or selling the same security, orders may be aggregated in the
interest of achieving the most favorable execution.

The Portfolios have authorized the advisers to allocate transactions to
some broker-dealers who help distribute the Portfolios' shares and on an agency
basis to Goodbody Stockbrokers, an affiliate of the advisers. The advisers may
make such allocations if commissions are comparable to those charged by
non-affiliated, qualified broker-dealers for similar services.

25
<PAGE> 29

The frequency of portfolio transactions or the portfolio turnover rate will
vary from year to year depending on market conditions. The annual portfolio
turnover rate for the Equity Index Portfolio is not expected to exceed 50%. For
the fiscal year ended April 30, 1997, the portfolio turnover rates for the
Income Portfolio and Small-Cap Portfolio were higher than for the prior fiscal
year due to market volatility during the period, liquidations related to share
redemptions and the realignment of certain portfolio investments. It is
anticipated that the portfolio trading engaged in by the Value Equity Portfolio,
International Equity Selection Portfolio, Short-Term Bond Portfolio and U.S.
Government Bond Portfolio will not result in annual rates of portfolio turnover
exceeding 100%. However, the underlying funds purchased by the International
Equity Selection Portfolio may experience much higher portfolio turnover rates
resulting in higher brokerage commissions, and taxable gains or losses. Because
a higher turnover rate increases transaction costs and may increase taxable
capital gains, the advisers carefully weigh the anticipated benefits of
short-term investing against these consequences.

VALUATION. The net asset value of the Retail Class shares of each Portfolio
is calculated by adding the Retail Class' pro rata share of the value of all
securities and other assets attributable to a Portfolio, deducting the Retail
Class' pro rata share of Portfolio-level liabilities, deducting Retail Class-
specific liabilities, and dividing the result by the number of Retail Class
shares outstanding. Assets of the money market Portfolios are valued based upon
the amortized cost method. Assets of the other Portfolios that are traded on an
exchange or in the over-the-counter market are valued based upon market
quotations. Other assets for which market quotations are not readily available
are valued by an independent pricing service approved by the Board of Trustees.
Foreign securities held by a Portfolio are valued on the basis of quotations
from the primary U.S. market in which they are traded or, if not traded on a
U.S. market, then their primary foreign market and are translated from foreign
market quotations into U.S. dollars using current exchange rates.

PRICING OF SHARES. The Portfolios are open for business and the net asset
values of their shares are calculated each day that the New York Stock Exchange
("NYSE") and the Federal Reserve Bank of New York are open ("Business Day").
Your purchase of shares of a money market Portfolio must be made in federal
funds or other readily available funds and will be processed at the net asset
value next calculated after your order is received and accepted by the Fund's
transfer agent. Your purchase of other Portfolios will be processed at the
public offering price next calculated after your order is received and accepted
by the transfer agent. The net asset values of the Portfolios (other than the
money market Portfolios) are determined at the close of business of the NYSE,
normally 4:00 p.m. Eastern Time ("4:00 p.m."). The net asset values of the U.S.
Treasury Money Market Portfolio and Tax-Free Money Market Portfolio are
determined as of 12:00 noon Eastern Time ("12:00 noon") and the close of
business of the NYSE, normally 4:00 p.m. The net asset values of the U.S.
Government Money Market Portfolio and Money Market Portfolio are determined as
of 5:00 p.m. Eastern Time ("5:00 p.m.").

PURCHASES, EXCHANGES AND REDEMPTIONS
- --------------------------------------------------------------------------------

WHO MAY INVEST?
- --------------------------------------------------------------------------------

Retail Class shares are designed for all investors seeking professionally
managed mutual funds. All investors in Retail Class shares will be required to
establish a brokerage account with a qualified securities broker or financial
institution (an "Investment Professional"), such as First Maryland Brokerage
Corporation, that has a clearing brokerage arrangement with National Financial
Services Corporation.

The minimum initial investment is $500 per Portfolio. Subsequent
investments may be in any amount of $500 or more. If your total investment in a
Portfolio falls below $500 due to redemption and you do not increase your total
investment, your account may be closed and the proceeds mailed to you at the
address on record. You will be given 30 days' notice to reestablish the minimum

26
<PAGE> 30

investment. Shares will be redeemed at the last calculated net asset value on
the day the account is closed.

HOW DO I SET UP AN ACCOUNT?
- --------------------------------------------------------------------------------

You may set up an account through your Investment Professional. Please
contact your Investment Professional or call 1-800-ARK FUND for information on
opening a brokerage account to invest in Retail Class shares of a Portfolio. The
program materials/brokerage account application from your Investment
Professional should be read in conjunction with this Prospectus. An Investment
Professional may impose additional charges for its services and limitations may
apply.

HOW DO I INVEST?
- --------------------------------------------------------------------------------

To invest in any Portfolio of the Fund, please contact your Investment
Professional.

Payments for Retail Class shares of a money market Portfolio must be made
by Federal Funds wire or other funds immediately available to the Portfolio. An
order for the purchase of shares will become effective on the day of receipt of
the order by the Fund's transfer agent and the shares purchased will be entitled
to that day's dividend if the order, together with available funds, is received
prior to 12:00 noon (for the U.S. Treasury Money Market Portfolio and Tax-Free
Money Market Portfolio) or 5:00 p.m. (for the Money Market Portfolio and U.S.
Government Money Market Portfolio). If a purchase order for the U.S. Treasury
Money Market Portfolio or Tax-Free Money Market Portfolio, together with
available funds, is received after 12:00 noon but before 4:00 p.m., it will be
processed at the net asset value determined at 4:00 p.m. and the shares
purchased will begin earning dividends the following Business Day. If an order
or payment is received after 4:00 p.m. (for the U.S. Treasury Money Market
Portfolio and Tax-Free Money Market Portfolio) or 5:00 p.m. (for the Money
Market Portfolio and U.S. Government Money Market Portfolio), an investor will
receive the net asset value next determined on the following Business Day.

Investors who wish to receive same-day acceptance of investments in the
Money Market Portfolio and the U.S. Government Money Market Portfolio must
contact the Fund's transfer agent (or its authorized agent) before 5:00 p.m. to
place the trade. In order for an investor to begin earning dividends on the
Business Day the investment is made, the transfer agent must receive the wire
before 5:00 p.m.

Purchase orders for Retail Class shares of a fixed-income or equity
Portfolio received by the transfer agent prior to 4:00 p.m. will be processed at
that day's public offering price (the net asset value plus the applicable sales
charge). The shares purchased will be eligible for dividends on the Business Day
following the date the purchase order is accepted. Payment is expected at the
time of the purchase order, but must be received within three Business Days of
the date of the purchase order. If funds are not received within three Business
Days, the order may be canceled and notice thereof provided to the party placing
the order. Any fees or losses due to cancellation of a purchase order may be the
responsibility of the party placing the order.

When the NYSE or the Federal Reserve Bank of New York closes early, the
Fund reserves the right to advance the time on any such day by which purchase
orders must be received.

It is the responsibility of your Investment Professional to transmit your
order to purchase and redeem shares to the transfer agent before the
next-determined net asset value calculation on a Business Day in order for you
to receive the next-determined share price. No certificates representing Retail
Class shares will be issued.

The Fund and its distributor reserve the right to reject any purchase
order.

27
<PAGE> 31

SALES CHARGES
- --------------------------------------------------------------------------------

The offering price (price to buy one share) is the net asset value of the
applicable Portfolio, divided by the sum of one minus the sales charge
percentage. The redemption price (price to sell one share) is the net asset
value of the applicable Portfolio. There are no sales charges imposed on the
money market Portfolios and the Short-Term Treasury Portfolio. The following
table shows the total sales charges applicable to purchases of shares of the
other Portfolios:

<TABLE>
<CAPTION>
SHORT-TERM BOND, U.S. GOVERNMENT BALANCED, EQUITY INCOME,
BOND, INTERMEDIATE FIXED INCOME, EQUITY INDEX, BLUE CHIP EQUITY,
INCOME, MARYLAND TAX-FREE MID-CAP EQUITY, VALUE EQUITY,
AND PENNSYLVANIA TAX-FREE STOCK, CAPITAL GROWTH, SMALL-CAP*, INTERNATIONAL EQUITY
PORTFOLIOS AND INTERNATIONAL EQUITY PORTFOLIOS SELECTION PORTFOLIO
------------------------------------ ------------------------------------ ------------------------------------
SALES CHARGE SALES CHARGE SALES CHARGE
AS A % OF PROFESSIONAL AS A % OF PROFESSIONAL AS A % OF PROFESSIONAL
-------------------- CONCESSION -------------------- CONCESSION -------------------- CONCESSION
OFFERING NET AMOUNT AS A % OF OFFERING NET AMOUNT AS A % OF OFFERING NET AMOUNT AS A % OF
PRICE INVESTED OFFERING PRICE PRICE INVESTED OFFERING PRICE PRICE INVESTED OFFERING PRICE
-------- ---------- -------------- -------- ---------- -------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than
$50,000.... 4.50 4.71 4.05 4.75 4.99 4.28 1.50
$50,000 to
less than
$100,000... 4.00 4.17 3.60 4.50 4.71 4.05 1.50
$100,000 to
less than
$250,000... 3.00 3.09 2.70 3.50 3.63 3.15 1.00
$250,000 to
less than
$500,000... 2.50 2.56 2.25 2.50 2.56 2.25 0.75
$500,000 to
less than
$1,000,000... 2.00 2.04 1.80 2.00 2.04 1.80 0.50
$1,000,000 to
less than
$3,000,000... 1.00 1.01 0.90 1.00 1.01 0.90 0.25
$3,000,000 to
less than
$5,000,000... 0.50 0.50 0.45 0.50 0.50 0.45 0.00
$5,000,000
and
above...... 0.00 0.00 0.00 0.00 0.00 0.00
</TABLE>

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

* formerly Special Equity

A portion of the sales charges are currently being waived so that the total
sales charges applicable to purchases of Portfolio shares by other investors
will be as follows:

<TABLE>
<CAPTION>
SALES CHARGE
AS A % OF PROFESSIONAL
--------------------------- CONCESSION
NET AMOUNT AS A % OF
OFFERING PRICE INVESTED OFFERING PRICE
-------------- ---------- --------------
<S> <C> <C> <C>
Less than $50,000.......................................... 3.00 3.09 2.90
$50,000 to less than $100,000.............................. 2.50 2.56 2.40
$100,000 to less than $250,000............................. 2.00 2.04 1.90
$250,000 to less than $500,000............................. 1.50 1.52 1.40
$500,000 to less than $1,000,000........................... 1.00 1.01 0.90
$1,000,000 and above....................................... 0.00 0.00 0.00
</TABLE>

All questions regarding the applicability of sales charges to share
purchases will be determined by the Distributor. The sales charge waivers
reflected in the above table may be discontinued at any time.

SALES CHARGE REDUCTIONS AND WAIVERS
- --------------------------------------------------------------------------------

The sales charge will be reduced for purchases of Retail Class shares
according to the above schedule if your purchase qualifies for one of the
following reduction plans. Please call your Investment Professional for more
details about each plan.

QUANTITY DISCOUNTS apply to purchases of Retail Class shares of a single
Portfolio or to combined purchases of Retail Class shares of any Portfolio
subject to a sales charge, and to purchases through an exchange from any such
Portfolio. An investment in Retail Class shares for several accounts held

28
<PAGE> 32

by you, your spouse, and your children under age 21 at the same time will be
considered a single transaction and qualify for a quantity discount as long as
the shares are purchased through the same Investment Professional and the total
is at least $50,000.

RIGHTS OF ACCUMULATION let you reduce your sales charge by adding to your
new purchases the value of all Retail Class shares held by you, your spouse, and
your children under age 21.

A LETTER OF INTENT (the "Letter") lets you receive a reduced sales charge
on purchases during a 13-month period as if the total amount invested had been
invested in a single lump sum. See "Quantity Discounts" above. You must file
your non-binding Letter with the Fund's transfer agent within 90 days of the
start of your purchases. Your initial investment must be at least 5% of the
amount you plan to invest. Out of the initial investment, 5% of the dollar
amount specified in the Letter will be registered in your name and held in
escrow. You will earn income dividends and capital gain distributions on
escrowed shares. Neither income dividends nor capital gain distributions
reinvested in additional shares will apply towards completion of the Letter. The
escrow will be released when your purchase of the total amount has been
completed. You are not obligated to complete the Letter and, in such case,
sufficient escrowed shares will be redeemed to pay any applicable sales charge.

A sales charge will not apply to Retail Class shares purchased: (1) by a
bank trust officer, registered representative, or other employee (or a member of
their immediate families) of Investment Professionals; (2) by a current or
former trustee or officer of the Fund or a current or retired officer, director
or regular employee of Allied Irish Banks, p.l.c., or its direct or indirect
subsidiaries (an "AIB employee"), the spouse of an AIB employee, an AIB employee
acting as custodian for a minor child, or a person acting as trustee of a trust
for the sole benefit of the minor child of an AIB employee; (3) by a charitable
organization (as defined in Section 501(c)(3) of the Code) investing $100,000 or
more; (4) for a charitable remainder trust or life income pool established for
the benefit of a charitable organization (as defined in Section 501(c)(3) of the
Code); (5) for a First Maryland account with the proceeds of a distribution from
an employee benefit plan that qualified for waiver (9); (6) for any state,
county or city, or any governmental instrumentality, department, authority or
agency; (7) with redemption proceeds from other mutual fund complexes on which
you have previously paid an initial or contingent deferred sales charge; (8) for
use in a broker-dealer managed account program, provided the broker-dealer has
executed a participation agreement with the Fund's distributor specifying
certain asset minimums and qualifications, and marketing, program and trading
restrictions (employee benefit plans assets do not qualify for this waiver); (9)
as part of an employee benefit plan having more than 25 eligible employees or a
minimum of $250,000 of plan assets invested in the Fund; (10) as part of an
employee benefit plan through an intermediary that has signed a participation
agreement with the Fund's distributor specifying certain asset minimums and
qualifications, and marketing, program and trading restrictions; and (11) on a
discretionary basis by a registered investment adviser that is not part of an
organization primarily engaged in the brokerage business and has executed a
participation agreement with the Fund's distributor specifying certain asset
minimums and qualifications, and marketing, program and trading restrictions
(employee benefit plan assets do not qualify for this waiver).

In order to continue to qualify for waiver (8), eligible investors with
existing Fund accounts will be required to sign and comply with a participation
agreement. You must notify your Investment Professional or First Maryland
Brokerage Corporation in advance if you qualify for a sales charge waiver. If
you are investing through an account managed by a broker-dealer, if you have
authorized an investment adviser to make investment decisions for you, or if you
are investing through a trust department, you may qualify to purchase either
Retail Class shares without a sales charge or Institutional Class shares.
Because Institutional Class shares have no sales charge, and do not pay a
distribution fee or a shareholder servicing fee, Institutional Class shares are
expected to have a higher total return than Retail Class shares. Contact your
Investment Professional to discuss if you qualify.

29
<PAGE> 33

HOW DO I EXCHANGE SHARES?
- --------------------------------------------------------------------------------

An exchange is a convenient way to buy and sell shares of another Portfolio
registered in your state. Retail Class shares of a Portfolio may be exchanged
for Retail Class shares of another Portfolio. The redemption will be made at the
net asset value of the shares to be redeemed next determined after the exchange
request is received by the transfer agent. If Retail Class shares are exchanged
for Retail Class shares of another Portfolio with a higher sales charge than
that paid for the shares being exchanged, you will pay a sales charge equal to
the difference between the sales charges. In order to exchange into another
Portfolio, the $500 minimum initial investment must be met.

Each exchange between Portfolios actually represents the sale of shares of
one Portfolio and the purchase of shares of another, which may produce a gain or
loss for tax purposes. In order to protect each Portfolio's performance and its
shareholders, frequent exchange activity in response to short-term market
fluctuations is discouraged. The Fund reserves the right to modify or withdraw
the exchange privilege or to suspend the offering of shares of a Portfolio of
any class without notice to shareholders if, in the adviser's judgment, the
Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected. The Fund also reserves the right to reject any specific purchase
order, including certain purchases by exchange.

An exchange between the Retail Class and the Institutional or Institutional
II Classes of any Portfolio is generally not permitted, except that an exchange
to the Institutional Class or Institutional II Class of a Portfolio will be
permitted should a Retail Class shareholder become eligible to purchase
Institutional Class or Institutional II Class shares. The Fund reserves the
right to require shareholders to complete an application or other documentation
in connection with the exchange. The Fund has received a private letter ruling
from the Internal Revenue Service which provides that exchanges of shares of one
class of a Portfolio for shares of another class of the same Portfolio will not
constitute taxable events. See your Investment Professional for additional
information.

HOW DO I REDEEM SHARES?
- --------------------------------------------------------------------------------

You may redeem all or a portion of your Retail Class shares on any Business
Day. Call your Investment Professional with redemption requests. Shares will be
redeemed at the net asset value next calculated after the Fund's transfer agent
has received the redemption request from your Investment Professional. It is the
responsibility of your Investment Professional to transmit promptly your order
to redeem shares to the transfer agent. Shares redeemed on any Business Day for
each Portfolio will receive the dividends declared, if any, through the time of
redemption. When the NYSE or the Federal Reserve Bank of New York closes early,
the Fund reserves the right to advance the time on any such day by which
redemption orders must be received.

To the extent portfolio securities are traded in other markets on days
which are not Business Days, the net asset value of the shares of a Portfolio
may be affected on days when investors are not able to purchase or redeem its
shares.

If making immediate payment could adversely affect a Portfolio, the
Portfolio may take up to seven days after redemption to pay the proceeds. When
the NYSE is closed (or when trading is restricted) for any reason other than its
customary weekend or holiday closings, or when any emergency circumstances exist
that the Securities and Exchange Commission determines merit such action, the
right of redemption may be suspended or the date of payment postponed for a
period of time that may exceed seven days.

If all the shares of a Portfolio in an account are redeemed, the
shareholder will receive, in addition to the value thereof, any declared but
unpaid distributions thereon at the beginning of the following month.

30
<PAGE> 34

EMPLOYEE INVESTMENT PROGRAM
- --------------------------------------------------------------------------------

Current and former trustees and officers of the Fund, current and retired
officers, directors and regular employees of Allied Irish Banks, p.l.c. and its
direct and indirect subsidiaries, and their spouses and minor children
("employees") may open an employee investment account directly with the Fund by
making an initial investment of $100 ($50 if purchasing through the Automatic
Investment Plan) or more in any Portfolio. Shares of the Portfolios may be
purchased without a sales charge and may be redeemed for an employee account as
described below. Automatic investment and systematic withdrawal plans are also
available for employee accounts. To open an employee account call 1-888-
4ARK-FUND to request an Account Application.

PURCHASES BY MAIL. Shares may be purchased for an employee account through
the mail by forwarding a completed Account Application along with a check (in
the case of a new account) or a check with the proper account information and
investment instructions (in the case of existing accounts) to:

ARK Funds
P.O. Box 8525
Boston, MA 02266-8525

All purchases made by check should be in U.S. dollars and made payable to
ARK Funds or for an IRA account, State Street Bank and Trust Company, as
custodian. Third party checks will not be accepted. When purchases are made by
check or through the Automatic Investment Plan, redemptions will not be allowed
until the investment being redeemed has been in the account for 15 calendar
days.

PURCHASES BY WIRE. Shares may be purchased for an employee account by
wiring money to:

State Street Bank and Trust Company
Boston, MA
ABA 011000028
Account Number: 99051609
Attention: [ARK Portfolio Name]
Further Credit to: [Employee Account Name and Number]

The wire instructions must include the employee's account number. An order
to purchase shares by Federal Funds wire will be deemed to have been received on
the Business Day of the wire, provided that employees notify the Fund's transfer
agent at 1-888-4ARK-FUND by 12:00 p.m. of their intention to wire money.

REDEMPTIONS BY MAIL. Written requests for redemptions from an employee
account must be received in good order by the Fund's transfer agent in order to
constitute a valid tender for redemption by mail. Requests should be mailed to:

ARK FUNDS
P.O. Box 8525
Boston, MA 02266-8525

The transfer agent may require that the signature on the written request be
guaranteed by a commercial bank or by a member firm of a domestic stock
exchange. Signature guarantees will be required if: (a) the redemption request
is an amount in excess of $25,000; (b) redemption proceeds are to be sent to a
name and/or address that differs from the registered name or address of record;
or (c) a transfer of registration is requested. Otherwise, written redemption
requests by mail may be accepted without a signature guarantee.

REDEMPTIONS BY TELEPHONE. Employees wishing to redeem shares from an
employee account by telephone must provide the information requested in the
Account Application. Thereafter, telephone redemption requests may be made by
calling 1-888-4ARK-FUND. Payment for telephone redemptions will normally be
transmitted on the next business day following receipt of a valid request for
redemption. Employees may have the proceeds sent either by mail or wire.

31
<PAGE> 35

BY WIRE: Shareholders of record may have their telephone redemption requests
paid by a direct wire to a domestic commercial bank account previously
designated by the employee on the Account Application. The Fund's
transfer agent may deduct its then-current wire fee from the proceeds
for wire redemptions. As of the date of this Prospectus, the fee was
$10 for each wire redemption. There is no minimum for telephone
redemptions paid by wire.

BY MAIL: Redemption proceeds may be paid by a check mailed to the name and
address in which the employee's account is registered with the Fund.
There is no minimum for telephone redemptions paid by check.

Employees may not close their accounts by telephone.

Neither the Fund nor its transfer agent will be responsible for any loss,
liability, cost or expense for acting upon wire instructions or upon telephone
instructions that it reasonably believes to be genuine. The Fund and the
transfer agent will each employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. To ensure the authenticity
of redemption or exchange instructions received by telephone, the transfer agent
examines each shareholder request by verifying the account number and/or tax
identification number at the time the request is made. The transfer agent
subsequently sends confirmations of the transaction to the shareholder for
verification. If reasonable procedures are not employed, the Fund and the
transfer agent may be liable for any losses due to unauthorized or fraudulent
telephone transactions.

REDEMPTION BY CHECKWRITING. Checkwriting is available for regular employee
accounts investing in a money market Portfolio. The Fund will provide
shareholders of record, upon request and without charge, with checks drawn on
the Portfolio. Shareholders will be required to sign signature cards and will be
subject to any applicable rules and regulations of the clearing bank relating to
check redemption privileges.

Checks drawn on the money market Portfolios may be made payable to the
order of any payee in an amount of $500 or more. Shareholders should be aware
that, as is the case with regular bank checks, certain banks may not provide
cash at the time of deposit, but will wait until they have received payment from
the clearing bank. When a check is presented to the clearing bank for payment,
subject to the Fund's acceptance of the check, the clearing bank, as agent,
causes the Fund to redeem, at the net asset value next determined after such
presentation, a sufficient number of full and fractional shares in the
shareholder's account to cover the amount of the check. Checks will be returned
by the clearing bank if there are insufficient shares to meet the withdrawal
amount. Shareholders of record wishing to use this method of redemption should
check the appropriate box on the Account Application, obtain a signature card by
calling 1-888-4ARK-FUND, and mail the completed form and signature card to ARK
Funds, P.O. Box 8525, Boston, MA 02266-8525. There is no charge for the
clearance of any checks, although the clearing bank will impose its customary
overdraft fee in connection with returning any checks as to which there are
insufficient shares to meet the withdrawal amount. As of the date of this
Prospectus, the overdraft fee was $20.

REDEMPTION BY TELEPHONE EXCHANGE. Employees may make telephone exchanges
of shares held in their accounts for shares in any other Portfolio offering
Retail Class shares by calling 1-888-4ARK-FUND. Shareholders wishing to use the
telephone exchange privilege must check the appropriate box on the Account
Application. The telephone exchange privilege is only available in states where
exchanges from one Portfolio to another can lawfully be made.

Telephone exchange requests received prior to 4:00 p.m. for an equity or
fixed-income Portfolio, or prior to 12:00 p.m. for the U.S. Treasury Money
Market Portfolio and Tax-Free Money Market Portfolio or 5:00 p.m. for the U.S.
Government Money Market Portfolio and Money Market Portfolio, on any Business
Day will be processed on the date of receipt. "Processing" a telephone exchange
request means that shares in the Portfolio from which the shareholder is making
the exchange will be redeemed at the net asset value per share as of 4:00 p.m.
(12:00 p.m. for the U.S. Treasury Money Market Portfolio and Tax-Free Money
Market Portfolio or 5:00 p.m. for the U.S. Government Money Market Portfolio and
Money Market Portfolio) on the date of receipt. Purchases of shares for the

32
<PAGE> 36

Portfolio into which the shareholder is making an exchange will be effected on
the same Business Day, at such other Portfolio's net asset value per share
determined as of 4:00 p.m. (12:00 p.m. for the U.S. Treasury Money Market
Portfolio and Tax-Free Money Market Portfolio or 5:00 p.m. for the U.S.
Government Money Market Portfolio and Money Market Portfolio) on such Business
Day. Telephone exchange requests received after 4:00 p.m. for an equity or
fixed-income Portfolio, or after 12:00 p.m. for the U.S. Treasury Money Market
Portfolio and Tax-Free Money Market Portfolio, or 5:00 p.m. for the U.S.
Government Money Market Portfolio and Money Market Portfolio, will be processed
on the next Business Day in the manner described above. The Fund will not be
responsible for the authenticity of exchange instructions received by telephone
and the investor will bear the risk of loss.

Before making an exchange, shareholders should consider the investment
objective, policies and restrictions of the Portfolio into which they are
exchanging, as set forth in the Prospectus. Any telephone exchange must satisfy
the requirements relating to the minimum initial investment amounts of the
Portfolio involved. The Fund reserves the right to reject any telephone exchange
request and to modify or terminate the telephone exchange privilege at any time,
upon 60 days' written notice.

For more information on exchanging shares, please see "Purchases, Exchanges
and Redemptions -- How Do I Exchange Shares?" above.

AUTOMATIC INVESTMENT PLAN. An employee may arrange for periodic
investments on any Business Day in a Portfolio through automatic deductions from
a checking account by completing the appropriate section of the Account
Application. The minimum pre-authorized investment amount is $50 per month per
Portfolio. All IRA investments made through the plan will be credited as
contributions for the current calendar year.

SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan may be used by
employees who wish to receive regular distributions from their accounts. Upon
commencement of a withdrawal plan, an account must have a current value of
$5,000 or more. Employees may elect to receive automatic payments of $50 or more
via check or direct deposit to a checking account on a monthly, quarterly,
semi-annual or annual basis. Automatic withdrawals are normally processed on the
25th day of the applicable month (if this is not a Business Day, then on the
next Business Day) and are paid promptly thereafter. To arrange a withdrawal
plan, an employee must complete the appropriate section of the Account
Application.

Employees should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending upon the
frequency and amount of the withdrawal payments and/or fluctuations in the net
asset value per share of the applicable Portfolio, their original investment
could be exhausted entirely. To participate in the Systematic Withdrawal
Program, employees must have their dividends automatically reinvested. Employees
may change or cancel a withdrawal plan at any time, upon written notice to ARK
Funds, P.O. Box 8525, Boston, MA 02266-8525.

IRA ACCOUNTS. Any of the Portfolios (other than the Tax-Free Money Market,
Maryland Tax-Free and Pennsylvania Tax-Free Portfolios) may be used as an
investment for an existing or new employee IRA account. Employee IRA accounts
are subject to minimum initial and subsequent investments of $100 ($50 through
the Automatic Investment Plan) in a Portfolio and the applicable contribution
limits set by the Internal Revenue Service. If an employee does not have an
existing IRA that permits investments in the Portfolios, one may be established
by obtaining an Account Application. All IRA investments made through the
Automatic Investment Plan will be credited as contributions for the current
calendar year. The telephone, wire and checkwriting privileges are not available
to employee IRA accounts. For more information about IRA accounts and to obtain
an Account Application, call 1-888-4ARK-FUND.

33
<PAGE> 37

ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

TAX-SHELTERED RETIREMENT PLANS. Retirement plans offer tax advantages to
individuals. Call your Investment Professional for more information on the plans
and their benefits, provisions and fees. Your Investment Professional can set up
your new account in any of the Portfolios (with the exception of the Tax-Free
Money Market Portfolio, Maryland Tax-Free Portfolio and Pennsylvania Tax-Free
Portfolio) under one of several tax-sheltered plans. These plans let you invest
for retirement and shelter your investment income from current taxes. Minimums
may differ from those described above. Plans include Individual Retirement
Accounts ("IRAs"), Rollover IRAs, Keogh Plans, and Simplified Employee Pension
Plans.

DISTRIBUTION OPTIONS. The money market Portfolios earn interest from their
investments. This interest, after payment of expenses, is passed along to
shareholders as income dividends. Income dividends for each money market
Portfolio are declared daily and paid monthly. The other Portfolios earn
dividends from stocks and interest from bond, money market, and other
investments. These dividends and interest, after payment of expenses, are passed
along as income dividends. Income dividends for the Short-Term Treasury
Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio, Pennsylvania Tax-Free Portfolio and Equity Income Portfolio are
declared and paid monthly; for the Balanced Portfolio, Equity Index Portfolio,
Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio and
Stock Portfolio dividends are declared and paid quarterly; and for the Capital
Growth Portfolio, Small-Cap Portfolio (formerly Special Equity Portfolio),
International Equity Selection Portfolio and International Equity Portfolio
dividends are declared and paid annually. Commencing March 1, 1998, income
dividends on all Portfolios will be declared daily and paid daily, monthly,
quarterly or annually, as the case may be. Net realized capital gains, if any,
for any Portfolio, are declared and paid at least annually.

When you fill out your brokerage account application, you can specify how
you want to receive your distributions. Currently, there are three available
options:

1. The SHARE OPTION reinvests dividends and capital gain distributions, if
any, in additional shares of the same Portfolio. Reinvestment will be made at
the net asset value next determined after payment. If you do not indicate a
choice on your application, you will be assigned this option.

2. The CASH OPTION. Each dividend and capital gain distribution, if any,
will be credited to your account in the manner specified for settlement on your
account application.

3. The INCOME-EARNED OPTION. This option is available for the Portfolios
other than the money market Portfolios. Your capital gain distributions will be
automatically reinvested in shares of the same Portfolio, and your dividends, if
any, will be credited to your account in the manner specified for settlement on
your account application.

AUTOMATIC ASSET BUILDER. This program offers a simple way to maintain a
regular investment program. You may arrange automatic transfers (minimum $100
per transaction) from your bank account to your brokerage account on a periodic
basis. When you participate in the Automatic Asset Builder, the minimum initial
investment in each Portfolio is $500. You will receive written confirmation when
you set up your program participation, or any time you make a change to your
participation. You may change the amount of your automatic investment, skip an
investment, or stop your Automatic Asset Builder investment by calling your
Investment Professional at least three business days prior to your next
scheduled investment date. This program is not available for the money market
Portfolios.

STATEMENTS AND REPORTS. You will receive a quarterly (or, if there has been
account activity, monthly) statement. You will also receive a statement after
each trading transaction in your account. A consolidated IRS Form 1099-DIV with
federal tax information will be mailed to you by January 31 of each tax year and
also will be filed with the IRS. At least twice a year, you will receive
financial reports of any Portfolio in which you are invested.

TELEPHONE TRANSACTIONS. You may initiate any transaction by telephoning
your Investment Professional. Neither the Fund nor its agents will be
responsible for any losses resulting from

34
<PAGE> 38

unauthorized transactions if reasonable procedures designed to verify the
identity of the caller are followed. Your Investment Professional may request
personalized security codes or other information, and may also record calls. You
should verify the accuracy of your confirmation statements immediately after you
receive them.

MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------

INVESTMENT ADVISERS
- --------------------------------------------------------------------------------

Allied Investment Advisors, Inc. 100 E. Pratt Street, Baltimore, MD 21202,
provides investment advisory services to each Portfolio other than the
International Equity Portfolio. AIB Investment Managers Limited, AIB Investment
House, Percy Place, Dublin 4, Ireland, provides investment advisory services to
the International Equity Portfolio. Investment advisory services are provided
subject to the general supervision of the Board of Trustees. The adviser, in its
sole discretion, may waive all or any portion of its advisory fee for any
Portfolio. Any such voluntary waiver will increase such Portfolio's yield for
the period during which the waiver is in effect. The adviser to a Portfolio is
entitled to receive for its advisory services payment at an annual rate based on
the following fee schedule:

<TABLE>
<CAPTION>
FEE (AS A PERCENTAGE
PORTFOLIO OF AVERAGE NET ASSETS)
---------------------------------------------------------------------------------------------
<S> <C>
Money Market Portfolios.............................................. .25%
Short-Term Treasury Portfolio........................................ .80%
Short-Term Bond Portfolio............................................ .75%
U.S. Government Bond Portfolio....................................... .75%
Intermediate Fixed Income Portfolio.................................. .60%
Income Portfolio..................................................... .60%
Maryland Tax-Free Portfolio.......................................... .65%
Pennsylvania Tax-Free Portfolio...................................... .65%
Balanced Portfolio................................................... .65%
Equity Income Portfolio.............................................. .70%
Equity Index Portfolio............................................... .20%
Blue Chip Equity Portfolio........................................... .70%
Mid-Cap Equity Portfolio............................................. .80%
Value Equity Portfolio............................................... 1.00%
Stock Portfolio...................................................... 70%
Capital Growth Portfolio............................................. .70%
Small-Cap Portfolio.................................................. .80%
International Equity Selection Portfolio............................. .65%
International Equity Portfolio....................................... .80%
</TABLE>

Allied Investment Advisors, Inc. is a wholly-owned subsidiary of First
National Bank of Maryland ("First Maryland"). First Maryland, established in
1806, is a wholly-owned subsidiary of First Maryland Bancorp, a bank holding
company registered under the Federal Bank Holding Company Act of 1956. First
Maryland Bancorp is a subsidiary of Allied Irish Banks, p.l.c. which, together
with its subsidiaries, is Ireland's leading banking and financial services
organization, See "Banking Law Matters". Allied Investment Advisors, Inc. was
organized in 1995 to manage assets and provide research services for the Trust
Division of First Maryland, which previously served as investment adviser to the
Portfolios. It provides investment management and advisory services to
individual, corporate and institutional clients, pension plans, common and
collective trust funds, and mutual funds. Officers, portfolio managers and
investment analysts of Allied Investment Advisors, Inc. previously served in
comparable capacities for the Trust Division of First Maryland. As of December
31, 1997, Allied Investment Advisors, Inc. had assets under management of
approximately $ billion.

35
<PAGE> 39

AIB Investment Managers Limited is the discretionary investment management
arm of the AIB Group. It has extensive experience managing the investments of
corporations, public and private pension funds, high-net-worth individuals, and
has a broad range of international, foreign mutual fund accounts. As of December
31, 1997, AIB Investment Managers Limited had assets under management of
approximately $ billion.

The investment advisory fee payable to AIB Investment Managers Limited by
the International Equity Portfolio is higher than the fees payable by most
mutual funds (although not necessarily higher than the fees payable by a typical
international fund), due to the greater complexity, expense and commitment of
resources involved in international investing. AIB Investment Managers Limited
has voluntarily agreed to waive all or a portion of its advisory fee (and, if
necessary, to reimburse other expenses) in order to limit the International
Equity Portfolio's total operating expenses to 1.55% of its average net assets.
This expense cap is subject to annual review by AIB Investment Managers Limited.

The Portfolios may from time to time, consistent with their investment
policies and applicable law, invest in securities of companies with which First
Maryland or its affiliates has a lending relationship. The lending relationship
will not be a factor in the selection by the advisers of the securities in which
the Portfolios invest.

PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------

James M. Hannan is a Principal of Allied Investment Advisors, Inc. and
manager of the money market Portfolios and the Short-Term Treasury Portfolio. He
is also responsible for several separately managed institutional portfolios
which he has managed since 1992. He has served as a Vice President of First
Maryland since 1987. Prior to 1987 he served as the Treasurer for the City of
Hyattsville, Maryland.

Susan S. Schnaars is a Principal of Allied Investment Advisors, Inc. and
manager of the Intermediate Fixed Income Portfolio, Maryland Tax-Free Portfolio
and Pennsylvania Tax-Free Portfolio. Ms. Schnaars is also responsible for
managing several commingled funds (taxable and tax-free) and several large
institutional accounts. Prior to 1992, Ms. Schnaars managed institutional and
commingled fixed-income portfolios, including the RAF Fixed Income Fund for PNC
Investment Management and Research (formerly known as Provident National Bank).
Ms. Schnaars is a Chartered Financial Analyst and a Certified Public Accountant.

Steven M. Gradow is a Managing Director of Allied Investment Advisors, Inc.
and manager of the Income Portfolio, co-manager, with Ms. Volk, of the U.S.
Government Bond Portfolio, and co-manager, with Mr. Stith, of the Short-Term
Bond Portfolio. Prior to joining First Maryland in January 1996, Mr. Gradow was
responsible for the management of $15 billion of fixed-income pension assets for
Washington State Investment Board in Seattle for four years. Mr. Gradow's
experience also includes five years fixed-income management for the Public
Employees Retirement System of California (CALPERS).

N. Beth Volk is a Principal of Allied Investment Advisors, Inc. and Senior
Fixed Income Credit Analyst responsible for leading the corporate research
effort of the Fixed Income Group. Ms. Volk is co-manager, with Mr. Gradow, of
the U.S. Governmental Bond Portfolio. Prior to 1996, she was the former head of
corporate fixed income research at Alex. Brown & Sons. Ms. Volk has over 17
years experience in the industry and is a Chartered Financial Analyst.

Wilmer C. Stith, III is a Vice President of Allied Investment Advisors,
Inc. and Fixed Income Portfolio Manager. Mr. Stith is co-manager, with Mr.
Gradow, of the Short-Term Bond Portfolio. He manages separate account money
market accounts, assists in the management of the money market portfolios, and
is responsible for analyzing and trading various fixed income securities. Prior
to joining Allied Investment Advisors, Inc. he was an investment executive with
the Treasury Banking Group of First National Bank of Maryland.

36
<PAGE> 40

Charles E. Knudsen is a Principal of Allied Investment Advisors, Inc. and
co-manager, with Mr. Leo, of the Balanced Portfolio. He follows several equity
industry groups. In addition, he is a senior portfolio manager for key, tax-free
institutional accounts, including pension and profit sharing plans, foundations,
and endowments. Mr. Knudsen has more than eight years of investment management
experience with First Maryland. Mr. Knudsen is a Chartered Financial Analyst.

Clyde L. Randall is a Principal of Allied Investment Advisors, Inc. and the
co-manager, with Mr. Ashcroft, of the Equity Income Portfolio and Blue Chip
Equity Portfolio. Prior to March 1995, Mr. Randall was an equity analyst and
portfolio manager for more than five years at Mercantile Safe Deposit and Trust
Company, Baltimore, Maryland. Mr. Randall is a Chartered Financial Analyst.

Allen J. Ashcroft, Jr. is a Principal of Allied Investment Advisors, Inc.
and co-manager, with Mr. Randall, of the Equity Income Portfolio and Blue Chip
Equity Portfolio. Prior to joining First Maryland, Mr. Ashcroft was an equity
analyst and portfolio manager for McGlinn Capital Management, Wyomissing,
Pennsylvania, for 12 years. Mr. Ashcroft has more than 17 years of experience in
investment research and equity analysis.

H. Giles Knight is a Principal of Allied Investment Advisors, Inc. and
manager of the Stock Portfolio and Small-Cap Portfolio (formerly Equity
Portfolio). Prior to joining First Maryland, Mr. Knight was with ASB Capital
Management, a subsidiary of NationsBank, from 1990 to 1994. He was Director of
Special Equity Investments, Capital Markets Division, where he was responsible
for one mutual fund and six employee benefit and personal trust common stock
funds.

Christopher E. Baggini is a Principal of Allied Investment Advisors, Inc.
and co-manager, with Mr. Baker, of the Mid-Cap Equity Portfolio and manager of
the Capital Growth Portfolio. Prior to joining First Maryland, Mr. Baggini
served as portfolio manager and research analyst for First Metropolitan
Development Corporation. He has more than nine years of experience in investment
management, including more than four years at Salomon Brothers with
responsibilities in equity research, sales and trading. Mr. Baggini is a
Chartered Financial Analyst.

Christopher D. Baker is an Investment Officer of Allied Investment
Advisors, Inc. and the co-manager, with Mr. Baggini, of the Mid-Cap Equity
Portfolio and manager of the Equity Index Portfolio. Mr. Baker has more than two
years of experience in managing mid-cap index common trust funds for the Trust
Division of First Maryland and more than five years of experience in First
Maryland's Trust Division in investment research and equity analysis.

J. Eric Leo is a Managing Director of, and Director of Equity Research for,
Allied Investment Advisors, Inc. Mr. Leo is manager of the Value Equity
Portfolio and co-manager, with Mr. Knudsen, of the Balanced Portfolio. Prior to
1997, he was Executive Vice President and Chief Investment Officer of Legg Mason
Capital Management, Inc. Mr. Leo has more than 20 years of experience in
investment management, including managing mutual fund portfolios and accounts
for both individuals and institutions.

Brett A. Hoffacker is a Principal of Allied Investment Advisors, Inc. and
the manager of the International Equity Selection Portfolio. Prior to 1997, he
was a Vice President of Dauphin Deposit Bank and Trust Company responsible for
managing four equity funds as well as various individual institutional, employee
benefit and personal trust portfolios. Mr. Hoffacker is a Certified Financial
Planner and Certified Retirement Plan Specialist.

Joseph Mottley is an Associate Director of AIB Investment Managers Limited
and the manager of the International Equity Portfolio. Since joining AIB
Investment Managers in 1985, he has worked on a number of international equity
funds, with broad exposure in the Asian and European markets. He has also
managed several U.S. equity funds. Prior to 1985, Mr. Mottley was a Policy
Analyst with the Irish Government's Treasury Department. He has a Master of
Science in Economics and Statistics from Trinity College, Dublin.

Investment personnel may invest in securities for their own account
pursuant to a code of ethics that establishes procedures for personal investing
and restricts certain transactions.

37
<PAGE> 41

ADMINISTRATOR
- --------------------------------------------------------------------------------

SEI Fund Resources (the "Administrator"), One Freedom Valley Drive, Oaks,
PA 19456, serves as the Portfolios' administrator under an administration
agreement with the Fund. SEI Financial Management Corporation, which served as
administrator for the Fund prior to June 1, 1996, is the owner of all beneficial
interest in the Administrator.

The Administrator assists in each Portfolio's administration and operation,
including providing facilities for maintaining each Portfolio's organization,
supervising relations with the custodian, transfer and pricing agents,
accountants, underwriters, and other persons dealing with each Portfolio,
preparing all general shareholder communications and conducting shareholder
relations, maintaining (or providing for the maintenance of) the Fund's records
and the registration of each Portfolio's shares under federal and state law,
developing management services for the Portfolios and furnishing reports,
evaluation and analyses on a variety of subjects to the Fund's Board of
Trustees. The Administrator is entitled to receive an annual fee of .13% of the
aggregate average net assets of the Fund, paid monthly, for services performed
under the administration agreement. The Administrator may voluntarily agree to
waive a portion of its administration fee on a Portfolio in order to limit its
total operating expenses. Any such voluntary waiver, which can be discontinued
at any time, will increase the Portfolio's yield for the period during which it
is in effect.

DISTRIBUTION AND SHAREHOLDER SERVICES

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

SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley
Drive, Oaks, PA 19456, a wholly-owned subsidiary of SEI Investments Company,
serves as the distributor for the Fund pursuant to a distribution agreement with
the Fund. The Distributor, a Pennsylvania corporation incorporated on July 20,
1981, is a broker-dealer registered under the Securities Exchange Act of 1934
and a member of the National Association of Securities Dealers. Inc. The
Distributor is the principal underwriter of the Fund. First Maryland neither
participates in nor is responsible for the underwriting of the shares of the
Fund.

The Board of Trustees has adopted a distribution plan on behalf of the
Retail Class of each Portfolio pursuant to Rule 12b-1 under the 1940 Act
("Plan"). The Plan provides for payment of a fee to the Distributor of up to
.75% of average net assets of the Retail Class of each Portfolio. The Board has
approved the following fee rates: .25% of the average net assets of the Retail
Class of each money market Portfolio; .30% of the average net assets of the
Retail Class of the Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, the Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio; .40% of the average net assets of
the Retail Class of the Short-Term Treasury Portfolio, Balanced Portfolio,
Equity Income Portfolio, Equity Index Portfolio, Mid-Cap Equity Portfolio,
Capital Growth Portfolio, Small-Cap Portfolio (formerly Special Equity
Portfolio), International Equity Selection Portfolio and International Equity
Portfolio; and .55% of the average net assets of the Retail Class of the Blue
Chip Equity Portfolio and Stock Portfolio.

The Distributor and Investment Professionals that receive portions of the
fees from the Distributor pay for the cost of printing (but not typesetting) and
mailing to prospective investors prospectuses and other materials relating to
the Retail Class, as well as for related direct mail, advertising and
promotional expenses.

The Plan does not obligate a Portfolio to reimburse the Distributor for the
actual expenses the Distributor may incur in fulfilling its obligations under
the Plan on behalf of the Retail Class. Thus, under the Plan, even if the
Distributor's actual expenses exceed the fee payable to the Distributor
thereunder at any given time, the Portfolios will not be obligated to pay more
than that fee. If the Distributor's expenses are less than the fee it receives,
the Distributor will retain the full amount of the fee.

38
<PAGE> 42

Under a Shareholder Services Plan in effect with respect to the Retail
Class of each Portfolio, the Retail Class of a Portfolio may pay shareholder
servicing fees to Investment Professionals at an annual rate of up to .25% of
the average net assets of the Retail Class shares attributable to their
customers for providing ongoing shareholder support services to their customers
with accounts in such class, including responding to shareholder communications,
account balance maintenance and dividend posting. The Board of Trustees has
approved an annual shareholder servicing fee rate of .15% of the average net
assets of the Retail Class of each Portfolio.

All or any portion of the 12b-1 or shareholder servicing fee for a
Portfolio may be waived at any time. Any such voluntary waiver, which can be
discontinued at any time, will increase the Portfolio's yield for the period
during which the waiver is in effect.

TRANSFER AGENT
- --------------------------------------------------------------------------------

SEI Fund Resources, One Freedom Valley Drive, Oaks, PA 19456, provides
transfer agent and related services for the Portfolios. SEI Fund Resources has
subcontracted the transfer agency services to State Street Bank and Trust
Company ("State Street Bank"). State Street Bank maintains shareholder accounts
and records for the Portfolios.

CUSTODIAN
- --------------------------------------------------------------------------------

FMB Trust Company, National Association, 25 South Charles Street,
Baltimore, MD 21201, is custodian (the "Custodian") for the securities and cash
of the Fund. Under the custody agreement with the Fund, the Custodian holds the
Fund's portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. For the services provided to the Fund pursuant
to the custody agreement, the Fund pays the Custodian a monthly fee at the
annual rate of .015% of the average net assets of the Portfolios. The Custodian
also charges the Fund transaction handling fees ranging from $5 to $75 per
transaction and receives reimbursement for out-of-pocket expenses. Foreign
securities purchased by the International Equity Portfolio are held by foreign
banks participating in a network coordinated by Bankers Trust Company, which
serves as sub-custodian for the Portfolio. All expenses incurred through this
network are paid by the Portfolio.

BANKING LAW MATTERS
- --------------------------------------------------------------------------------

Banking laws and regulations generally permit a bank or bank affiliate to
act as an investment adviser and to purchase shares of an investment company as
agent for and upon the order of a customer. However, banking laws and
regulations, including the Glass-Steagall Act as currently interpreted by the
Board of Governors of the Federal Reserve System, prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 or any
affiliate thereof from sponsoring, organizing, controlling or distributing the
shares of a registered, open-end investment company continuously engaged in the
issuance of its shares, and prohibit banks generally from issuing, underwriting,
selling or distributing securities. Upon advice of legal counsel, the Adviser
believes that it may perform the advisory services described in this Prospectus
for the Portfolios and their shareholders without violating applicable federal
banking laws or regulations.

Judicial or administrative decisions or interpretations of, as well as
changes in, either federal or state statutes or regulations relating to the
activities of banks and their affiliates could prevent a bank or bank affiliate
from continuing to perform all or a part of the activities contemplated by this
Prospectus. If banks or bank affiliates were prohibited from so acting, changes
in the operation of the Fund might occur. It is not anticipated, however, that
any such change would affect the net asset value of the Portfolio's shares or
result in any financial loss to any shareholder.

39
<PAGE> 43

TAX MATTERS
- --------------------------------------------------------------------------------

Each Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the Code. So long as a Portfolio qualifies for this tax
treatment, it will be relieved of federal income tax on amounts distributed to
shareholders, but shareholders, unless otherwise exempt, will pay income or
capital gains taxes on amounts so distributed (except distributions that
constitute "exempt interest dividends" or that are treated as a return of
capital) regardless of whether such distributions are paid in cash or reinvested
in additional shares.

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio intend to pay substantially all of their
respective dividends as "exempt interest dividends". Investors in these
Portfolios should note, however, that taxpayers are required to report the
receipt of tax-exempt interest and "exempt interest dividends" in their federal
income tax returns and that in two circumstances such amounts, while exempt from
regular federal income tax, are taxable to persons subject to alternative
minimum tax. Alternative minimum tax is currently imposed at a maximum marginal
rate of 28% in the case of non-corporate taxpayers and at the rate of 20% in the
case of corporate taxpayers. First, tax-exempt interest and "exempt interest
dividends" derived from certain private activity bonds issued after August 7,
1986 will generally constitute an item of tax preference for corporate and
non-corporate taxpayers in determining alternative minimum tax liability. The
Portfolios intend to avoid investing their assets in such private activity bonds
but may do so if required by market conditions. Second, tax-exempt interest and
"exempt interest dividends" derived from all municipal securities must be taken
into account by corporate taxpayers in determining their adjusted current
earnings adjustments for alternative minimum tax purposes. Realized market
discount on tax-exempt obligations purchased after April 30, 1993, is treated as
ordinary income and not as capital gain. Shareholders who are recipients of
Social Security Act or Railroad Retirement Act benefits should further note that
tax-exempt interest and "exempt interest dividends" will be taken into account
in determining the taxability of their benefit payments.

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio will determine annually the percentage of their
respective net investment incomes that is fully tax-exempt, the percentage which
constitutes an item of tax preference for alternative minimum tax purposes and
the percentage which is fully taxable, and will apply such percentages uniformly
to all distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.

Shareholders of the Maryland Tax-Free Portfolio who are subject to Maryland
state and local income tax will not be subject to tax in Maryland on dividends
paid by the Portfolio to the extent that they are attributable to interest on
tax-exempt obligations of the State of Maryland or its political subdivisions,
interest on obligations of the United States or its possessions and territories,
or gains realized from the disposition of either of these categories of
obligations (with the express exception of dividends attributable to gain from
the disposition of obligations of a U.S. territory or possession which are
subject to Maryland state and local income tax). Dividends attributable to
interest on obligations issued by states other than Maryland and income from
repurchase agreements are subject to Maryland state and local income tax.

Individual shareholders of the Pennsylvania Tax-Free Portfolio will not be
subject to Pennsylvania personal income taxes on distributions of interest
attributable to exempt obligations (generally, obligations issued by
Pennsylvania and its agencies, public authorities, municipalities and other
political subdivisions as well as obligations of the United States), but will be
subject to Pennsylvania personal income taxes on distributions of profits, gains
or income derived from the sale, exchange or other disposition of obligations
issued by Pennsylvania and its agencies, public authorities, municipalities and
other political subdivisions as well as obligations of the United States. Exempt
interest in Pennsylvania is referred to as excludable exempt-interest dividends
and will be identified by the Portfolio.

40
<PAGE> 44

The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each Portfolio.

Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that time
will reflect the amount of the forthcoming distribution. Those investors
purchasing just prior to a distribution will nevertheless be taxed on the entire
amount of the distribution received. The foregoing considerations do not apply
to the purchase of shares of the money market Portfolios, which are offered at
the constant net asset value of $1.00.

Shareholders are urged to consult their tax advisers concerning their own
tax situation, including the application of state and local income taxes to
investments in a Portfolio.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

ARK Funds is an open-end management investment company organized as a
Massachusetts business trust pursuant to a Declaration of Trust dated October
22, 1992, and amended and restated on March 19, 1993. The Board of Trustees
supervises Fund activities and reviews contractual arrangements with the
companies that provide the Fund and its Portfolios with services. The Board of
Trustees may authorize the Fund to offer other portfolios which may differ in
the types of securities in which their assets may be invested.

The Fund may issue an unlimited number of shares of each of its Portfolios.
Each share of a Portfolio gives a shareholder one vote in Trustee elections and
other matters submitted to a vote of shareholders. All shares of the Fund have
equal voting rights, except that in matters affecting only a particular
Portfolio or class of shares, only shares of that Portfolio or class are
entitled to vote. As a Massachusetts business trust, the Fund is not required to
hold annual shareholder meetings, although special meetings may be called for
the purpose of voting on certain changes in the operations of a Portfolio or the
Fund, or for the election or removal of Trustees under certain circumstances.

The Fund is composed of the following twenty-two separately managed
Portfolios: U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Money Market Portfolio, Tax-Free Money Market Portfolio, Short-Term
Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio, Pennsylvania Tax-Free Portfolio, Balanced Portfolio, Equity Income
Portfolio, Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity
Portfolio, Value Equity Portfolio, Stock Portfolio, Capital Growth Portfolio,
Small-Cap Portfolio (formerly Special Equity Portfolio), International Equity
Selection Portfolio and International Equity Portfolio. The Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio are non-diversified Portfolios;
the remaining Portfolios are diversified Portfolios.

The Board of Trustees of the Fund has established three classes of shares
of each money market Portfolio and two classes of shares of each other
Portfolio. You may obtain more information on the classes of shares not offered
through this Prospectus from your Investment Professional or by calling
1-800-624-4116 (inside Maryland 1-800-638-7751).

41
<PAGE> 45

APPENDIX
- --------------------------------------------------------------------------------

ADRS AND EDRS. American Depositary Receipts and European Depositary
Receipts ("ADRs" and "EDRs") are certificates evidencing ownership of shares of
a foreign-based issuer held in trust by a bank or similar financial institution.
Designed for use in U.S. and European securities markets, respectively, ADRs and
EDRs are alternatives to the purchase of the underlying securities in their
national markets and currencies.

ASSET-BACKED SECURITIES. Asset-backed securities consist of undivided
fractional interests in pools of consumer loans (unrelated to mortgage loans)
held in a trust. Payments of principal and interest are passed through to
certificate holders and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
senior subordination. The degree of credit enhancement varies, but generally
amounts to only a fraction of the security's par value until exhausted. If the
credit enhancement is exhausted, certificate holders may experience losses or
delays in payment if the required payments of principal and interest are not
made to the trust with respect to the underlying loans. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, or the financial institution providing the credit enhancement.
Asset-backed securities are ultimately dependent upon payment of consumer loans
by individuals, and the certificate holder generally has no recourse to the
entity that originated the loans. The underlying loans are subject to
prepayments which shorten the securities' weighted average life and may lower
their return. (As prepayments flow through at par, total returns would be
affected by the prepayments: if a security were trading at a premium, its total
return would be lowered by prepayments, and if a security were trading at a
discount, its total return would be increased by prepayments.)

BANK OBLIGATIONS. Bank obligations include bankers' acceptances which are
negotiable obligations of a bank to pay a draft which has been drawn on it by a
customer; certificates of deposit which are negotiable certificates representing
a commercial bank's obligation to repay funds deposited with it, earning
specified rates of interest over given periods or issued at a discount; and time
deposits which are non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.

COMMERCIAL PAPER. Commercial paper is an obligation issued by a bank,
broker-dealer, corporation and other entities for purposes such as financing its
current operations.

CONVERTIBLE SECURITIES. Convertible securities are usually preferred stock
or bond issues that may be converted or exchanged by the holder into shares of
the underlying common stock at a stated exchange ratio. A convertible security
may also be subject to redemption by the issuer but only after a particular date
and under certain circumstances (including a specified price) established upon
issue. If a convertible security held by a Portfolio is called for redemption,
that Portfolio could be required to tender it for redemption, convert it to the
underlying common stock, or sell it to a third party.

HEDGING STRATEGIES. The adviser may, to the extent permitted by the
investment policies and limitations of a Portfolio, buy and sell options on
securities, currencies, futures contracts and options on such contracts
("Hedging Instruments") to manage exposure to changing interest rates, security
prices, and currency exchange rates. Some strategies using these instruments,
including selling futures, buying puts and writing calls, tend to hedge the
Portfolio's investments against price fluctuations. Other strategies, including
buying futures, writing puts and buying calls, tend to increase market exposure.
Hedging Instruments may be used in combination with each other or with forward
currency contracts in order to adjust the risk and return characteristics of the
overall strategy. A Portfolio may invest in Hedging Instruments based on any
type of security, index, or currency, including options and futures traded on
foreign exchanges and options not traded on exchanges. These strategies may
increase the volatility of a Portfolio and may involve a small investment of
cash relative to the magnitude of the risk assumed. In addition, these
strategies could result in a loss to a Portfolio if the counterparty to the
transaction does not perform as promised.

42
<PAGE> 46

Hedging Instruments can be volatile investments and involve certain risks.
If the adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, use of Hedging Instruments may lower a Portfolio's
return. A Portfolio could also experience a loss if the prices of its options
and futures positions were poorly correlated with its other investments, or if
it could not close out its positions because of an illiquid secondary market.

Under normal conditions, no Portfolio will hedge more than 25% of its total
assets by selling futures, writing calls, and buying puts. In addition, a
Portfolio will not buy futures or write puts where the value of the underlying
investment exceeds 25% of its total assets and a Portfolio will not buy calls
with a value exceeding 5% of its total assets.

ILLIQUID SECURITIES. Under currently applicable regulations, each money
market Portfolio may invest up to 10%, and the other Portfolios may invest up to
15%, of their respective net assets in illiquid securities. Illiquid securities
are securities that cannot be disposed of in the usual course of business within
seven days without taking a reduced price. Generally, securities subject to
restriction on resale, variable rate demand notes, repurchase agreements with
more than seven days to maturity, and time deposits are considered to be
illiquid unless the adviser determines, in accordance with guidelines
established by the Board of Trustees, that such securities are readily
marketable. The absence of a trading market can make it difficult to ascertain a
market value for illiquid securities, and it may be difficult or impossible for
a Portfolio to sell them promptly at an acceptable price. In addition, unless
securities are registered for sale, securities can only be sold in privately
negotiated transactions or pursuant to an exemption from registration.

INDEXED SECURITIES. Indexed securities are derivative securities whose
value depends on the price of securities indices, or other financial indicators.
These include commercial paper and certificates of deposit. These securities may
be positively or negatively indexed; that is, their value may increase or
decrease if the underlying instrument appreciates. Some indexed securities may
be based on underlying instruments whose total value is greater than the value
of the indexed security itself. Some indexed securities may be based on
underlying instruments whose total value is greater than the value of the
indexed instrument itself.

MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are issued by
government and non-government entities such as banks, mortgage lenders, or other
financial institutions and include mortgage pass-through securities,
mortgage-backed securities, and mortgage pay-through securities. A mortgage
pass-through security is a pro-rata interest in a pool of mortgages where the
cash flow generated from the mortgage collateral is passed through to the
security holder. Mortgage-backed bonds are general obligations of their issuers,
payable out of the issuers' general funds and additionally secured by a first
lien on a pool of mortgages. Mortgage pay-through securities exhibit
characteristics of both pass-throughs and mortgage-backed bonds. Mortgage-backed
securities also include other debt obligations secured by mortgages on
commercial real estate or residential properties. The value of mortgage-backed
securities may change due to shifts in the market's perception of issuers. In
addition, regulatory or tax changes may adversely affect the mortgage securities
market as a whole. Non-government mortgage-backed securities may offer higher
yields than those issued by government entities, but also may be subject to
greater price changes than government issues. Because mortgage securities pay
both principal and interest as their underlying mortgages are paid off, they are
subject to pre-payment risk. Pre-payment, which occurs when unscheduled or early
payments are made on the underlying mortgages, may shorten the effective
maturities of these securities and may lower their total returns. Finally, the
value of a mortgage security may be affected by changes in market interest
rates.

MUNICIPAL OBLIGATIONS. Municipal obligations are issued to raise money for
a variety of public or private purposes, including general financing for state
and local governments, or financing for specific projects or public facilities.
They may be issued in anticipation of future revenues, and may be backed by the
full taxing power of a municipality, the revenues from a specific project, or
the credit of a private organization. The value of some or all municipal
securities may be affected by uncertainties in the municipal market related to
legislation or litigation involving the taxation of municipal securities or

43
<PAGE> 47

the rights on municipal securities holders. A Portfolio may own a municipal
security directly or through a participation interest.

REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement a
Portfolio sells a portfolio instrument to another party, such as a bank, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Portfolio will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. A Portfolio will enter into reverse
repurchase agreements only with parties whose creditworthiness is deemed
satisfactory by the adviser.

SECURITIES LENDING. The Short-Term Treasury Portfolio, Short-Term Bond
Portfolio, U.S. Government Portfolio, Intermediate Fixed Income Portfolio and
Income Portfolio may lend securities to parties such as broker-dealers or
institutional investors. Securities lending allows a Portfolio to retain
ownership of the securities loaned and, at the same time, to earn income. Since
there may be delays in the recovery of loaned securities, or even a loss or
rights in collateral supplied should the borrower fail financially, loans will
be made only to parties whose creditworthiness has been reviewed and found
satisfactory by the Portfolio's adviser.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities may be backed by
the full faith and credit of the U.S. government as a whole or only by the
issuing agency. For example, securities issued by the Federal Home Loan Banks
and the Federal Home Loan Mortgage Corporation are supported only by the credit
of the issuing agency, and not by the U.S. government. Securities issued by the
Federal Farm Credit System, the Federal Land Banks and the Federal National
Mortgage Association are supported by the agency's right to borrow money from
the U.S. Treasury under certain circumstances. U.S. Treasury securities and some
agency securities, such as those issued by the Federal Housing Administration
and the Government National Mortgage Association, are backed by the full faith
and credit of the U.S. government and are the highest quality government
securities.

VARIABLE OR FLOATING RATE INSTRUMENTS. Variable or floating rate
instruments (including notes purchased directly from issuers) bear variable or
floating interest rates and may carry rights that permit holders to demand full
payment from issuers or certain financial intermediaries. Floating rate
securities have interest rates that change whenever there is a change in a
designated base rate, while variable rate instruments provide for a specified
periodic adjustment in the interest rate. These formulas are designed to result
in a market value for the instrument that approximates its par value. Many
variable and floating rate instruments also carry demand features that permit a
Portfolio to sell them at par value plus accrued interest on short notice.

WARRANTS. Warrants entitle the holder to buy equity securities at a
specified price for a specified period of time. They may be considered more
speculative than certain other types of investments because they do not entitle
a holder to dividends or voting rights with respect to the securities that may
be purchased, nor do they represent any rights in the assets of the issuing
company. The value of a warrant may be more volatile than the value of the
securities underlying the warrants. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.

WHEN-ISSUED TRANSACTIONS. The market value of securities purchased on a
when-issued or delayed-delivery basis way may change before the delivery date,
which could affect the market value of the assets and could increase
fluctuations in a Portfolio's share price, yield and return. Ordinarily, a
Portfolio will not earn interest on the securities purchased until they are
delivered.

44
<PAGE> 48

ZERO COUPON DEBT. Zero coupon debt securities do not make regular interest
payments. Instead, they are sold at a deep discount from their face value. In
calculating its daily dividend, a Portfolio takes into account as income a
portion of the difference between these securities' purchase prices and their
face values. Because they do not pay current income, the prices of zero coupon
debt securities can be volatile when interest rates change.

ADDITIONAL INVESTMENTS FOR THE TAX-FREE MONEY MARKET, MARYLAND TAX-FREE AND
PENNSYLVANIA TAX-FREE PORTFOLIOS
- --------------------------------------------------------------------------------

MUNICIPAL LEASE OBLIGATIONS are issued by a state or local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the interest is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of default on the lease obligation and significant loss to
the Portfolio. Certificates of participation in municipal lease obligations or
installment sales contracts entitle the holder to a proportionate interest in
the lease-purchase payments made. Each Portfolio will only purchase rated
municipal lease obligations.

MUNICIPAL SECURITIES include general obligation securities, which are
backed by the full taxing power of a municipality, and revenue securities, which
are backed by the revenues of a specific tax, project, or facility. Industrial
development bonds are a type of revenue bond backed by the credit and security
of a private issuer and may involve greater risk.

REFUNDING CONTRACTS. The Portfolios may purchase securities on a
when-issued basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and the Portfolio
to buy refunded municipal obligations at a stated price and yield on a
settlement date that may be several months or several years in the future.
Although a Portfolio may sell its rights under a refunding contract, these
contracts are relatively new and the secondary market for them may be less
liquid than the secondary market for other types of municipal securities.

RESOURCE RECOVERY BONDS are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy plants.
Typically, a private corporation will be involved, at least during the
construction phase, and the revenue stream will be secured by fees or rents paid
by municipalities for use of the facilities. The viability of a resource
recovery project, environmental protection regulations, and project operator tax
incentives may affect the value and credit quality of resource recovery bonds.

TAX AND REVENUE ANTICIPATION NOTES are issued by municipalities in
expectation of future tax or other revenues, and are payable from those specific
taxes or revenues. Bond anticipation notes normally provide interim financing in
advance of an issue of bonds or notes, the proceeds of which are used to repay
the anticipation notes. Tax-exempt commercial paper is issued by municipalities
to help finance short-term capital or operating needs.

45
<PAGE> 49
ARK FUNDS: INSTITUTIONAL CLASS

CROSS REFERENCE SHEET

Form N-1A Item Number

<TABLE>
<CAPTION>
Part A Prospectus Caption
<S> <C>
1 ........................Cover Page
2 ........................Fees and Expenses
3 a,b.....................Financial Highlights
c........................Performance
4 a(i)....................General Information
a(ii),b,c Investment Objectives and Policies; Risks
to Consider
5 a,b,c,d,e,f.............Management of the Fund
g........................Portfolio Transactions and Valuation
5A........................*
6 a.......................General Information
b,c,d....................*
e........................General Information
f,g......................Portfolio Transactions and Valuation; Tax Matters
h........................General Information
7 a.......................Purchases, Exchanges and Redemptions
b(i),(ii)................Portfolio Transactions and Valuation
b(iii,iv,v),c............*
d........................Purchases, Exchanges and Redemptions
e, f(i),(ii).............Management of the Fund
f(iii)...................*
8 ........................Purchases, Exchanges and Redemptions
9 ........................*
</TABLE>

* Not applicable.
<PAGE> 50

ARK FUNDS -- INSTITUTIONAL CLASS
- --------------------------------------------------------------------------------
PROSPECTUS

JANUARY , 1998

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

<TABLE>
<S> <C>
* U.S. Treasury Money Market Portfolio * Balanced Portfolio
* U.S. Government Money Market Portfolio * Equity Income Portfolio
* Money Market Portfolio * Equity Index Portfolio
* Tax-Free Money Market Portfolio * Blue Chip Equity Portfolio
* Short-Term Treasury Portfolio * Mid-Cap Equity Portfolio
* Short-Term Bond Portfolio * Value Equity Portfolio
* U.S. Government Bond Portfolio * Stock Portfolio
* Intermediate Fixed Income Portfolio * Capital Growth Portfolio
* Income Portfolio * Small-Cap Portfolio
* Maryland Tax-Free Portfolio * International Equity Selection
* Pennsylvania Tax-Free Portfolio Portfolio
* International Equity Portfolio
</TABLE>

ARK Funds (the "Fund") is an open-end management investment company composed of
separately managed diversified and non-diversified portfolios. The portfolios of
the Fund listed above have an Institutional Class of shares. Institutional Class
shares are offered through this Prospectus only to individuals, institutions and
other entities that have established trust, custodial or money management
relationships with The First National Bank of Maryland ("First Maryland"), its
affiliated banks (including Allied Irish Banks, p.l.c. and its affiliates), or
its correspondent banks or their affiliated banks.

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, FIRST MARYLAND OR ANY DEPOSITARY INSTITUTION, AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTING IN THE SHARES INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.

This Prospectus is designed to provide investors with information that they
should know before investing. Please read and retain it for future reference. A
Statement of Additional Information dated January , 1998, Annual Report
(including financial statements for the fiscal year ended April 30, 1997) and
Semi-Annual Report (including financial statements for the six months ended
October 31, 1997 (unaudited)) have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information, Annual Report and Semi-Annual Report are available upon request
without charge by calling 1-800-624-4116 (inside Maryland 1-800-638-7751).

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

<TABLE>
<S> <C>
Summary...................................... 2
Fees and Expenses............................ 4
Financial Highlights......................... 8
Investment Objectives and Policies........... 10
Additional Investment Policies and
Limitations................................ 24
Risks to Consider............................ 25
Performance.................................. 28
Portfolio Transactions and Valuation......... 29
Purchases, Exchanges and Redemptions......... 30
Management of the Fund....................... 34
Tax Matters.................................. 40
General Information.......................... 41
Appendix..................................... 43
</TABLE>

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 51

SUMMARY
- --------------------------------------------------------------------------------

INTERMEDIATE FIXED INCOME PORTFOLIO -- seeks to provide current income
consistent with the preservation of capital by investing primarily in
intermediate-term fixed-income securities.

PENNSYLVANIA TAX-FREE PORTFOLIO -- seeks to provide high current income
that is free from federal and Pennsylvania state income taxes by investing
primarily in investment-grade municipal securities.

EQUITY INCOME PORTFOLIO -- seeks to provide a moderate level of current
income and growth of capital by investing primarily in high-quality,
income-producing common stocks.

EQUITY INDEX PORTFOLIO -- seeks to provide investment results that
correspond to the performance of the Standard & Poor's 500 Composite Stock Price
Index.

2
<PAGE> 52

BLUE CHIP EQUITY PORTFOLIO -- seeks to provide long-term capital
appreciation by investing primarily in equity securities of established, large
capitalization companies.

MID-CAP EQUITY PORTFOLIO -- seeks to provide long-term capital appreciation
by investing primarily in equity securities of medium-sized companies.

VALUE EQUITY PORTFOLIO -- seeks to provide growth of principal by investing
primarily in the equity securities from high quality companies.

STOCK PORTFOLIO -- seeks to provide long-term capital appreciation by
investing primarily in common stocks.

CAPITAL GROWTH PORTFOLIO -- seeks to achieve long-term capital appreciation
by investing primarily in common stock and securities convertible into common
stock.

SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO) -- seeks to provide
capital appreciation by investing in securities of companies believed by the
adviser to be "special equities".

INTERNATIONAL EQUITY PORTFOLIO -- seeks to provide long-term capital growth
by investing primarily in foreign equity securities.

PURCHASE, EXCHANGE AND REDEMPTION OF SHARES. Institutional Class shares of
the Portfolios are sold at their net asset value without a sales charge and are
currently available only to certain qualified accounts. Shares of a Portfolio
may be exchanged for shares of another Portfolio. Shareholders may redeem all or
any portion of their shares at the net asset value next determined after the
Fund's transfer agent has received the redemption request. See "Purchases,
Exchanges and Redemptions".

SHAREHOLDER INQUIRIES. Any questions or communications regarding the
Portfolios can be directed to the Fund at 1-800-624-4116 (inside Maryland
1-800-638-7751).

3
<PAGE> 53

FEES AND EXPENSES
- --------------------------------------------------------------------------------

The expense summary format below was developed for use by all mutual funds
to help investors make their investment decisions. Investors should consider
this expense information along with other important information, including each
Portfolio's investment objectives, performance (if any) and financial
highlights.

ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
------------------------------------------------------------
U.S.
TREASURY U.S. GOVERNMENT MONEY TAX-FREE
MONEY MARKET MONEY MARKET MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- --------- ------------
<S> <C> <C> <C> <C>
Advisory Fees (after waivers)(1)............. .19% .14% .11% .09%
Shareholder Services Fee (after waiver)(2)... .06% .06% .06% .06%
Other Expenses(3)............................ .18% .18% .18% .20%
---- ---- ---- ----
Total Operating Expenses (after
waivers)(4)................................ .43% .38% .35% .35%
==== ==== ==== ====
</TABLE>

(2) A portion of the shareholder services fee is being waived for the
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(4) Absent the voluntary fee waivers described above, total operating expenses
for Institutional Class shares of the U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, Money Market Portfolio and Tax-Free
Money Market Portfolio would be .58%, .58% .58% and .60%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Portfolio....................... 4 14 24 54
U.S. Government Money Market Portfolio..................... 4 12 21 48
Money Market Portfolio..................................... 4 11 20 44
Tax-Free Money Market Portfolio............................ 4 11 20 44
</TABLE>

4
<PAGE> 54

ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
----------------------------------------------------------------------------------------
SHORT-TERM SHORT-TERM U.S. GOVERNMENT INTERMEDIATE MARYLAND PENNSYLVANIA
TREASURY BOND BOND FIXED INCOME INCOME TAX-FREE TAX-FREE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- --------------- ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees (after
waivers)(1).............. .35% .70% .65% .45% .51% .49% .65%
Shareholder Services Fee
(after waiver)(2)........ .06% .06% .06% .06% .06% .06% .06%
Other Expenses(3).......... .20% % % .23% .20% .23% .23%
---- ---- ---- ---- ---- ---- ----
Total Operating Expenses
(after waivers)(4)....... .61% % % .74% .77% .78% .94%
==== ==== ==== ==== ==== ==== ====
</TABLE>

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for the Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Intermediate Fixed Income Portfolio, Income
Portfolio, Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio
and the advisory fees shown reflect those voluntary waivers. The adviser
reserves the right to terminate its fee waivers at any time in its sole
discretion. Absent such waivers, the advisory fees for the Short-Term
Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio and Pennsylvania Portfolio would be .80%, .75%, .75%,
.60%, .60%, .65% and .65%, respectively.

(2) A portion of the shareholder services fee is being waived for the
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(3) Other expenses are estimated based on amounts incurred during the previous
fiscal year and include, all expenses except nonrecurring account fees,
brokerage commissions and other capital items, and advisory and shareholder
services fees.

(4) Absent the voluntary fee waivers described above, the total operating
expenses for Institutional Class shares of the Short-Term Treasury
Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio would be 1.15%, %, %,
.98%, .95%, 1.03%, and 1.03%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Short-Term Treasury Portfolio................................. 6 20 34 76
Short-Term Bond Portfolio.....................................
U.S. Government Bond Portfolio................................
Intermediate Fixed Income Portfolio........................... 8 24 41 92
Income Portfolio.............................................. 8 25 43 95
Maryland Tax-Free Portfolio................................... 8 25 43 97
Pennsylvania Tax-Free Portfolio............................... 10 30 52 115
</TABLE>

5
<PAGE> 55

ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
-----------------------------------------------
EQUITY EQUITY BLUE CHIP
BALANCED INCOME INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Advisory Fees (after waivers)(1)........................... .56% .64% .06% .60%
Shareholder Services Fee (after waiver)(2)................. .06% .06% .00% .06%
Other Expenses (after waivers)(3).......................... .21% .23% .14% .17%
---- ---- ---- ----
Total Operating Expenses (after waivers)(4)................ .83% .93% .20% .83%
==== ==== ==== ====
</TABLE>

* Institutional Class shares of this Portfolio are not currently being
offered.

(2) A portion of the shareholder services fee is being waived for the
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(4) Absent the voluntary fee waivers described above, total operating expenses
for Institutional Class shares of the Balanced Portfolio, Equity Income
Portfolio, Equity Index Portfolio and Blue Chip Equity Portfolio would be
1.01%, 1.08%, .69% and 1.02%, respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Balanced Portfolio......................................... 8 26 46 103
Equity Income Portfolio.................................... 9 30 51 114
Equity Index Portfolio..................................... 2 6 -- --
Blue Chip Equity Portfolio................................. 8 26 46 103
</TABLE>

6
<PAGE> 56

ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
------------------------------------------------------------------------------------
MID-CAP VALUE CAPITAL INTERNATIONAL INTERNATIONAL
EQUITY EQUITY STOCK GROWTH SMALL-CAP EQUITY SELECTION EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO* PORTFOLIO PORTFOLIO
------- --------- --------- --------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees (after waivers)(1).... .74% .87% .60% .65% .79% .55% .38%
Shareholder Services Fee (after
waiver)(2)........................ .06% .06% .06% .06% .06% .06% .00%
Other Expenses(3)................... .30% . % .25% .26% .39% .26% 1.17%
---- ---- ---- ---- ----- ---- -----
Total Operating Expenses (after
waivers)(4)....................... 1.10% . % .91% .97% 1.24% .81% 1.55%
==== ==== ==== ==== ===== ==== =====
</TABLE>

* Formerly Special Equity Portfolio.

(1) The adviser has agreed to waive, on a voluntary basis, a portion of its fees
for the Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock Portfolio,
Capital Growth Portfolio, Small-Cap Portfolio and International Equity
Selection Portfolio; the adviser to the International Equity Portfolio has
agreed to waive, on a voluntary basis, a portion of its fee (and, if
necessary, to reimburse other expenses) in order to limit the Portfolio's
expense ratio to 1.55%. The advisory fees shown reflect those voluntary
waivers. The advisers reserve the right to terminate its fee waivers at any
time in its sole discretion. Absent such waivers, the advisory fees for the
Mid-Cap Equity Portfolio, Value Equity Portfolio, Capital Growth Portfolio,
Small-Cap Portfolio, International Equity Selection Portfolio and
International Equity Portfolio would be .80%, 1.00%, .70%, .70%, .80%, .65%
and .80%, respectively.

(2) A portion of the shareholder services fee is being waived for the
Portfolios. Absent such waivers, the shareholder services fee would be .15%.

(4) Absent the voluntary fee waivers described above, the total operating
expenses for Institutional Class shares of the Mid-Cap Equity Portfolio,
Value Equity Portfolio, Stock Portfolio, Capital Growth Portfolio, Small-Cap
Portfolio, International Equity Selection Portfolio and International Equity
Portfolio would be 1.25%, %, 1.10%, 1.11%, 1.34%, %, and 2.12%,
respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Mid-Cap Equity Portfolio............................................. 11 35 61 134
Value Equity Portfolio...............................................
Stock Portfolio...................................................... 9 29 50 112
Capital Growth Portfolio............................................. 10 31 54 119
Small-Cap Portfolio.................................................. 13 39 68 150
International Equity Selection Portfolio.............................
International Equity Portfolio....................................... 16 49 84 185
</TABLE>

7
<PAGE> 57

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table provides information about the financial history of the
Institutional Class of each Portfolio (excluding Portfolios which as of October
31, 1997 had not commenced operations). The table expresses the information in
terms of a single share outstanding throughout the year or period. The
information has been audited by KPMG Peat Marwick LLP, independent auditors for
the Fund. Their report on the financial statements and financial highlights for
the year ended April 30, 1997 is included in the Annual Report. The information
for the six months ended October 31, 1997 (unaudited) is included in the
Semi-Annual Report. The Annual Report and Semi-Annual Report are incorporated by
reference into the Statement of Additional Information. The table should be read
in conjunction with the Portfolios' financial statements and the notes thereto,
which may be obtained free of charge from the Fund.

For a Share Outstanding Throughout the Year or Period Ended April 30,

<TABLE>
<CAPTION>
Realized Distri-
and butions Ratio of
Net Unrealized from Distri- Net Net Expenses
Asset Gains or Net butions Asset Assets to
Value, Net (Losses) Invest- from Value, End of Average
Beginning Investment on ment Capital End of Total Period Net
of Period Income Investments Income Gains Period Return (000) Assets
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------
1997a
1997 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.00% $ 225,924 0.37%
1996 1.00 0.05 -- (0.05) -- 1.00 5.32 275,259 0.36
1995 1.00 0.05 -- (0.05) -- 1.00 4.60 221,069 0.38
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.48 137,826 0.43*
- ----------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- ----------------------------------
1997a
1997 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.22% $1,250,778 0.32%
1996 1.00 0.05 -- (0.05) -- 1.00 5.64 1,043,758 0.31
1995 1.00 0.05 -- (0.05) -- 1.00 5.00 651,113 0.25
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.70 271,437 0.35*
- -------------------
MONEY MARKET PORTFOLIO
- -------------------
1997a
1997 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.36% $ 318,919 0.28%
1996 1.00 0.06 -- (0.06) -- 1.00 5.78 348,343 0.25
1995 1.00 0.05 -- (0.05) -- 1.00 5.13 227,859 0.20
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.80 197,162 0.26*
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
1997a
1997 $ 1.00 0.03 -- (0.03) -- $ 1.00 3.29% $ 69,091 0.28%
1996 1.00 0.04 -- (0.04) -- 1.00 3.61 74,739 0.22
1995 1.00 0.03 -- (0.03) -- 1.00 3.24 64,112 0.22
1994(1) 1.00 0.02 -- (0.02) -- 1.00 1.87 66,692 0.35*
- ------------------------
SHORT-TERM TREASURY PORTFOLIO
- ------------------------
1997a
1997 $ 9.96 0.50 -- (0.49) (0.01) $ 9.96 5.13% $ 21,563 0.55%
1996(2) 10.00 0.06 (0.04) (0.06) -- 9.96 0.16 18,823 0.55*
- -----------------------------
INTERMEDIATE FIXED INCOME PORTFOLIO
- -----------------------------
1997a
1997(3) $ 10.00 0.28 (0.20) (0.28) -- $ 9.80 0.78% $ 76,326 0.68%*
- -------------
INCOME PORTFOLIO
- -------------
1997a
1997 $ 9.80 0.59 0.02 (0.59) -- $ 9.82 6.51% $ 242,966 0.68%
1996 9.60 0.61 0.20 (0.61) -- 9.80 8.46 180,962 0.73
1995 9.61 0.58 0.02 (0.58) (0.03) 9.60 6.53 66,441 0.74
1994(4) 10.00 0.38 (0.38) (0.38) (0.01) 9.61 (0.08) 54,289 0.77*
- -----------------------
MARYLAND TAX-FREE PORTFOLIO
- -----------------------
1997a
1997(3) $ 10.00 0.22 (0.13) (0.22) -- $ 9.87 0.89% $ 79,608 0.67%*

<CAPTION>
Ratio of Ratio of
Net Expenses
Investment to Average
Income Net
to Average Assets Portfolio
Net (Excluding Turnover
Assets Waivers) Rate
-------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------
1997a
1997 4.88% 0.43% --
1996 5.18 0.45 --
1995 4.59 0.47 --
1994(1) 2.80* 0.51* --
- ----------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- ----------------------------------
1997a
1997 5.10% 0.43% --
1996 5.45 0.44 --
1995 5.09 0.47 --
1994(1) 3.03* 0.62* --
- ------------------
MONEY MARKET PORTFOLIO
- ------------------
1997a
1997 5.23% 0.43% --
1996 5.62 0.44 --
1995 5.13 0.46 --
1994(1) 3.16* 0.52* --
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
1997a
1997 3.23% 0.44% --
1996 3.54 0.45 --
1995 3.21 0.47 --
1994(1) 2.10* 0.53* --
- -------------------------
SHORT-TERM TREASURY PORTFOLIO
- -------------------------
1997a
1997 5.11% 0.60% 147.86%
1996(2) (0.55)* 0.60* --
- -------------------------------
INTERMEDIATE FIXED INCOME PORTFOLIO
- -------------------------------
1997a
1997(3) 5.55%* 0.83%* 17.18%
- ------------
INCOME PORTFOLIO
- ------------
1997a
1997 6.19% 0.68% 271.60%
1996 6.00 0.73 107.33
1995 6.15 0.74 73.00
1994(4) 4.90* 0.77* 20.00
- -----------------------
MARYLAND TAX-FREE PORTFOLIO
- -----------------------
1997a
1997(3) 4.95%* 0.72%* 11.13%
</TABLE>

8
<PAGE> 58

<TABLE>
<CAPTION>
Realized Distri-
and butions Ratio of
Net Unrealized from Distri- Net Net Expenses
Asset Gains or Net butions Asset Assets to
Value, Net (Losses) Invest- from Value, End of Average
Beginning Investment on ment Capital End of Total Period Net
of Period Income Investments Income Gains Period Return (000) Assets
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
- --------------------------
1997a
1997(3) $ 10.00 0.21 (0.08) (0.21) -- $ 9.92 1.32% $ 23,278 0.63%*
- ---------------
BALANCED PORTFOLIO
- ---------------
1997a
1997 $11.38 0.33 0.53 (0.30) (0.51) $11.43 7.85% $ 76,987 0.74%
1996 10.04 0.34 1.71 (0.34) (0.37) 11.38 20.90 102,233 0.75
1995 10.16 0.33 0.03 (0.29) (0.19) 10.04 3.75 91,039 0.77
1994(4) 10.00 0.19 0.17 (0.19) (0.01) 10.16 3.56 88,208 0.81*
- -------------------
EQUITY INCOME PORTFOLIO
- -------------------
1997a
1997(3) $ 10.00 0.12 0.67 (0.12) -- $10.67 7.88% $ 83,947 0.83%*
- ---------------------
BLUE CHIP EQUITY PORTFOLIO
- ---------------------
1997a
1997 $ 10.12 0.17 2.28 (0.17) (0.01) $12.39 24.41% $ 35,690 0.70%
1996(5) 10.00 -- 0.12 -- -- 10.12 1.20 11,456 0.65*
- --------------------
MID-CAP EQUITY PORTFOLIO
- --------------------
1997a
1997(3) $ 10.00 0.03 0.17 (0.03) -- $10.17 1.98% $ 27,059 0.90%*
- ------------
STOCK PORTFOLIO
- ------------
1997a
1997(3) $ 10.00 0.03 0.77 (0.03) -- $10.77 8.04% $ 40,571 0.90%*
- -------------------
CAPITAL GROWTH PORTFOLIO
- -------------------
1997a
1997 $ 11.60 0.11 1.41 (0.14) (1.06) $11.92 13.46% $ 34,170 0.39%
1996 10.20 0.16 2.17 (0.16) (0.77) 11.60 23.62 39,560 0.24
1995 10.19 0.14 0.16 (0.11) (0.18) 10.20 3.15 41,170 0.74
1994(4) 10.00 0.06 0.21 (0.03) (0.05) 10.19 2.66 52,233 0.87*
- ---------------------------------------------
SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- ---------------------------------------------
1997a
1997 $ 14.72 (0.01) (2.97) -- (3.21) $ 8.53 (23.43)% $ 17,746 0.95%
1996(6) 10.00 0.09 4.72 (0.09) -- 14.72 48.34 33,621 0.91*
- -----------------------
INTERNATIONAL EQUITY PORTFOLIO
- -----------------------
1997a
1997 $ 11.23 0.05 (0.63) -- (0.20) $10.45 (5.22)% $ 3,836 1.55%
1996 10.13 0.19 1.37 (0.23) (0.23) 11.23 15.66 3,571 1.55
1995(7) 10.00 0.03 0.10 -- -- 10.13 1.30 2,940 1.55*

<CAPTION>
Ratio of Ratio of
Net Expenses
Investment to Average
Income Net
to Average Assets Portfolio Average
Net (Excluding Turnover Commission
Assets Waivers) Rate Rate**
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
- --------------------------
1997a
1997(3) 4.78%* 0.76%* 32.76% --
- ---------------
BALANCED PORTFOLIO
- ---------------
1997a
1997 2.79% 0.74% 124.22% .0673
1996 3.19 0.75 107.56 --
1995 3.32 0.77 81.00 --
1994(4) 2.41* 0.81* 37.00 --
- -------------------
EQUITY INCOME PORTFOLIO
- -------------------
1997a
1997(3) 2.47%* 0.93%* 34.38% .0689
- ---------------------
BLUE CHIP EQUITY PORTFOLIO
- ---------------------
1997a
1997 1.55% 0.90% 46.91% .0727
1996(5) 1.52* 1.38* 0.97 --
- --------------------
MID-CAP EQUITY PORTFOLIO
- --------------------
1997a
1997(3) 0.65%* 0.95%* 14.74% .0715
- ------------
STOCK PORTFOLIO
- ------------
1997a
1997(3) 0.76%* 0.95%* 83.17% .0720
- -------------------
CAPITAL GROWTH PORTFOLIO
- -------------------
1997a
1997 0.92% 0.85% 246.14% .0692
1996 1.26 0.84 578.57 --
1995 1.35 0.85 182.00 --
1994(4) 0.78* 0.87* 41.00 --
- ---------------------------------------------
SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- ---------------------------------------------
1997a
1997 (0.12)% 0.95% 704.41% .0678
1996(6) 0.60* 0.91* 286.80 --
- -----------------------
INTERNATIONAL EQUITY PORTFOLIO
- -----------------------
1997a
1997 0.33% 1.91% 26.65% .0381
1996 0.15 2.96 37.16 --
1995(7) 0.97* 5.35* 2.00 --
</TABLE>

(a) For the six months ended October 31, 1997 (unaudited).

* Annualized
** Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal
years beginning after September 1, 1995.
(1) Commenced operations on June 14, 1993.
(2) Commenced operations on March 20, 1996.
(3) Commenced operations on November 18, 1996.
(4) Commenced operations on July 16, 1993.
(5) Commenced operations on April 1, 1996.
(6) Commenced operations on July 13, 1995.
(7) Commenced operations on December 30, 1994.

As of the date of this Prospectus, the Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Value Equity Portfolio and International Equity
Selection Portfolio had not yet commenced operations.

9
<PAGE> 59

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

MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------

The investment objective of the U.S. TREASURY MONEY MARKET PORTFOLIO is to
maximize current income and provide liquidity and security of principal by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government and thus constitute direct obligations of the
United States. As a non-fundamental policy, the Portfolio invests 100% of its
total assets in U.S. Treasury bills, notes and bonds, and limits its investments
to U.S. Treasury obligations that pay interest which is specifically exempt from
state and local taxes under federal law.

10
<PAGE> 60

U.S. Government Securities and in repurchase agreements backed by such
instruments. The Portfolio normally may not invest more than 5% of its total
assets in the securities of any single issuer (other than the U.S. government).
Under certain conditions, however, the Portfolio may invest up to 25% of its
total assets in first-tier securities of a single issuer for up to three days.

The investment objective of the MONEY MARKET PORTFOLIO is to maximize
current income and provide liquidity and security of principal by investing in a
broad range of short-term, high-quality U.S. dollar-denominated debt securities
("Money Market Instruments"). At least 95% of the assets of the Portfolio will
be invested in securities that have received the highest rating assigned by any
two nationally recognized statistical rating organizations ("NRSROs") or, if
only one such rating organization has assigned a rating, such single
organization. Up to 5% of the Portfolio's assets may be invested in securities
that have received ratings in the second highest category by any two NRSROs or,
if only one such rating organization has assigned a rating, such single
organization. The Portfolio may also acquire unrated securities determined by
the adviser to be comparable in quality in accordance with guidelines adopted by
the Board of Trustees. The Portfolio may invest in U.S. dollar-denominated
obligations of U.S. banks and foreign branches of U.S. banks ("Eurodollars"),
U.S. branches and agencies of foreign banks ("Yankee dollars"), and foreign
branches of foreign banks. See the Appendix for more information. The Portfolio
may also invest more than 25% of its total assets in certain obligations of
domestic banks and normally may not invest more than 5% of its total assets in
the securities of any single issuer (other than the U.S. government). Under
certain conditions, however, the Portfolio may invest up to 25% of its total
assets in first-tier securities of a single issuer for up to three days.

11
<PAGE> 61

SHORT-TERM TREASURY PORTFOLIO
- --------------------------------------------------------------------------------

SHORT-TERM BOND PORTFOLIO

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

12
<PAGE> 62

U.S. GOVERNMENT BOND PORTFOLIO

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

INTERMEDIATE FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------

13
<PAGE> 63

INCOME PORTFOLIO
- --------------------------------------------------------------------------------

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets Portfolio will be invested in fixed-income securities. The
Portfolio may invest in income-producing securities of all types, including
bonds, notes, mortgage securities, government and government agency obligations,
zero coupon securities, convertible securities, foreign securities, indexed
securities, and asset-backed securities. The Portfolio normally will invest in
investment-grade debt securities (including convertible securities) and unrated
securities determined by the adviser to be of comparable quality. The Portfolio
may also invest up to 5% of its total assets in lower-quality debt securities,
sometimes referred to as "junk bonds". Common stocks acquired through exercise
of conversion rights or warrants or acceptance of exchange or similar offers
ordinarily will not be retained by the Portfolio. An orderly disposition of such
stocks will be effected consistent with the judgment of the adviser as to the
best price available.

MARYLAND TAX-FREE PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the MARYLAND TAX-FREE PORTFOLIO is to provide
high current income that is free from federal income tax and the Maryland state
and county income taxes.

14
<PAGE> 64

PENNSYLVANIA TAX-FREE PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the PENNSYLVANIA TAX-FREE PORTFOLIO is to
provide high current income that is free from federal and Pennsylvania state
income taxes.

BALANCED PORTFOLIO
- --------------------------------------------------------------------------------

The Portfolio's common stock investments may include foreign and domestic
issues of larger, well-established companies, as well as medium-sized and
smaller companies. The Portfolio may invest in preferred stock and convertible
securities. Debt securities acquired by the Portfolio may include mortgage or
asset-backed securities, corporate issues, indexed securities, and U.S.
Government Securities. The Portfolio normally will invest in investment-grade
debt securities (including convertible securities) and unrated securities
determined by the adviser to be of comparable quality, but may also invest up to
5% of its total assets in lower-quality debt securities, sometimes referred to
as "junk bonds". The average maturity of the Portfolio's debt obligations will

15
<PAGE> 65

vary depending on market conditions. The adviser may adjust the Portfolio's
investments based on its interpretation of underlying economic, financial, and
security trends. The adviser's ability to make such adjustments successfully
will depend on its ability to predict market trends. The Portfolio maintains at
least 25% of its total assets in fixed-income securities.

EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the EQUITY INCOME PORTFOLIO is to provide a
moderate level of current income and growth of capital by investing primarily in
high-quality, income-producing common stocks.

EQUITY INDEX PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the Equity Index Portfolio is to provide
investment results that correspond to the performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500").

The Portfolio invests at least 65% of total assets in common stocks
included in the S&P 500. The Portfolio's adviser believes that the Portfolio's
objective can best be achieved by investing in

16
<PAGE> 66

the common stocks of approximately 250 to 500 of the companies included in the
S&P 500, depending upon the size of the Portfolio.

17
<PAGE> 67

BLUE CHIP EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The Portfolio seeks capital appreciation from a broadly diversified
portfolio of common stocks of established, large capitalization companies. The
adviser may also seek capital appreciation on behalf of the Portfolio by
investing up to 35% of its total assets in other types of securities, including
preferred stock and debt securities, securities convertible into common stock,
and asset-backed securities. The Portfolio normally invests in investment-grade
debt securities (including convertible securities) and unrated securities
determined by the adviser to be of comparable quality, but may invest up to 5%
of its total assets in lower-quality debt securities, sometimes referred to as
"junk bonds".

Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in equity securities of companies with an
operating histories of ten years or more and market capitalizations in excess of
$5 billion which the adviser considers to be leaders in their respective
markets. The median market capitalization of the stocks included in the S&P 500
is approximately $5 billion. It is expected that the companies in which the
Portfolio invests will be based primarily in the United States, and will be
recognized market leaders with strong financial positions. The Portfolio will
invest in securities that the adviser believes offer above-average growth
potential based on their fundamental strength. The adviser considers many
factors when evaluating the overall quality of a security for investment by the
Portfolio, including a company's current financial strength and relative value.

MID-CAP EQUITY PORTFOLIO

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

The investment objective of the MID-CAP EQUITY PORTFOLIO is to provide
long-term capital appreciation by investing primarily in equity securities of
medium-sized companies.

18
<PAGE> 68

VALUE EQUITY PORTFOLIO

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

STOCK PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the STOCK PORTFOLIO is to provide long-term
capital appreciation by investing primarily in common stocks.

CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the CAPITAL GROWTH PORTFOLIO is to provide
long-term capital appreciation. The Portfolio is expected to produce modest
dividend or interest income. This income will be incidental to the Portfolio's
primary objective.

19
<PAGE> 69

Portfolio may, however, invest up to 5% of its total assets in lower-quality
debt securities, sometimes referred to as "junk bonds".

SMALL CAP PORTFOLIO

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

The investment objective of the SMALL-CAP PORTFOLIO(formerly Special Equity
Portfolio) is to provide capital appreciation by investing primarily in
securities of companies believed by the adviser to be "special equities".

A "special situation" may involve one or more of the following
characteristics:

- a technological advance or discovery, the offering of a new or unique
product or service, or changes in consumer demand or consumption
forecasts.

- new or changed management, or material changes in management policies or
corporate structure.

- significant economic or political occurrences abroad, including changes
in foreign or domestic import and tax laws or other regulations.

- other events, including natural disasters, favorable litigation
settlements, or a major change in demographic patterns.

The adviser intends to invest primarily in common stocks and securities
that are convertible into common stocks; however, the Portfolio may also invest
up to 35% of its total assets in debt securities of all types and quality if the
adviser believes that investing in these securities will result in capital
appreciation. The Portfolio may invest in lower-quality debt securities,
sometimes referred to as "junk bonds". The Portfolio may invest up to 35% of its
total assets in foreign securities of all

20
<PAGE> 70

types and may enter into forward currency contracts for the purpose of managing
exchange rate risks and to facilitate transactions in foreign securities. The
Portfolio may purchase or engage in indexed securities, illiquid instruments,
loans and other direct debt instruments, options and futures contracts,
repurchase agreements, securities loans, restricted securities, swap agreements,
warrants, real estate-related instruments and zero coupon bonds. See "Risks to
Consider", the Appendix to this Prospectus and the Statement of Additional
Information for more information.

The Portfolio spreads investment risk by limiting its holdings in any one
company or industry. The adviser may use various investment techniques to hedge
the Portfolio's risks, but there is no guarantee that these strategies will work
as the adviser intended. The adviser normally invests the Portfolio's assets
according to its investment strategy. The Portfolio expects to be fully invested
under most market conditions. However, the Portfolio reserves the right to
invest without limitation in preferred stocks and investment-grade debt
instruments for temporary, defensive purposes when, in the adviser's judgment, a
more conservative approach to investment is desirable.

INTERNATIONAL EQUITY SELECTION PORTFOLIO

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

The investment objective of the INTERNATIONAL EQUITY SELECTION PORTFOLIO is
to provide long-term capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in shares of other mutual funds (the
"underlying funds"), the portfolios of which consist primarily of equity
securities of non-U.S. issuers. Under normal market conditions, and as a
investment policy, the Portfolio will invest at least 65% of its total assets in
underlying funds that are international equity funds. However, as an operational
policy, the Portfolio anticipates investing substantially all of its assets in
international equity funds. International equity funds are those which invest
primarily in equity securities of companies located in three or more countries
outside the United States. The adviser will attempt to identify and select a
varied portfolio of international equity funds which presents the greatest
long-term capital growth potential based on the adviser's analysis of many
factors. The selection of international equity funds may include international
equity funds that invest primarily in emerging markets or focus their
investments on geographic regions (provided they invest in at least three
countries other than the United States). The adviser will first assess the
relative attractiveness of individual countries, geographic regions, and/or
emerging markets. After identifying the most and least attractive countries,
regions or markets, consideration will be given to the expected returns and
risks before deciding whether to invest in funds that overweight and underweight
certain countries, regions or markets. The selection of underlying funds also
involves an initial peer group screening process which assesses fund investment
style, investment objectives and policies, and fund management. Rankings of
certain independent rating services are also considered. Potential underlying
funds which, in the adviser's view, meet these criteria will then be subject to
further evaluation of investment policies, historic total return, size,
volatility and operating expenses over various time periods. Also, on a
macroeconomic level, a fund's geographical diversification is also considered.
The underlying funds may be subject to more, less, the same or different
investment restrictions than the Portfolio, and the adviser will consider these
similarities and differences when making investment decisions.

The 1940 Act currently provides that the Portfolio may not purchase the
securities of an underlying fund if, as a result, the Portfolio together with
any of its affiliates would own more than

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<PAGE> 71

3% of the total outstanding securities of that underlying fund. Thus, the
Portfolio's ability to invest in shares of certain underlying funds could be
restricted and the adviser may have to select alternative investments. By
investing in the Portfolio, investors bear not only the Portfolio's total
operating expenses, but the operating expenses of the underlying funds as well.
An investor in the Portfolio should recognize that investments may be made
directly in underlying funds and that, by investing in underlying funds
indirectly through the Portfolio, investors will bear not only a proportionate
share of the expenses of the Portfolio, but also, indirectly, similar expenses
of the underlying funds including, distribution expenses and sales charges.
Finally, investors should recognize that, as a result of the Portfolio's
policies of investing in other mutual funds, investors may receive taxable
capital gains distributions to a greater extent than would be the case if you
invest directly in the underlying funds.

22
<PAGE> 72

For temporary defensive purposes (up to 100% of total assets) and to
maintain liquidity (up to 35% of total assets), the Fund may invest in
short-term Money Market Instruments.

INTERNATIONAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the INTERNATIONAL EQUITY PORTFOLIO is to
provide long-term capital growth. Dividend income is incidental to the
Portfolio's primary objective.

When allocating the Portfolio's investments among geographic regions and
individual countries, the adviser considers various factors such as prospects
for relative economic growth, expected levels of inflation, anticipated interest
rate movements, government policies influencing business conditions and the
outlook for currency relationships. The adviser expects that the Portfolio's
investments will focus mainly on countries which are included in the Morgan
Stanley Capital International Europe, Australia, Far East Index (the "EAFE
Index"), although other geographical regions, such as Latin America, South
Africa, Central and Eastern Europe, and emerging Asian markets are also
permitted. The risks of investing in foreign securities are heightened when
investing in emerging markets. See "Risks to Consider -- Foreign Securities".
The countries that make up the EAFE Index include, but are not limited to:
United Kingdom, Ireland, France, Germany, Switzerland, the Netherlands, Italy,
Spain, Belgium, Sweden, Norway, Finland, Denmark, Austria, Japan, Australia, New
Zealand, Hong Kong, Malaysia and Singapore. It is not the objective of the
Portfolio to replicate the EAFE Index. The Portfolio may also invest in
investment-grade convertible debt securities (and unrated securities determined
by the adviser to be of comparable quality), and may purchase U.S. government
securities and indexed securities.

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<PAGE> 73

ADDITIONAL INVESTMENT POLICIES AND LIMITATIONS
- --------------------------------------------------------------------------------

24
<PAGE> 74

RISKS TO CONSIDER
- --------------------------------------------------------------------------------

An investment in any of the Portfolios involves certain risks. These risks
include the following:

MUNICIPAL OBLIGATIONS. The Tax-Free Money Market Portfolio, Maryland
Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio invest primarily in
municipal obligations and other Portfolios may invest in such obligations to the
extent permitted by their investment policies. Municipal securities are issued
to raise money for various public purposes, including general purpose financing
for state and local governments as well as financing for specific projects or
public facilities. Municipal securities may be backed by the full taxing power
of a municipality or by the revenues from a specific project or the credit of a
private organization. Some municipal securities are insured by private insurance
companies, while others may be supported by letters of credit ("LOCs") furnished
by domestic or foreign banks.

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<PAGE> 75

SMALLER-CAPITALIZATION COMPANIES. The Small-Cap Portfolio (formerly Special
Equity Portfolio) emphasizes investments in companies with relatively-small
market capitalizations and other Portfolios may invest in such companies to the
extent permitted by their investment policies. The equity securities of
smaller-capitalization companies frequently have experienced greater price
volatility than those of larger-capitalization companies, and they may be
expected to do so in the future. Their reliance on limited product lines,
markets, financial resources, or other factors may make smaller companies more
susceptible to setbacks and downturns. As a result, their stock prices may be
particularly volatile. In addition, investing in securities involving a "special
situation" bears the risk that the situation will not develop as favorably as
expected, or that it may deteriorate. For example, a merger with favorable
implications may be blocked, an industrial development may not enjoy anticipated
market acceptance, or a bankruptcy may not be as favorably resolved as had been
expected.

FOREIGN SECURITIES. Investing in the securities of foreign issuers involves
special risks not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investment in foreign countries, and potential restrictions on the
flow of international capital and currencies. Foreign issuers may also be
subject to less government regulation than U.S. companies. Moreover, the
dividends and interest payable on foreign securities may be subject to foreign
withholding taxes, thus reducing the net amount of income available for
distribution to a Portfolio's shareholders. Further, foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
may exhibit greater price volatility. Investing in emerging markets involves
special

26
<PAGE> 76

considerations (in addition to those relating to foreign investments generally)
which include, among others, greater political uncertainty, an economy's
dependence on revenues from particular commodities or on international aide or
development assistance, currency transfer restrictions, a limited number of
potential buyers for securities, and delays and disruptions in securities
settlement procedures. Changes in foreign exchange rates will affect, favorably
or unfavorably, the value of those securities which are denominated or quoted in
currencies other than the U.S. dollar.

Investors should review the investment objective and policies of a
Portfolio and carefully consider their ability to assume the risks involved in
purchasing its shares.

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<PAGE> 77

PERFORMANCE
- --------------------------------------------------------------------------------

The YIELD of shares of a Portfolio is calculated by dividing the net
investment income earned by the shares over a 7-day period (for the money market
Portfolios) and a 30-day period (for other Portfolios), by the average number of
shares entitled to receive dividends and expressing the result as an annualized
percentage rate based on each share price at the end of the 7- and 30-day
periods, respectively. The EFFECTIVE YIELD is calculated similarly, but assumes
that the income earned from the investment is reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment. Because yield accounting methods differ from the methods
used for other accounting purposes, the yields of shares of the Portfolios may
not equal their respective distribution rates, the income paid to your account
or the income reported in the financial statements of the Institutional Class of
the relevant Portfolio.

A TAX-EQUIVALENT yield shows the approximate taxable yield that would have
to be earned before taxes to equal a tax-free yield. A tax-equivalent yield is
calculated by dividing the shares' tax-exempt yield by the result of one minus a
stated federal and/or state tax rate. If only a portion of a Portfolio's income
was tax-exempt, only that portion is adjusted in the calculation.

For additional performance information, please call 1-800-624-4116 (inside
Maryland 1-800-638-7751) to request a Statement of Additional Information and
Annual Report.

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<PAGE> 78

PORTFOLIO TRANSACTIONS AND VALUATION
- --------------------------------------------------------------------------------

Subject to the general supervision of the Board of Trustees, a Portfolio's
adviser is responsible for placing orders for securities transactions.
Transactions in debt securities are expected to occur primarily with issuers,
underwriters or major dealers acting as principals. Such transactions are
normally effected on a net basis and do not involve payment of brokerage
commissions. Transactions involving equity securities will normally be conducted
through brokerage firms entitled to receive commissions for effecting such
transactions. The Portfolios have no obligation to enter into securities
transactions with any particular dealer, issuer, underwriter or other entity. In
placing orders for the Portfolios, it is the policy of the advisers to obtain
the most favorable execution. Where such execution may be obtained from more
than one broker or dealer, securities transactions may be directed at higher
commission rates to those who provide research, statistical and other
information to the adviser. If more than one account managed by an adviser is
purchasing or selling the same security, such orders may be aggregated in the
interest of achieving the most favorable execution.

The frequency of portfolio transactions or the portfolio turnover rate will
vary from year to year depending on market conditions. The annual portfolio
turnover rate for the Equity Index Portfolio is not expected to exceed 50%. For
the fiscal year ended April 30, 1997, the portfolio turnover rate for the Income
Portfolio and Small-Cap Portfolio were higher than for the prior fiscal year due
to market volatility during the period, liquidations related to share
redemptions and the realignment of certain portfolio investments. It is
anticipated that the portfolio trading engaged in by the Value Equity Portfolio,
International Equity Selection Portfolio, Short-Term Bond Portfolio and U.S.
Government Bond Portfolio will not result in annual rates of portfolio turnover
exceeding 100%. However, the underlying funds purchased by the International
Equity Selection Portfolio may experience much higher portfolio turnover rates
resulting in higher brokerage commissions, and taxable gains or losses. Because
a higher turnover rate increases transaction costs and may increase taxable
capital gains, the advisers carefully weigh the anticipated benefits of
short-term investing against these consequences.

VALUATION. The net asset value of the Institutional Class shares of each
Portfolio is calculated by adding the Institutional Class' pro rata share of the
value of all securities and other assets attributable to a Portfolio, deducting
the Institutional Class' pro rata share of Portfolio-level liabilities,
deducting Institutional Class-specific liabilities, and dividing the result by
the number of Institutional Class shares outstanding. Assets of the money market
Portfolios are valued based upon the amortized cost method. Assets of the other
Portfolios that are traded on an exchange or in the over-the-counter market are
valued based upon market quotations. Other assets for which market quotations
are not readily available are valued by an independent pricing service approved
by the Board of Trustees. Foreign securities held by a Portfolio are valued on
the basis of quotations from the primary U.S. market in which they are traded
or, if not traded on a U.S. market,

29
<PAGE> 79

then their primary foreign market and are translated from foreign market
quotations into U.S. dollars using current exchange rates.

PRICING OF SHARES. The Portfolios are open for business and the net asset
values of their shares are calculated each day the New York Stock Exchange
("NYSE") and the Federal Reserve Bank of New York are open ("Business Day"). An
investor's purchase will be processed at the net asset value next calculated
after the order is received and accepted by the Fund's transfer agent. The net
asset values of the Portfolios (other than the money market Portfolios) are
determined at the close of business of the NYSE, normally 4:00 p.m. Eastern Time
("4:00 p.m."). The net asset values of the U.S. Treasury Money Market Portfolio
and Tax-Free Money Market Portfolio are determined as of 12:00 noon Eastern Time
("12:00 noon") and the close of business of the NYSE, normally 4:00 p.m. The net
asset values of the U.S. Government Money Market Portfolio and Money Market
Portfolio are determined as of 5:00 p.m. Eastern Time ("5:00 p.m.").

PURCHASES, EXCHANGES AND REDEMPTIONS
- --------------------------------------------------------------------------------

OPENING AN ACCOUNT. Institutional Class shares are sold without a sales
charge and are currently available only to individuals, institutions and other
entities that have established trust, custodial or money management
relationships with First National Bank of Maryland ("First Maryland"), its
affiliated banks (including Allied Irish Banks, p.l.c. and its affiliates), or
its correspondent banks or their affiliated banks ("qualified accounts"). An
initial investment in Institutional Class shares must be preceded or accompanied
by the establishment of a qualified account. This may require that certain
documents and applications be signed before an investment can be made. Fees may
be charged in addition to those described herein based upon agreements for those
qualified accounts. Fee schedules and agreements for opening qualified accounts
are available upon request by calling 1-800-624-4116 (inside Maryland
1-800-638-7751).

The minimum initial investment required to establish a new account is $100,000.
After meeting this requirement, a registered shareholder must, within six
months, reach and maintain an aggregate balance of $250,000. Accounts of
individual investors or trusts maintained in a master account of a bank or other
institution may be aggregated for this purpose. Subsequent investments may be
made in any amount. Shareholders of record whose aggregate account balance falls
below $250,000 due to redemption may be automatically redeemed upon 30 days'
notice.

PURCHASING SHARES
- --------------------------------------------------------------------------------

MONEY MARKET PORTFOLIOS. Payments for Institutional Class shares of a money
market Portfolio must be made by Federal Funds wire or other funds immediately
available to the Portfolio. An order for the purchase of shares will become
effective on the day of receipt of the order by the Fund's transfer agent, and
the shares purchased will be entitled to that day's dividend, if the order,
together with available funds, is received prior to 12:00 noon (for the U.S.
Treasury Money Market Portfolio and Tax-Free Money Market Portfolio) or 5:00
p.m. (for the Money Market Portfolio and U.S. Government Money Market
Portfolio). If a purchase order, together with available funds, is received
after 12:00 noon but before 4:00 p.m., it will be processed at the net asset
value determined at 4:00 p.m. and the shares purchased will begin earning
dividends the following

30
<PAGE> 80

Business Day. If an order or payment is received after 4:00 p.m. (for the U.S.
Treasury Money Market Portfolio and Tax-Free Money Market Portfolio) or 5:00
p.m. (for the Money Market Portfolio and U.S. Government Money Market
Portfolio), an investor will receive the net asset value next determined on the
following Business Day.

OTHER PORTFOLIOS. Purchase orders for Institutional Class shares of a fixed
income or equity Portfolio must be received before 4:00 p.m. any Business Day in
order to receive the net asset value determined on that day and to be eligible
for dividends the next Business Day. Any orders received after 4:00 p.m. will
receive the net asset value next determined on the following Business Day.
Payment for purchases is expected at the time of the purchase order but must be
received within three Business Days of the date of the purchase order. If funds
are not received within three Business Days, the order may be canceled and
notice thereof provided to the party placing the order. Any fees or losses
incurred due to cancellation of a purchase order may be the responsibility of
the party placing the order.

When the NYSE or the Federal Reserve Bank of New York closes early, the
Fund reserves the right to advance the time on any such day by which purchase
orders must be received.

The Fund and its distributor reserve the right to reject any purchase
order.

OTHER INFORMATION
- --------------------------------------------------------------------------------

It is anticipated that First Maryland will be the holder of record for all
Institutional Class shares held through qualified accounts. First Maryland, at
least quarterly, will provide each client who is a beneficial owner of the
shares, a statement showing details of all transactions effected on behalf of
such client in shares, including the then-current balance of full and fractional
shares. No certificates representing Institutional Class shares will be issued.

Shareholders may instruct First Maryland to purchase Institutional Class
shares automatically at intervals established by the shareholder. Additional
fees may be charged by First Maryland for this and other services, including
cash sweeps. For more complete information concerning these services and
associated fees, please call 1-800-624-4116 (inside Maryland 1-800-638-7751).

The services rendered by First Maryland in the management of its accounts
are not duplicative of any of the services for which the advisers are
compensated for managing and advising the Portfolios. The charges paid by
clients of First Maryland or its affiliates should be considered in calculating
the net yield or total return on investments in the Institutional Class shares.
Clients of First Maryland and its affiliates should read this Prospectus in
connection with those documents that govern the qualified-account program in
which each client participates.

It is the responsibility of each financial institution to transmit orders
to purchase, redeem or exchange shares to the transfer agent before the
next-determined net asset value calculation in

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<PAGE> 81

order to receive the next-determined share price. The transfer agent must
receive payment within three Business Days after an order is placed. Otherwise,
the purchase order may be canceled and the financial institution could be held
liable for resulting fees and/or losses.

DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------

Each money market Portfolio declares dividends daily and pays them monthly.
Income dividends for the Short-Term Treasury Portfolio, Short-Term Bond
Portfolio, U.S. Government Bond Portfolio, Intermediate Fixed Income Portfolio,
Income Portfolio, Maryland Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio
and Equity Income Portfolio are declared and paid monthly; for the Balanced
Portfolio, Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity
Portfolio and Stock Portfolio dividends are declared and paid quarterly; and for
the Capital Growth Portfolio, Small-Cap Portfolio (formerly Special Equity
Portfolio), International Equity Selection Portfolio and International Equity
Portfolio dividends are declared and paid annually. Commencing March 1, 1998,
income dividends on all Portfolios will be declared daily and paid daily,
monthly, quarterly or annually, as the case may be. Net realized capital gains,
if any, for any Portfolio are declared and paid at least annually.

The following distribution options are available to shareholders:

A. The SHARE OPTION reinvests dividends and capital gain distributions, if
any, in additional shares. This option will be assigned automatically if no
choice is specified on the account application. Dividends and distributions will
be reinvested at the net asset value as of the payment date for the
distribution.

B. The INCOME-EARNED OPTION reinvests capital gain distributions and pays
income dividends in cash.

C. The CASH OPTION pays dividends and capital gain distributions in cash.
Distribution checks will be mailed no later than seven days after the last day
of the month, quarter or year.

If you select Option B or C and the U.S. Postal Service cannot deliver the
checks, or if the checks remain uncashed for six months, distributions will be
reinvested in the account at the then-current net asset value and your election
will be converted to the Share Option.

EXCHANGING SHARES
- --------------------------------------------------------------------------------

An exchange is a convenient way to buy and sell shares of another Portfolio
registered in your state. Institutional Class shares of a Portfolio may be
exchanged for Institutional Class shares of another Portfolio. The redemption
will be made at the net asset value of the shares to be redeemed next determined
after the exchange request is received by the transfer agent.

32
<PAGE> 82

shareholders if, in the adviser's judgment, the Portfolio would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected. The Fund also reserves the
right to reject any specific purchase order, including certain purchases by
exchange.

An exchange between the Institutional Class and the Retail Class or
Institutional II Class of any Portfolio is generally not permitted, except that
an exchange to the Retail Class of a Portfolio will occur should an investor
become ineligible to purchase Institutional Class shares (except in the case of
a Portfolio which is not currently offering Retail Class shares). The Fund will
provide 30 days' notice of any such exchange. The exchange will take place at
net asset value, without the imposition of any sales load, fee, or other charge.
After the exchange, the exchanged shares will be subject to all fees applicable
to the Retail Class. If a shareholder declines to accept the exchange, and if
the shareholder does not meet the requirements for investing in Institutional
Class shares, the Fund reserves the right to redeem the shares upon expiration
of the 30-day period. The Fund reserves the right to require shareholders to
complete an application or other documentation in connection with the exchange.
The Fund has received a private letter ruling from the Internal Revenue Service
which provides that exchanges of shares of one class of a Portfolio for shares
of another class of the same Portfolio will not constitute taxable events.

REDEEMING SHARES
- --------------------------------------------------------------------------------

Shareholders may redeem all or a portion of their Institutional Class
shares by mail or telephone. A shareholder may redeem shares on each Business
Day. Shares will be redeemed at the net asset value next determined after the
Fund's transfer agent has received and accepted a redemption request. Shares of
a money market Portfolio redeemed at 12:00 noon (for the U.S. Treasury Money
Market Portfolio and Tax-Free Money Market Portfolio) or 5:00 p.m. (for the U.S.
Government Money Market Portfolio and Money Market Portfolio) do not earn the
dividend declared on the day of the redemption. With respect to the other
Portfolios, shares will be eligible to earn dividends through the date of
redemption; however, shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next Business Day.

BY MAIL. To redeem by mail send a written request to The First National
Bank of Maryland, Trust Division [Banc #101-621], P.O. Box 1596, Baltimore, MD
21203.

The signatures on the written request must be properly guaranteed.
Signature guarantees will be accepted from banks, brokers, dealers, municipal
securities dealers and brokers, government securities dealers and brokers,
credit unions (if authorized under state law), national securities exchanges,
registered securities associations, clearing agencies and savings associations.

BY TELEPHONE. To redeem by telephone call 1-800-624-4116 (inside Maryland
1-800-638-7751).

With respect to the money market Portfolios, under normal circumstances, if
the request for redemption is received by 12:00 noon (for the U.S. Treasury
Money Market Portfolio and Tax-Free Money Market Portfolio) or 1:30 p.m. (for
the U.S. Government Money Market Portfolio and Money Market Portfolio) on any
Business Day, the redemption proceeds will be wired via Federal Funds on the
same day. If, under normal circumstances, the request is received after 12:00
noon or

33
<PAGE> 83

1:30 p.m., respectively, and before 4:00 p.m., on a Business Day, that day's
dividend will be received and the redemption proceeds will be wired the next
Business Day. With respect to the other Portfolios, under normal circumstances,
if a redemption request is received before 4:00 p.m. on a Business Day, the
redemption proceeds will be wired via Federal Funds on the next Business Day.
When the NYSE or the Federal Reserve Bank of New York closes early, the Fund
reserves the right to advance the time on that day by which redemption orders
must be received.

Although at present First Maryland pays the wire costs involved, the Fund
reserves the right at any time to require the investor to pay such costs.

If all shares of a Portfolio in an account are redeemed, the shareholder
will receive, in addition to the value thereof, any declared but unpaid
distributions thereon at the beginning of the following month.

MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------

INVESTMENT ADVISERS
- --------------------------------------------------------------------------------

Allied Investment Advisors, Inc., 100 E. Pratt Street, Baltimore, MD 21202,
provides investment advisory services to each Portfolio other than the
International Equity Portfolio. AIB Investment Managers Limited, AIB Investment
House, Percy Place, Dublin 4, Ireland, provides investment advisory services to
the International Equity Portfolio. Investment advisory services are provided
subject to the general supervision of the Board of Trustees. The adviser, in its
sole discretion, may waive all or any portion of its advisory fee for a
Portfolio. Any such voluntary waiver will increase the

34
<PAGE> 84

Portfolio's yield for the period during which the waiver is in effect. The
adviser to a Portfolio is entitled to receive for its advisory services payment
at an annual rate based on the following fee schedule:

<TABLE>
<CAPTION>
FEE (AS A PERCENTAGE
PORTFOLIO OF AVERAGE NET ASSETS)
---------------------------------------------------------- ----------------------
<S> <C>
Money Market Portfolios................................... .25%
Short Term Treasury Portfolio............................. .80%
Short-Term Bond Portfolio................................. .75%
U.S. Government Bond Portfolio............................ .75%
Intermediate Fixed Income Portfolio....................... .60%
Income Portfolio.......................................... .60%
Maryland Tax-Free Portfolio............................... .65%
Pennsylvania Tax-Free Portfolio........................... .65%
Balanced Portfolio........................................ .65%
Equity Income Portfolio................................... .70%
Equity Index Portfolio.................................... .20%
Blue Chip Equity Portfolio................................ .70%
Mid-Cap Equity Portfolio.................................. .80%
Value Equity Portfolio.................................... 1.00%
Stock Portfolio........................................... .70%
Capital Growth Portfolio.................................. .70%
Small-Cap Portfolio....................................... .80%
International Equity Selection Portfolio.................. .65%
International Equity Portfolio............................ .80%
</TABLE>

Allied Investment Advisors, Inc. is a wholly-owned subsidiary of First
National Bank of Maryland ("First Maryland"). First Maryland, established in
1806, is a wholly-owned subsidiary of First Maryland Bancorp, a bank holding
company registered under the Federal Bank Holding Company Act of 1956. First
Maryland Bancorp is a subsidiary of Allied Irish Banks, p.l.c. which, together
with its subsidiaries, is Ireland's leading banking and financial services
organization. See "Banking Law Matters". Allied Investment Advisors, Inc. was
organized in 1995 to manage assets and provide research services for the Trust
Division of First Maryland, which previously served as investment adviser to the
Portfolios. It provides investment management and advisory services to
individual, corporate and institutional clients, pension plans, common and
collective trust funds, and mutual funds. Officers, portfolio managers and
investment analysts of Allied Investment Advisors, Inc. previously served in
comparable capacities for the Trust Division of First Maryland. As of December
31, 1997, Allied Investment Advisors, Inc. had assets under management of
approximately $ billion.

35
<PAGE> 85

PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------

Susan S. Schnaars is a Principal of Allied Investment Advisors, Inc. and
manager of the Intermediate Fixed Income Portfolio, Maryland Tax-Free Portfolio
and Pennsylvania Tax-Free Portfolio. Ms. Schnaars is also responsible for
managing several commingled funds (taxable and tax-free) and several large
institutional accounts. Prior to 1992, Ms. Schnaars managed institutional and
commingled fixed-income portfolios, including the RAF Fixed Income Fund, for PNC
Investment Management and Research (formerly known as Provident National Bank).
Ms. Schnaars is a Chartered Financial Analyst and a Certified Public Accountant.

36
<PAGE> 86

market portfolios, and is responsible for analyzing and trading various fixed
income securities. Prior to joining Allied Investment Advisors, Inc. he was an
investment executive with the Treasury Banking Group of First National Bank of
Maryland.

Clyde L. Randall is a Principal of Allied Investment Advisors, Inc. and
co-manager, with Mr. Ashcroft, of the Equity Income Portfolio and Blue Chip
Equity Portfolio. Prior to March 1995, Mr. Randall was an equity analyst and
portfolio manager for more than five years at Mercantile Safe Deposit and Trust,
Baltimore, Maryland. Mr. Randall is a Chartered Financial Analyst.

H. Giles Knight is a Principal of Allied Investment Advisors, Inc. and
manager of the Stock Portfolio and Small-Cap Portfolio (formerly Special Equity
Portfolio). Prior to joining First Maryland, Mr. Knight was with ASB Capital
Management, a subsidiary of NationsBank, from 1990 to 1994. He was Director of
Special Equity Investments, Capital Markets Division, where he was responsible
for one mutual fund and six employee benefit and personal trust common stock
funds.

Christopher E. Baggini is a Principal of Allied Investment Advisors, Inc.
and co-manager, with Mr. Baker, of the Mid-Cap Equity Portfolio and manager of
the Capital Growth Portfolio. Prior to joining First Maryland, Mr. Baggini
served as portfolio manager and research analyst for First Metropolitan
Development Corporation. He has over nine years of experience in investment
management, including more than four years at Salomon Brothers with
responsibilities in equity research, sales and trading. Mr. Baggini is a
Chartered Financial Analyst.

Brett A. Hoffacker is a Principal of Allied Investment Advisors, Inc. and
the manager of the International Equity Selection Portfolio. Prior to 1997, he
was a Vice President of Dauphin Deposit

37
<PAGE> 87

Bank and Trust Company responsible for managing four equity funds as well as
various individual institutional, employee benefit and personal trust
portfolios. Mr. Hoffacker is a Certified Financial Planner and Certified
Retirement Plan Specialist.

Investment personnel may invest in securities for their own account
pursuant to a code of ethics that establishes procedures for personal investing
and restricts certain transactions.

ADMINISTRATOR

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

DISTRIBUTION AND SHAREHOLDER SERVICES

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

SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley
Drive, Oaks, PA 19456, a wholly-owned subsidiary of SEI Investments Company,
serves as the distributor for the Fund pursuant to a distribution agreement with
the Fund. The Distributor, a Pennsylvania corporation incorporated on July 20,
1981, is a broker-dealer registered under the Securities Exchange Act of 1934
and a member of the National Association of Securities Dealers, Inc. The
Distributor sells shares of each Portfolio as agent on behalf of the Fund. The
Distributor is the principal underwriter of the Fund. First Maryland and its
affiliates neither participate in nor are responsible for the underwriting of
the shares of the Fund.

38
<PAGE> 88

Under a shareholder services plan in effect with respect to the
Institutional Class of each Portfolio, the Institutional Class of a Portfolio
may pay shareholder services fee at an annual rate of up to .15% of the average
net assets of the Institutional Class shares. The Board of Trustees has approved
an annual shareholder servicing fee rate of .06% of the average net assets of
the Institutional Class of each Portfolio.

All or any portion of the shareholder services fee for a Portfolio may be
waived at any time. Any such voluntary waiver, which can be discontinued at any
time, will increase the Portfolio's yield for the period during which the waiver
is in effect.

TRANSFER AGENT
- --------------------------------------------------------------------------------

CUSTODIAN
- --------------------------------------------------------------------------------

BANKING LAW MATTERS
- --------------------------------------------------------------------------------

Banking laws and regulations generally permit a bank or bank affiliate to
act as an investment adviser and to purchase shares of an investment company as
agent for and upon the order of a customer. However, banking laws and
regulations, including the Glass-Steagall Act as currently interpreted by the
Board of Governors of the Federal Reserve System, prohibit a bank holding
company registered under the Federal Bank Holding Company Act of 1956 or any
affiliate thereof from sponsoring, organizing, controlling or distributing the
shares of a registered, open-end investment company continuously engaged in the
issuance of its shares, and prohibit banks generally from issuing, underwriting,
selling or distributing securities. Upon advice of legal counsel, the advisers
believe that they may perform the advisory services described in this Prospectus
for

39
<PAGE> 89

the Portfolios and their shareholders without violating applicable federal
banking laws or regulations.

Judicial or administrative decisions or interpretations of, as well as
changes in, either federal or state statutes or regulations relating to the
activities of banks and their affiliates could prevent a bank or bank affiliate
from continuing to perform all or a part of the activities contemplated by this
Prospectus. If banks or bank affiliates were prohibited from so acting, changes
in the operation of the Fund might occur. It is not anticipated, however, that
any such change would affect the net asset value of the Portfolios' shares or
result in any financial loss to any shareholder.

TAX MATTERS
- --------------------------------------------------------------------------------

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio intend to pay substantially all of their
respective dividends as "exempt interest dividends". Investors in these
Portfolios should note, however, that taxpayers are required to report the
receipt of tax-exempt interest and "exempt interest dividends" in their federal
income tax returns and that in two circumstances such amounts, while exempt from
regular federal income tax, are taxable to persons subject to alternative
minimum tax. Alternative minimum tax is currently imposed at a maximum marginal
rate of 28% in the case of non-corporate taxpayers and at the rate of 20% in the
case of corporate taxpayers. First, tax-exempt interest and "exempt interest
dividends" derived from certain private activity bonds issued after August 7,
1986 will generally constitute an item of tax preference for corporate and
non-corporate taxpayers in determining alternative minimum tax liability. The
Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and Pennsylvania
Tax-Free Portfolio intend to avoid investing their assets in such private
activity bonds but may do so if required by market conditions. Second,
tax-exempt interest and "exempt interest dividends" derived from all municipal
securities must be taken into account by corporate taxpayers in determining
their adjusted current earnings adjustments for alternative minimum tax
purposes. Realized market discount on tax-exempt obligations purchased after
April 30, 1993 is treated as ordinary income and not as capital gain.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should further note that tax-exempt interest and "exempt interest
dividends" will be taken into account in determining the taxability of their
benefit payments.

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio will determine annually the percentage of their
respective net investment incomes that is fully tax-exempt, the percentage which
constitutes an item of tax preference for alternative minimum tax purposes and
the percentage that is fully taxable, and will apply such percentages uniformly
to all distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.

40
<PAGE> 90

The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each Portfolio.

Shareholders are urged to consult their tax advisers concerning their own
tax situation, including the application of state and local income taxes to
investments in a Portfolio.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

41
<PAGE> 91

although special meetings may be called for the purpose of voting on certain
changes in the operations of a Portfolio or the Fund, or for the election or
removal of Trustees under certain circumstances.

The Fund is composed of the following twenty-two separately managed
Portfolios: U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Money Market Portfolio, Tax-Free Money Market Portfolio, Short-Term
Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio, Pennsylvania Tax-Free Portfolio, Balanced Portfolio, Equity Income
Portfolio, Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity
Portfolio, Value Equity Portfolio, Stock Portfolio, Capital Growth Portfolio,
Small Cap Portfolio (formerly Special Equity Portfolio), International Equity
Selection Portfolio and International Equity Portfolio. The Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio are non-diversified Portfolios;
the remaining Portfolios are diversified Portfolios.

The Board of Trustees of the Fund has established three classes of shares
of each money market Portfolio and two classes of shares of each other
Portfolio. You may obtain more information on the classes of shares not offered
through this Prospectus by calling 1-800-624-4116 (inside Maryland
1-800-638-7751).

42
<PAGE> 92

APPENDIX
- --------------------------------------------------------------------------------

ASSET-BACKED SECURITIES. Asset-backed securities which consist of undivided
fractional interests in pools of consumer loans (unrelated to mortgage loans)
held in a trust. Payments of principal and interest are passed through to
certificate holders and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
senior subordination. The degree of credit enhancement varies, but generally
amounts to only a fraction of the security's par value until exhausted. If the
credit enhancement is exhausted, certificate holders may experience losses or
delays in payment if the required payments of principal and interest are not
made to the trust with respect to the underlying loans. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, or the financial institution providing the credit enhancement.
Asset-backed securities are ultimately dependent upon payment of consumer loans
by individuals, and the certificate holder generally has no recourse to the
entity that originated the loans. The underlying loans are subject to
prepayments which shorten the securities' weighted average life and may lower
their return. (As prepayments flow through at par, total returns would be
affected by the prepayments: if a security were trading at a premium, its total
return would be lowered by prepayments, and if a security were trading at a
discount, its total return would be increased by prepayments.)

BANK OBLIGATIONS. Bank obligations include: bankers' acceptances which are
negotiable obligations of a bank to pay a draft which has been drawn on it by a
customer; certificates of deposit which are negotiable certificates representing
a commercial bank's obligation to repay funds deposited with it, earning
specified rates of interest over given periods or issued at a discount; and time
deposits which are non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.

COMMERCIAL PAPER. Commercial paper is an obligation issued by a bank,
broker-dealer, corporation and other entities for purposes such as financing its
current operations.

HEDGING STRATEGIES. The advisers, to the extent permitted by the investment
policies and limitations of a Portfolio, may buy and sell options on securities,
currencies, futures contracts and options on such contracts ("Hedging
Instruments") to manage exposure to changing interest rates,

43
<PAGE> 93

security prices, and currency exchange rates. Some strategies using these
instruments, including selling futures, buying puts and writing calls, tend to
hedge a Portfolio's investments against price fluctuations. Other strategies,
including buying futures, writing puts and buying calls, tend to increase market
exposure. Hedging Instruments may be used in combination with each other or with
forward currency contracts in order to adjust the risk and return
characteristics of the overall strategy. A Portfolio may invest in Hedging
Instruments based on any type of security, index, or currency, including options
and futures traded on foreign exchanges and options not traded on exchanges.
These strategies may increase the volatility of a Portfolio and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these strategies could result in a loss to a Portfolio if the
counterparty to the transaction does not perform as promised.

Hedging Instruments can be volatile investments and involve certain risks.
If an adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, use of Hedging Instruments may lower a Portfolio's
return. A Portfolio could also experience a loss if the prices of its options
and futures positions were poorly correlated with its other investments, or if
it could not close out its positions because of an illiquid secondary market.

Under normal conditions no Portfolio will hedge more than 25% of its total
assets by selling futures, writing calls, and buying puts. In addition, a
Portfolio will not buy futures or write puts where the value of the underlying
investment exceeds 25% of its total assets and a Portfolio will not buy calls
with a value exceeding 5% of its total assets.

INDEXED SECURITIES. Indexed securities are derivative securities whose
value depends on the price of securities indices, or other financial indicators.
These include commercial paper and certificates of deposit. These securities may
be positively or negatively indexed; that is, their value may increase or
decrease if the underlying instrument appreciates. Some indexed securities may
be based on underlying instruments whose total value is greater than the value
of the indexed security itself. Some indexed securities may have return
characteristics similar to direct investments in the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.

44
<PAGE> 94

Mortgage-backed bonds are general obligations of their issuers, payable out of
the issuers' general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities exhibit characteristics of both
pass-throughs and mortgage-backed bonds. Mortgage-backed securities also include
other debt obligations secured by mortgages on commercial real estate or
residential properties. The value of mortgage-backed securities may change due
to shifts in the market's perception of issuers. In addition, regulatory or tax
changes may adversely affect the mortgage securities market as a whole.
Non-government mortgage-backed securities may offer higher yields than those
issued by government entities, but also may be subject to greater price changes
than government issues. Because mortgage securities pay both principal and
interest as their underlying mortgages are paid off, they are subject to
pre-payment risk. Pre-payment, which occurs when unscheduled or early payments
are made on the underlying mortgages, may shorten the effective maturities of
these securities and may lower their total returns. Finally, the value of a
mortgage security may be affected by changes in market interest rates.

MUNICIPAL OBLIGATIONS. Municipal obligations are issued to raise money for
a variety of public or private purposes, including general financing for state
and local governments, or financing for specific projects or public facilities.
They may be issued in anticipation of future revenues, and may be backed by the
full taxing power of a municipality, the revenues from a specific project or the
credit of a private organization. The value of some or all municipal securities
may be affected by uncertainties in the municipal market related to legislation
or litigation involving the taxation of municipal securities or the rights on
municipal securities holders. A Portfolio may own a municipal security directly
or through a participation interest.

REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously commits to resell that security back at
a higher price. In the event of bankruptcy of the other party to either a
repurchase agreement, a Portfolio could experience delays in recovering its
cash. To the extent, in the meantime, the value of the securities purchased had
decreased, the Portfolio could experience a loss. In all cases, the adviser must
find the creditworthiness of the other party to the transaction satisfactory.
The International Equity Portfolio may enter into foreign repurchase agreements,
which may be less well secured than U.S. repurchase agreements, and may be
denominated in foreign currencies. They may involve greater risk of loss if the
counterparty defaults. Some counterparties in these transactions may be less
creditworthy than those in U.S. markets.

SECURITIES LENDING. The Short-Term Treasury Portfolio, Short-Term Bond
Portfolio, U.S. Government Bond Portfolio, Intermediate Fixed Income Portfolio
and Income Portfolio may lend securities to parties such as broker-dealers or
institutional investors. Securities lending allows a Portfolio to retain
ownership of the securities loaned and, at the same time, to earn income. Since
there may be delays in the recovery of loaned securities, or even a loss or
rights in collateral

45
<PAGE> 95

supplied should the borrower fail financially, loans will be made only to
parties whose creditworthiness has been reviewed and found satisfactory by the
Portfolio's adviser.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities may be backed by the
full faith and credit of the U.S. government as a whole or only by the issuing
agency. For example, securities issued by the Federal Home Loan Banks and the
Federal Home Loan Mortgage Corporation are supported only by the credit of the
issuing agency, and not by the U.S. government. Securities issued by the Federal
Farm Credit System, the Federal Land Banks and the Federal National Mortgage
Association are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. U.S. Treasury securities and some agency
securities, such as those issued by the Federal Housing Administration and the
Government National Mortgage Association, are backed by the full faith and
credit of the U.S. government and are the highest quality government securities.

WARRANTS. Warrants entitle the holder to buy equity securities at a
specific price for a specific period of time. Warrants may be considered more
speculative than certain other types of investments because they do not entitle
a holder to dividends or voting rights with respect to the securities that may
be purchased, nor do they represent any rights in the assets of the issuing
company. The value of a warrant may be more volatile than the value of the
securities underlying the warrants. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.

WHEN-ISSUED TRANSACTIONS. The market value of securities purchased on a
when-issued or delayed-delivery basis may change before the delivery date, which
could affect the market value of the assets and could increase fluctuations in a
Portfolio's share price, yield and return. Ordinarily, a Portfolio will not earn
interest on the securities purchased until they are delivered.

46
<PAGE> 96

ADDITIONAL INVESTMENTS FOR THE TAX-FREE MONEY MARKET, MARYLAND TAX-FREE AND
PENNSYLVANIA TAX-FREE PORTFOLIOS
- --------------------------------------------------------------------------------

REFUNDING CONTRACTS. The Portfolios may purchase securities on a
when-issued basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and a Portfolio to
buy refunded municipal obligations at a stated price and yield on a settlement
date that may be several months or several years in the future. Although a
Portfolio may sell its rights under a refunding contract, these contracts are
relatively new and the secondary market for them may be less liquid than the
secondary market for other types of municipal securities.

47
<PAGE> 97
ARK FUNDS: INSTITUTIONAL II CLASS

U.S. TREASURY MONEY MARKET PORTFOLIO
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
MONEY MARKET PORTFOLIO
TAX-FREE MONEY MARKET PORTFOLIO

CROSS REFERENCE SHEET

Form N-1A Item Number

<TABLE>
<CAPTION>
Part A Prospectus Caption
<S> <C>
1 ........................Cover Page
2 ........................Fees and Expenses
3 a,b.....................Financial Highlights
c........................Performance
4 a(i)....................General Information
a(ii),b,c................Investment Objectives and Policies; Risks
to Consider
5 a,b,c,d,e,f.............Management of the Fund
g........................Portfolio Transactions and Valuation
5A........................*
6 a.......................General Information
b,c,d....................*
e........................General Information
f,g......................Portfolio Transactions and Valuation; Tax Matters
h........................General Information
7 a.......................Purchases, Exchanges and Redemptions
b(i),(ii)................Portfolio Transactions and Valuation
b(iii,iv,v),c............*
d........................Purchases, Exchanges and Redemptions
e, f(i),(ii).............Management of the Fund
f(iii)...................*
8 ........................Purchases, Exchanges and Redemptions
9 ........................*
</TABLE>

* Not applicable.
<PAGE> 98

ARK FUNDS -- INSTITUTIONAL II CLASS
- --------------------------------------------------------------------------------
PROSPECTUS

JANUARY , 1998

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

U.S. TREASURY MONEY MARKET PORTFOLIO, U.S. GOVERNMENT MONEY MARKET PORTFOLIO and
MONEY MARKET PORTFOLIO each seek to maximize current income and provide
liquidity and security of principal by investing in high-quality, short-term,
U.S. dollar-denominated debt securities. TAX-FREE MONEY MARKET PORTFOLIO seeks
to provide a high level of interest income by investing in high-quality
municipal obligations that are exempt from federal income taxes. Each portfolio
seeks to maintain a constant net asset value per share of $1.00.

Institutional II Class shares are offered through this Prospectus only to
individuals, institutions and other entities that direct their own investments
and have established trust relationships with First National Bank of Maryland
("First Maryland"), its affiliated banks (including Allied Irish Banks, p.l.c.
and its affiliates), or its correspondent banks or their affiliated banks.

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

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, FIRST MARYLAND OR ANY DEPOSITARY INSTITUTION, AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENT AGENCY. INVESTING IN THE SHARES INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.

This Prospectus is designed to provide investors with information that they
should know before investing. Please read and retain it for future reference. A
Statement of Additional Information dated January , 1998, Annual Report
(including financial statements for the fiscal year ended April 30, 1997) and
Semi-Annual Report (including financial statements for the six months ended
October 31, 1997 (unaudited)) have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information, Annual Report and Semi-Annual Report, and additional information
about the classes of shares not offered through this Prospectus, is available
upon request without charge by calling 1-800-624-4116 (inside Maryland
1-800-638-7751).

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

<TABLE>
<S> <C>
Summary................................. 2
Fees and Expenses....................... 3
Financial Highlights.................... 4
Investment Objectives and Policies...... 5
Additional Investment Policies and
Limitations........................... 8
Performance............................. 9
Portfolio Transactions and Valuation.... 9
Purchases, Exchanges and Redemptions.... 10
Management of the Fund.................. 14
Tax Matters............................. 16
General Information..................... 17
Appendix................................ 19
</TABLE>

SUMMARY
- --------------------------------------------------------------------------------

U.S. TREASURY MONEY MARKET PORTFOLIO -- seeks to maximize current income
and provide liquidity and security of principal by investing in instruments
which are insured or guaranteed as to principal and interest by the U.S.
government and thus constitute direct obligations of the United States.

U.S. GOVERNMENT MONEY MARKET PORTFOLIO -- seeks to maximize current income
and provide liquidity and security of principal by investing in instruments
which are issued or guaranteed as to principal and interest by the U.S.
government or any of its agencies or instrumentalities, or in repurchase
agreements backed by such instruments.

MONEY MARKET PORTFOLIO -- seeks to maximize current income and provide
liquidity and security of principal by investing in a broad range of short-term,
high-quality U.S. dollar-denominated debt securities.

TAX-FREE MONEY MARKET PORTFOLIO -- seeks to provide a high level of
interest income by investing primarily in high-quality municipal obligations
that are exempt from federal income taxes.

INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR. Allied Investment
Advisors, Inc. serves as investment adviser to each of the Portfolios. SEI
Investments Distribution Co. serves as the distributor of the Portfolios' shares
and SEI Fund Resources serves as the Fund's administrator. See "Management of
the Fund".

PURCHASE, EXCHANGE AND REDEMPTION OF SHARES. Institutional II Class shares
of the Portfolios are sold at their net asset value without a sales charge and
are currently available only to certain qualified accounts. Shares of a
Portfolio may be exchanged for shares of another Portfolio. Shareholders may
redeem all or any portion of their shares at the net asset value next determined
after the Fund's transfer agent has received the redemption request. See
"Purchases, Exchanges and Redemptions".

SHAREHOLDER INQUIRIES. Any questions or communications regarding the
Portfolios can be directed to the Fund at 1-800-624-4116 (inside Maryland
1-800-638-7751).

2
<PAGE> 100

FEES AND EXPENSES
- --------------------------------------------------------------------------------

ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INSTITUTIONAL II CLASS
-------------------------------------------------------------
U.S.
TREASURY U.S. GOVERNMENT MONEY TAX-FREE
MONEY MARKET MONEY MARKET MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- --------- -------------
<S> <C> <C> <C> <C>
Advisory Fees (after waivers)(1)............. .19% .14% .11% .09%
12b-1 Fees................................... .10% .10% .10% .10%
Other Expenses(2)............................ .18% .18% .18% .20%
------ ------ --------- ------
Total Operating Expenses (after
waivers)(3)................................ .47% .42% .39% .39%
=========== ============= ======= ===========
</TABLE>

(2) Other expenses are estimated based on amounts incurred during the previous
fiscal year and include all expenses except nonrecurring account fees,
brokerage commissions and other capital items, and advisory and 12b-1 fees.

(3) Absent the voluntary fee waivers described above, total operating expenses
for Institutional II Class shares of the U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Money Market Portfolio
and Tax-Free Money Market Portfolio would be .53%, .53%, .53% and .55%,
respectively.

EXAMPLE
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
----- ------ ------ -------
<S> <C> <C> <C> <C>
U.S. Treasury Money Market Portfolio............. 5 15 26 59
U.S. Government Money Market Portfolio........... 4 13 24 53
Money Market Portfolio........................... 4 13 22 49
Tax-Free Money Market Portfolio.................. 4 13 22 49
</TABLE>

3
<PAGE> 101

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The following table provides information about the financial history of the
Institutional II Class of each Portfolio. The table expresses the information in
terms of a single share outstanding throughout the year or period. The
information for the year ended April 30, 1997 has been audited by KPMG Peat
Marwick LLP, independent auditors for the Fund. Their report on the financial
statements and financial highlights is included in the Annual Report. The
information for the six months ended October 31, 1997 (unaudited) is included in
the Semi-Annual Report. The Annual Report and the Semi-Annual Report are
incorporated by reference into the Statement of Additional Information. The
table should be read in conjunction with the Portfolios' financial statements
and the notes thereto, which may be obtained free of charge from the Fund.

For a Share Outstanding Throughout the Year or Period Ended April 30,

<TABLE>
<CAPTION>
Distri- Ratio of Ratio of
butions Ratio of Net Expenses
Net from Net Net Expenses Investment to Average
Asset Net Asset Assets to Income Net
Value, Net Invest- Value, End of Average to Average Assets
Beginning Investment ment End of Total Period Net Net (Excluding
of Period Income Income Period Return (000) Assets Assets Waivers)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------
1997a
1997 $1.00 0.05 (0.05) $1.00 4.89% $63,496 0.47% 4.79% 0.53%
1996(1) 1.00 0.04 (0.04) 1.00 3.87 47,220 0.47* 4.98* 0.55*
- ----------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- ----------------------------------
1997a
1997 $1.00 0.05 (0.05) $1.00 5.12% $37,284 0.42% 5.01% 0.53%
1996(1) 1.00 0.04 (0.04) 1.00 4.11 17,027 0.41* 5.25* 0.56*
- -------------------
MONEY MARKET PORTFOLIO
- -------------------
1997a
1997 $1.00 0.05 (0.05) $1.00 5.25% $62,960 0.38% 5.14% 0.53%
1996(2) 1.00 0.04 (0.04) 1.00 4.33 28,790 0.36* 5.37* 0.55*
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
1997a
1997 $1.00 0.03 (0.03) $1.00 3.19% $16,727 0.38% 3.14% 0.54%
1996(1) 1.00 0.02 (0.02) 1.00 2.62 9,387 0.33* 3.35* 0.58*
</TABLE>

(a) for the six months ended October 31, 1997 (unaudited)

* Annualized
(1) Commenced operations on July 28, 1995.
(2) Commenced operations on July 21, 1995.

4
<PAGE> 102

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

The Portfolios seek to maximize current income and provide liquidity and
security of principal by investing in high-quality, short-term, U.S.
dollar-denominated instruments determined by the adviser to present minimal
credit risks in accordance with guidelines adopted by the Board of Trustees of
the Fund. The Portfolios limit their investments to securities with remaining
maturities of 397 days or less, and maintain a dollar-weighted average maturity
of 90 days or less. Estimates may be used in determining a security's maturity
for purposes of calculating average maturity. An estimated maturity can be
substantially shorter than a stated final maturity.

By itself no Portfolio constitutes a balanced investment plan. There is no
assurance that a Portfolio will achieve its investment objective.

The Portfolios seek to maintain a stable net asset value per share of $1.00
but there is no assurance that they will be able to do so. Although the
Portfolios' policies are designed to help maintain a stable $1.00 share price,
all money market instruments can change in value when interest rates or issuers'
creditworthiness change, or if an issuer or guarantor of a security fails to pay
interest or principal when due. If these changes in value were large enough, a
Portfolio's share price could fall below $1.00. In general, securities with
longer maturities are more vulnerable to price changes, although they may
provide higher yields.

U.S. TREASURY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the U.S. TREASURY MONEY MARKET PORTFOLIO is to
maximize current income and provide liquidity and security of principal by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government and thus constitute direct obligations of the
United States. As a non-fundamental policy, the Portfolio invests 100% of its
total assets in U.S. Treasury bills, notes and bonds, and limits its investments
to U.S. Treasury obligations that pay interest which is specifically exempt from
state and local taxes under federal law.

5
<PAGE> 103

U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the U.S. GOVERNMENT MONEY MARKET PORTFOLIO is
to maximize current income and provide liquidity and security of principal by
investing in instruments which are issued or guaranteed as to principal and
interest by the U.S. government or any of its agencies or instrumentalities
("U.S. Government Securities"), or in repurchase agreements backed by such
instruments. As a non-fundamental policy, the Portfolio invests 100% of its
total assets in U.S. Government Securities and in repurchase agreements backed
by such instruments. The Portfolio normally may not invest more than 5% of its
total assets in the securities of any single issuer (other than the U.S.
government). Under certain conditions, however, the Portfolio may invest up to
25% of its total assets in first-tier securities of a single issuer for up to
three days.

MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

At least 95% of the assets of the Portfolio will be invested in securities
that have received the highest rating assigned by any two nationally recognized
statistical rating organizations ("NRSROs") or, if only one such rating
organization has assigned a rating, such single organization. Up to 5% of the
Portfolio's assets may be invested in securities that have received ratings in
the second highest category by any two NRSROs or, if only one such rating
organization has assigned a rating, such single organization. The Portfolio may
also acquire unrated securities determined by the adviser to be comparable in
quality to rated securities in accordance with guidelines adopted by the Board
of Trustees. The Portfolio may invest in U.S. dollar-denominated obligations of
U.S. banks and foreign branches of U.S. banks ("Eurodollars"), U.S. branches and
agencies of foreign banks ("Yankee dollars"), and foreign branches of foreign
banks. See the Appendix for more information. The Portfolio may invest more than
25% of its total assets in certain obligations of domestic banks and normally
may not invest more than 5% of its total assets in the securities of any single
issuer (other than the U.S. government). Under certain conditions, however, the
Portfolio may invest up to 25% of its total assets in first-tier securities of a
single issuer for up to three days.

TAX-FREE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

The Portfolio invests in high-quality, short-term municipal securities but
may also invest in high-quality, long-term fixed, variable, or floating rate
instruments (including tender option bonds) which have demand features or
interest rate adjustment features that result in interest rates, maturities,

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<PAGE> 104

and prices similar to short-term instruments. The Portfolio's investments in
municipal securities may include tax, revenue, or bond anticipation notes;
tax-exempt commercial paper; general obligation or revenue bonds (including
municipal lease obligations and resource recovery bonds); and zero coupon bonds.
At least 95% of the assets of the Portfolio will be invested in securities that
have received the highest rating assigned by any two NRSROs or, if only one such
rating organization has assigned a rating, such single organization. The
Portfolio may also acquire unrated securities determined by the adviser to be of
comparable quality in accordance with guidelines adopted by the Board of
Trustees.

Municipal securities are issued to raise money for various public purposes,
including general purpose financing for state and local governments as well as
financing for specific projects or public facilities. Municipal securities may
be backed by the full taxing power of a municipality or by
the revenues from a specific project or the credit of a private organization.
Some municipal securities are insured by private insurance companies, while
others may be supported by ("LOCs") furnished by domestic or foreign banks.

The adviser anticipates that the Portfolio will be as fully invested as is
practicable in municipal obligations. However, the Portfolio reserves the right
for temporary defensive purposes to invest without limitation in taxable Money
Market Instruments. There may be occasions when, as a result of maturities of
portfolio securities or sales of Portfolio shares, or in order to meet
anticipated redemption requests, the Portfolio may hold cash which is not
earning income.

The Portfolio may invest up to 25% of its net assets in a single issuer's
securities. The Portfolio may invest any portion of its assets in industrial
revenue bonds ("IRBs") backed by private companies, and may invest up to 25% of
its total assets in IRBs related to a single industry. The Portfolio also may
invest 25% or more of its total assets in tax-exempt securities whose revenue
sources are from similar types of projects (e.g., education, electric utilities,
health care, housing, transportation, water, sewer, and gas utilities). There
may be economic, business or political developments or changes that affect all
securities of a similar type. Therefore, developments affecting a single issuer
or industry, or securities financing similar types of projects, could have a
significant effect on the Portfolio's performance.

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<PAGE> 105

ADDITIONAL INVESTMENT POLICIES AND LIMITATIONS
- --------------------------------------------------------------------------------

GOVERNMENT SECURITIES. Government Securities include U.S. Treasury bills,
notes and bonds, and obligations issued by federal agencies such as the
Export-Import Bank of the United States, the General Services Administration,
the Government National Mortgage Association and the Small Business
Administration. Obligations issued or guaranteed as to principal and interest by
U.S. government agencies or instrumentalities include instruments issued by the
Federal Home Loan Bank, Federal Farm Credit Bank and Federal National Mortgage
Association.

MONEY MARKET INSTRUMENTS. Money Market Instruments include, but are not
limited to: U.S. Government Securities; custodial receipts evidencing future
interest or principal payments on U.S. Government Securities; obligations of
domestic or foreign banks including bankers' acceptances, time deposits and
certificates of deposit ("CDs"); commercial paper (including variable and
floating rate instruments); corporate obligations; and asset-backed securities
and indexed securities -- each with 397 days or less remaining to maturity.

1. Each Portfolio may not, with respect to 75% of its assets, invest more
than 5% of the total market value of its assets in the securities of any one
issuer (other than U.S. Government Securities) if as a result, (a) more than 5%
of its total assets would be invested in the securities of that issuer, or (b)
it would hold more than 10% of the issuer's outstanding voting securities.
(Under applicable regulations, a money market Portfolio may not invest more than
5% of its total assets in securities of a single issuer unless the securities
are first-tier securities.)

2. Each Portfolio (other than the Money Market Portfolio) may not purchase
a security (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentality's) if, as a result, more than 25% of its
total assets would be invested in securities of a particular industry. The Money
Market Portfolio may invest 25% or more of its assets in obligations of domestic
banks.

3. A Portfolio (a) may borrow money from a bank for temporary or emergency
purposes or by engaging in reverse repurchase agreements, but not in an amount
exceeding 33 1/3% of its total assets, and (b) will not purchase securities when
borrowings (including reverse repurchase agreements) exceed 5% of its total
assets.

4. A Portfolio may not make a loan if more than 33 1/3% of its assets would
be lent to other parties. The U.S. Treasury Money Market Portfolio, U.S.
Government Money Market Portfolio and Tax-Free Money Market Portfolio do not
currently intend to lend portfolio securities.

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<PAGE> 106

PERFORMANCE
- --------------------------------------------------------------------------------

The performance of each class of shares of a Portfolio may be quoted in
advertising in terms of yield, effective yield or total return. In addition, a
tax-equivalent yield may be quoted for shares of the Tax-Free Money Market
Portfolio. All types of performance are based on historical results and are not
intended to indicate future performance.

The YIELD of shares of a Portfolio is calculated by dividing the net
investment income earned by the shares over a 7-day period by the average number
of shares entitled to receive dividends and expressing the result as an
annualized percentage rate based on each share price at the end of the 7-day
period. The EFFECTIVE YIELD is calculated similarly, but assumes that the income
earned from the investment is reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Because yield accounting methods differ from the methods used for
other accounting purposes, the yields of shares of the Portfolios may not equal
their respective distribution rates, the income paid to your account or the
income reported in the financial statements of the Institutional II Class of the
relevant Portfolio.

Each Portfolio may periodically compare its performance to the performance
of other mutual funds tracked by mutual-fund rating services, broad groups of
comparable mutual funds, or unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs. The classes of shares of a Portfolio have different sales
charges and other expenses that may affect performance.

For additional performance information, please call 1-800-624-4116 (inside
Maryland 1-800-638-7751) to request a Statement of Additional Information and
Annual Report.

PORTFOLIO TRANSACTIONS AND VALUATION
- --------------------------------------------------------------------------------

Subject to the general supervision of the Board of Trustees, the adviser is
responsible for placing orders for securities transactions for each Portfolio.
Transactions for the Portfolios are expected to occur primarily with issuers,
underwriters or major dealers acting as principal. Such

9
<PAGE> 107

transactions are normally effected on a net basis and do not involve payment of
brokerage commissions. The Portfolios have no obligation to enter into
securities transactions with any particular dealer, issuer, underwriter or other
entity. In placing orders for the Portfolios, it is the adviser's policy to
obtain the most favorable execution. If more than one account managed by the
adviser is purchasing or selling the same security, such orders may be
aggregated in the interest of achieving the most favorable execution.

VALUATION. The net asset value of the Institutional II Class shares of each
Portfolio is calculated by adding the Institutional II Class' pro rata share of
the value of all securities and other assets attributable to a Portfolio,
deducting the Institutional II Class' pro rata share of Portfolio-level
liabilities, deducting Institutional II Class-specific liabilities and dividing
the result by the number of Institutional II Class shares outstanding. Assets of
the Portfolios are valued based upon the amortized cost method. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. Although each Portfolio seeks
to maintain net asset value of $1.00 for the Institutional II Class shares,
there can be no assurance that this net asset value per share will not vary.

PRICING OF SHARES. The Portfolios are open for business and the net asset
values of their shares are calculated each day the New York Stock Exchange
("NYSE") and the Federal Reserve Bank of New York are open ("Business Day"). An
investor's purchase will be processed at the net asset value next calculated
after the order is received and accepted by the Fund's transfer agent. The net
asset values of the U.S. Treasury Money Market Portfolio and Tax-Free Money
Market Portfolio are determined as of 12:00 noon Eastern Time ("12:00 noon") and
the close of business of the NYSE, normally 4:00 p.m. Eastern Time ("4:00
p.m."). The net asset values of the U.S. Government Money Market Portfolio and
Money Market Portfolio are determined as of 5:00 p.m. Eastern Time ("5:00
p.m.").

PURCHASES, EXCHANGES AND REDEMPTIONS
- --------------------------------------------------------------------------------

OPENING AN ACCOUNT. Institutional II Class shares are sold without a sales
charge and are currently available only to individuals, institutions and other
entities that direct their own investments and have established trust
relationships with First Maryland, its affiliated banks (including Allied Irish
Banks, p.l.c. and its affiliates), or its correspondent banks or their
affiliated banks ("qualified accounts"). An initial investment in Institutional
II Class shares must be preceded or accompanied by the establishment of a
qualified account. This may require that certain documents and applications be
signed before an investment can be made. Fees may be charged in addition to
those described herein based upon agreements for those qualified accounts. Fee
schedules and agreements for opening qualified accounts are available upon
request by calling 1-800-624-4116 (inside Maryland 1-800-638-7751).

The minimum initial investment required to establish a new account is $500.
After meeting this requirement, there is no minimum required account balance.
Subsequent investments may be made in any amount.

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<PAGE> 108

PURCHASING SHARES
- --------------------------------------------------------------------------------

Payments for Institutional II Class shares of a Portfolio must be made by
Federal Funds wire or other funds immediately available to the Portfolio. An
order for the purchase of shares will become effective on the day of receipt of
the order by the Fund's transfer agent, and the shares purchased will be
entitled to that day's dividend, if the order, together with available funds, is
received prior to 12:00 noon (for the U.S. Treasury Money Market Portfolio and
Tax-Free Money Market Portfolio) or 5:00 p.m. (for the Money Market Portfolio
and U.S. Government Money Market Portfolio). If a purchase order, together with
available funds, is received after 12:00 noon but before 4:00 p.m., it will be
processed at the net asset value determined at 4:00 p.m. and the shares
purchased will begin earning dividends the following Business Day. If an order
or payment is received after 4:00 p.m., (for the U.S. Treasury Money Market
Portfolio and Tax-Free Money Market Portfolio) or 5:00 p.m. (for the Money
Market Portfolio and U.S. Government Money Market Portfolio, an investor will
receive the net asset value next determined the following Business Day.

When the NYSE or the Federal Reserve Bank of New York closes early, the
Fund reserves the right to advance the time on any such day by which purchase
orders must be received.

The Fund and its distributor reserve the right to reject any purchase
order.

OTHER INFORMATION
- --------------------------------------------------------------------------------

It is anticipated that First National Bank of Maryland ("First Maryland")
will be the holder of record for all Institutional II Class shares held through
qualified accounts. First Maryland, at least quarterly, will provide each client
who is a beneficial owner of the shares, a statement showing details of all
transactions effected on behalf of such client in shares, including the
then-current balance of full and fractional shares. No certificates representing
Institutional II Class shares will be issued.

Shareholders may instruct First Maryland to purchase Institutional II Class
shares automatically at intervals established by the client. Additional fees may
be charged by First Maryland for this and other services, including cash sweeps.
For more complete information concerning these services and associated fees,
please call 1-800-624-4116 (inside Maryland 1-800-638-7751).

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<PAGE> 109

DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------

Each Portfolio declares dividends daily and pays them monthly. The
following distribution options are available to shareholders:

B. The INCOME-EARNED OPTION reinvests capital gain distributions and pays
dividends in cash.

C. The CASH OPTION pays dividends and capital gain distributions in cash.
Distribution checks will be mailed no later than seven days after the last day
of the month.

EXCHANGING SHARES
- --------------------------------------------------------------------------------

An exchange is a convenient way to buy and sell shares of another Portfolio
registered in your state. Institutional II Class shares of a Portfolio may be
exchanged for Institutional II Class shares of another Portfolio. The redemption
will be made at the net asset value of the shares to be redeemed next determined
after the exchange request is received by the transfer agent.

An exchange between the Institutional II Class and another class of any
Portfolio is generally not permitted.

REDEEMING SHARES
- --------------------------------------------------------------------------------

Shareholders may redeem all or a portion of their Institutional II Class
shares by mail or telephone. A shareholder may redeem shares on each Business
Day. Shares will be redeemed at the net asset value next determined after the
Fund's transfer agent has received and accepted a redemption request. Shares of
a Portfolio redeemed at 12:00 noon (for the U.S. Treasury Money Market Portfolio
and Tax-Free Money Market Portfolio) or 5:00 p.m. (for the U.S. Government

12
<PAGE> 110

Money Market Portfolio and Money Market Portfolio) do not earn the dividend
declared on the day of the redemption.

BY MAIL. To redeem by mail send a written request to The First National
Bank of Maryland, Trust Division [Banc #101-621], P.O. Box 1596, Baltimore, MD
21203.

BY TELEPHONE. To redeem by telephone call 1-800-624-4116 (inside Maryland
1-800-638-7751).

Under normal circumstances, if the request for redemption is received by
12:00 noon (for the U.S. Treasury Money Market Portfolio and Tax-Free Money
Market Portfolio) or 1:30 p.m. (for the U.S. Government Money Market Portfolio
and Money Market Portfolio) on any Business Day, the redemption proceeds will be
wired via Federal Funds on the same day. If, under normal circumstances, the
request is received after 12:00 noon or 1:30 p.m., respectively, and before 4:00
p.m., on a Business Day, that day's dividend will be received and the redemption
proceeds will be wired the next Business Day. When the NYSE or the Federal
Reserve Bank of New York closes early, the Fund reserves the right to advance
the time on that day by which redemption orders must be received.

Although at present First Maryland pays the wire costs involved, the Fund
reserves the right at any time to require the investor to pay such costs.

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<PAGE> 111

MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------

INVESTMENT ADVISER
- --------------------------------------------------------------------------------

Allied Investment Advisors, Inc., 100 E. Pratt Street, Baltimore, MD 21202,
provides investment advisory services to each Portfolio subject to the general
supervision of the Board of Trustees of the Fund. It is entitled to receive for
its advisory services payment at an annual rate of .25% of each Portfolio's
average net assets. Allied Investment Advisors, Inc., in its sole discretion,
may waive all or a portion of its advisory fee for a Portfolio. Any such
voluntary waiver, will increase the Portfolio's yield for the period during
which the waiver is in effect.

Allied Investment Advisors, Inc. is a wholly-owned subsidiary of First
National Bank of Maryland ("First Maryland"). First Maryland, established in
1806, is a wholly-owned subsidiary of First Maryland Bancorp, a bank holding
company registered under the Federal Bank Holding Company Act of 1956. First
Maryland Bancorp is a subsidiary of Allied Irish Banks, p.l.c. which, together
with its subsidiaries, is Ireland's leading banking and financial services
organization. See "Banking Law Matters". Allied Investment Advisors, Inc. was
organized in 1995 to manage assets and provide research services for the Trust
Division of First Maryland, which previously served as investment adviser to the
Portfolios. It provides investment management and advisory services to
individual, corporate and institutional clients, pension plans, common and
collective trust funds, and mutual funds. Officers, portfolio managers and
investment analysts of Allied Investment Advisors, Inc. previously served in
comparable capacities for the Trust Division of First Maryland. As of December
31, 1997, Allied Investment Advisors, Inc. had assets under management of
approximately $ billion.

PORTFOLIO MANAGEMENT
- --------------------------------------------------------------------------------

James M. Hannan is a Principal of Allied Investment Advisors, Inc. and
manager of the Portfolios. He is also manager of the Fund's Short-Term Treasury
Portfolio and is responsible for several separately managed institutional
portfolios which he has managed since 1992. He has served as a Vice President of
First Maryland since 1987. Prior to 1987 he served as the Treasurer for the City
of Hyattsville, Maryland.

Investment personnel may invest in securities for their own account
pursuant to a code of ethics that establishes procedures for personal investing
and restricts certain transactions.

ADMINISTRATOR
- --------------------------------------------------------------------------------

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<PAGE> 112

The Administrator assists in each Portfolio's administration and operation,
including providing facilities for maintaining each Portfolio's organization,
supervising relations with the custodian, transfer and pricing agents,
accountants, underwriters, and other persons dealing with each Portfolio,
preparing all general shareholder communications and conducting shareholder
relations, maintaining (or providing for the maintenance of) the Fund's records
and the registration of each Portfolio's shares under federal and state law,
developing management services for the Portfolios and furnishing reports,
evaluation and analyses on a variety of subjects to the Fund's Board of
Trustees. The Administrator is entitled to receive an annual fee of .13% of
aggregate average net assets of the Fund, paid monthly, for services performed
under the administration agreement. The Administrator may voluntarily agree to
waive a portion of its administration fee on a Portfolio in order to limit its
total operating expenses. Any such voluntary waiver, which can be discontinued
at any time, will increase the Portfolio's yield for the period during which it
is in effect.

DISTRIBUTION OF SHARES

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

SEI Investments Distribution Co. (the "Distributor"), One Freedom Valley
Drive, Oaks, PA 19456, a wholly-owned subsidiary of SEI Investments Company,
serves as distributor for the Fund pursuant to a distribution agreement with the
Fund. The Distributor, a Pennsylvania corporation incorporated on July 20, 1981,
is a broker-dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. The Distributor
is the principal underwriter of the Fund. First Maryland neither participates in
nor is responsible for the underwriting of the shares of the Fund.

The Board of Trustees has adopted a distribution plan on behalf of the
Institutional II Class of each Portfolio pursuant to Rule 12b-1 under the 1940
Act ("Plan"). The Plan provides for payment of a fee to the Distributor of up to
.75% of average net assets of the Institutional II Class of each Portfolio. The
Board has approved the fee rate of .10% of the average net assets of the
Institutional II Class of each Portfolio. All or any portion of the fee for a
Portfolio may be waived at any time. Any such voluntary waiver, which can be
discontinued at any time, will increase the Portfolio's yield for the period
during which it is in effect.

The Distributor and investment professionals that receive portions of the
fees from the Distributor pay for the cost of printing (but not typesetting) and
mailing to prospective investors prospectuses and other materials relating to
the Institutional II Class, as well as for related direct mail, advertising and
promotional expenses.

The Plan does not obligate a Portfolio to reimburse the Distributor for the
actual expenses that it may incur in fulfilling its obligations under the Plan
on behalf of the Institutional II Class. Thus, under the Plan, even if the
Distributor's actual expenses exceed the fee payable to the Distributor
thereunder at any given time, the Portfolios will not be obligated to pay more
than that fee. If the Distributor's expenses are less than the fee it receives,
it will retain the full amount of the fee.

TRANSFER AGENT
- --------------------------------------------------------------------------------

SEI Fund Resources, One Freedom Valley Drive, Oaks, PA 19456, provides
transfer agent and related services for the Portfolios. SEI Fund Resources has
subcontracted the transfer agency

15
<PAGE> 113

services to State Street Bank and Trust Company ("State Street Bank"). State
Street Bank maintains shareholder accounts and records for the Portfolios.

CUSTODIAN
- --------------------------------------------------------------------------------

FMB Trust Company, National Association, 25 South Charles Street,
Baltimore, MD 21201, is custodian (the "Custodian") for the securities and cash
of the Fund. Under the custody agreement with the Fund, the Custodian holds the
Fund's portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties. For the services provided to the Fund pursuant
to the custody agreement, the Fund pays the Custodian a monthly fee at the
annual rate of .015% of the average net assets of the Portfolios. The Custodian
also charges the Fund transaction fees ranging from $5 to $75 per transaction
and receives reimbursement for out-of-pocket expenses.

BANKING LAW MATTERS
- --------------------------------------------------------------------------------

Judicial or administrative decisions or interpretations of, as well as
changes in, either federal or state statutes or regulations relating to the
activities of banks and their affiliates could prevent a bank or bank affiliate
from continuing to perform all or a part of the activities contemplated by this
Prospectus. If banks or bank affiliates were prohibited from so acting, changes
in the operation of the Fund might occur. It is not anticipated, however, that
any such change would affect the net asset value of the Portfolios' shares or
result in any financial loss to any shareholder.

TAX MATTERS
- --------------------------------------------------------------------------------

Each Portfolio has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
a Portfolio qualifies for this tax treatment, it will be relieved of federal
income tax on amounts distributed to shareholders, but shareholders, unless
otherwise exempt, will pay income or capital gains taxes on amounts so
distributed (except distributions that constitute "exempt interest dividends" or
that are treated as a return of capital) regardless of whether such
distributions are paid in cash or reinvested in additional shares.

16
<PAGE> 114

The Tax-Free Money Market Portfolio intends to pay substantially all of its
dividends as "exempt interest dividends". Investors in this Portfolio should
note, however, that taxpayers are required to report the receipt of tax-exempt
interest and "exempt interest dividends" in their federal income tax returns and
that in two circumstances such amounts, while exempt from regular federal income
tax, are taxable to persons subject to alternative minimum tax. Alternative
minimum tax is currently imposed at a maximum marginal rate of 28% in the case
of non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers. First, tax-exempt interest and "exempt interest dividends" derived
from certain private activity bonds issued after August 7, 1986 will generally
constitute an item of tax preference for corporate and non-corporate taxpayers
in determining alternative minimum tax liability. The Tax-Free Money Market
Portfolio intends to avoid investing its assets in such private activity bonds
but may do so if required by market conditions. Second, tax-exempt interest and
"exempt interest dividends" derived from all municipal securities must be taken
into account by corporate taxpayers in determining their adjusted current
earnings adjustments for alternative minimum tax purposes. Realized market
discount on tax-exempt obligations purchased after April 30, 1993 is treated as
ordinary income and not as capital gain. Shareholders who are recipients of
Social Security Act or Railroad Retirement Act benefits should further note that
tax-exempt interest and "exempt interest dividends" will be taken into account
in determining the taxability of their benefit payments.

The Tax-Free Money Market Portfolio will determine annually the percentage
of its net investment income that is fully tax-exempt, the percentage which
constitutes an item of tax preference for alternative minimum tax purposes and
percentage that is fully taxable, and will apply such percentages uniformly to
all distributions declared from net investment income during that year. These
percentages may differ significantly from the actual percentages for any
particular day.

The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by each Portfolio.

Shareholders are urged to consult their tax advisers concerning their own
tax situation, including the application of state and local income taxes to
investments in a Portfolio.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

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<PAGE> 115

operations of a Portfolio, or the Fund, or for the election or removal of
Trustees under certain circumstances.

The Fund is composed of the following twenty-two separately managed
Portfolios:
U.S. Treasury Money Market Portfolio, U.S. Government Money Market Portfolio,
Money Market Portfolio, Tax-Free Money Market Portfolio, Short-Term Treasury
Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio, Pennsylvania Tax-Free Portfolio, Balanced Portfolio (formerly Growth
and Income Portfolio), Equity Income Portfolio, Equity Index Portfolio, Blue
Chip Equity Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock
Portfolio, Capital Growth Portfolio, Small-Cap Portfolio (formerly Special
Equity Portfolio), International Equity Selection Portfolio and International
Equity Portfolio. The Maryland Tax-Free Portfolio and Pennsylvania Tax-Free
Portfolio are non-diversified Portfolios; the remaining Portfolios are
diversified Portfolios.

The Board of Trustees of the Fund has established three classes of shares
of each money market Portfolio and two classes of shares of each other
Portfolio. You may obtain more information on the classes of shares not offered
through this Prospectus by calling 1-800-624-4116 (inside Maryland
1-800-638-7751).

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<PAGE> 116

APPENDIX
- --------------------------------------------------------------------------------

ASSET-BACKED SECURITIES. The Money Market Portfolio and Tax-Free Money
Market Portfolio may purchase asset-backed securities which consist of undivided
fractional interests in pools of consumer loans (unrelated to mortgage loans)
held in a trust. Payments of principal and interest are passed through to
certificate holders and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
senior subordination. The degree of credit enhancement varies, but generally
amounts to only a fraction of the security's par value until exhausted. If the
credit enhancement is exhausted, certificate holders may experience losses or
delays in payment if the required payments of principal and interest are not
made to the trust with respect to the underlying loans. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the loan pool, the originator of the
loans, or the financial institution providing the credit enhancement. Asset-
backed securities are ultimately dependent upon payment of consumer loans by
individuals, and the certificate holder generally has no recourse to the entity
that originated the loans. The underlying loans are subject to prepayments which
shorten the securities' weighted average life and may lower their return. (As
prepayments flow through at par, total returns would be affected by the
prepayments: if a security were trading at a premium, its total return would be
lowered by prepayments, and if a security were trading at a discount, its total
return would be increased by prepayments.)

BANK OBLIGATIONS. The Money Market Portfolio and Tax-Free Money Market
Portfolio may purchase BANK OBLIGATIONS. These include: bankers' acceptances
which are negotiable obligations of a bank to pay a draft which has been drawn
on it by a customer; certificates of deposit which are negotiable certificates
representing a commercial bank's obligation to repay funds deposited with it,
earning specified rates of interest over given periods or issued at a discount;
and time deposits which are non-negotiable deposits in a banking institution
earning a specified interest rate over a given period of time.

COMMERCIAL PAPER. The Money Market Portfolio and Tax-Free Money Market
Portfolio may purchase COMMERCIAL PAPER. Commercial paper is an obligation
issued by a bank, broker-dealer, corporation and other entities for purposes
such as financing its current operations.

FOREIGN INVESTMENTS. The Money Market Portfolio and Tax-Free Money Market
Portfolio may invest in EURODOLLARS, YANKEE DOLLARS and FOREIGN BANK OBLIGATIONS
which involve risks that are different from investments in securities of U.S.
banks. These risks may include future unfavorable political and economic
developments, withholding taxes, seizures of foreign deposits, currency
controls, interest limitations, or other governmental restrictions that might
affect payment of principal or interest. Additionally, there may be less public
information available about foreign banks and their branches and agencies.
Foreign branches of domestic banks are not regulated by U.S. banking authorities
and generally are not subject to accounting, auditing, and financial reporting
standards comparable to those applicable to U.S. banks. For this purpose,
domestic banks include foreign branches of domestic banks for which the domestic
parent is unconditionally liable in the event the foreign branch failed to pay
on its instruments for any reason.

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<PAGE> 117

ILLIQUID SECURITIES. Under currently applicable regulations, each Portfolio
may invest up to 10% of its net assets in illiquid securities. Illiquid
securities are securities that cannot be disposed of in the usual course of
business within seven days without taking a reduced price. Generally, securities
subject to restriction on resale, variable rate demand notes, repurchase
agreements with more than seven days to maturity, and time deposits are
considered to be illiquid unless the adviser determines, in accordance with
guidelines established by the Board of Trustees, that certain such securities
are readily marketable. The absence of a trading market can make it difficult to
ascertain a market value for illiquid securities, and it may be difficult or
impossible for a Portfolio to sell them promptly at an acceptable price. In
addition, unless securities are registered for sale, securities can only be sold
in privately negotiated transactions or pursuant to an exemption from
registration.

MUNICIPAL OBLIGATIONS. The Money Market Portfolio and Tax-Free Money Market
Portfolio may purchase MUNICIPAL OBLIGATIONS which are issued to raise money for
a variety of public or private purposes, including general financing for state
and local governments, or financing for specific projects or public facilities.
They may be issued in anticipation of future revenues, and may be backed by the
full taxing power of a municipality, the revenues from a specific project, or
the credit of a private organization. The value of some or all municipal
securities may be affected by uncertainties in the municipal market related to
legislation or litigation involving the taxation of municipal securities or the
rights on municipal securities holders. A fund may own a municipal security
directly or through a participation interest.

REPURCHASE AGREEMENTS. The U.S. Government Money Market Portfolio and Money
Market Portfolio may enter into REPURCHASE AGREEMENTS. In a repurchase
agreement, the Portfolio buys a security at one price and simultaneously commits
to resell that security back at a higher price. In the event of bankruptcy of
the other party to either a repurchase agreement, a Portfolio could experience
delays in recovering its cash. To the extent, in the meantime, the value of the
securities purchased had decreased, the Portfolio could experience a loss. In
all cases, the adviser must find the creditworthiness of the other party to the
transaction satisfactory.

BORROWING MONEY AND REVERSE REPURCHASE AGREEMENTS. Each Portfolio may
borrow money by engaging in reverse repurchase agreements. In a reverse
repurchase agreement a Portfolio sells a portfolio instrument to another party,
such as a bank, in return for cash and agrees to repurchase the instrument at a
particular price and time. While a reverse repurchase agreement is outstanding,
a Portfolio will maintain appropriate liquid assets in a segregated custodial
account to cover its obligation under the agreement. A Portfolio will enter into
reverse repurchase agreements only with parties whose creditworthiness is deemed
satisfactory by the adviser.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities are securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities. They may be backed by the full faith and credit of the U.S.
government as a whole or only by the issuing agency. For example, securities
issued by the Federal Home Loan Banks and the Federal Home Loan Mortgage
Corporation are supported only by the credit of the issuing agency, and not by
the U.S. government. Securities issued by the Federal Farm Credit System, the
Federal Land Banks and the Federal National Mortgage Association are supported
by the agency's right to borrow money from the U.S. Treasury under certain
circumstances. U.S. Treasury securities and some agency securities, such as
those issued by the Federal Housing Administration and the Government National
Mortgage Association,

20
<PAGE> 118

are backed by the full faith and credit of the U.S. government and are the
highest quality government securities.

ADDITIONAL INVESTMENTS FOR THE TAX-FREE MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------

MUNICIPAL LEASE OBLIGATIONS are issued by a state or local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the interest is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of default on the lease obligation and significant loss to
the Portfolio. Certificates of participation in municipal lease obligations or
installment sales contracts entitle the holder to a proportionate interest in
the lease-purchase payments made. The Portfolio will only purchase rated
municipal lease obligations.

REFUNDING CONTRACTS. The Portfolio may purchase securities on a when-issued
basis in connection with the refinancing of an issuer's outstanding
indebtedness. Refunding contracts require the issuer to sell and the Portfolio
to buy refunded municipal obligations at a stated price and yield on a
settlement date that may be several months or several years in the future.
Although the Portfolio may sell its rights under a refunding contract, these
contracts are relatively new and the secondary market for them may be less
liquid than the secondary market for other types of municipal securities.

21
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22
<PAGE> 120
ARK FUNDS

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Form N-1A Item Number
Part B Statement of Additional Information
<S> <C>
10,11...................Cover Page
12 .....................Description of the Fund
13 a,b,c................Investment Policies and Limitations
d......................*
14 a,b..................Trustees and Officers
c......................*
15 a,b,c................*
16 a(i,ii)..............Investment Advisers
a(iii),b,c,d...........Portfolio Transactions
e......................*
f......................Administrator and Distributor
g......................*
h......................Description of the Fund
i......................Administrator and Distributor
17 a....................Portfolio Transactions
b......................*
c......................Portfolio Transactions
d,e....................*
18 a....................Description of the Fund
b......................*
19 a....................Additional Purchase and Redemption Information
b......................Valuation of Portfolio Securities
20 .....................Taxes
21 a(i),(ii)............Administrator and Distributor
a(iii),b,c.............*
22 .....................Performance
23 .....................Financial Statements
</TABLE>

* Not applicable.
<PAGE> 121
ARK FUNDS

STATEMENT OF ADDITIONAL INFORMATION

JANUARY ____, 1998

This Statement of Additional Information is not a prospectus but
should be read in conjunction with the current Prospectuses dated January __,
1998, for the Retail Class, Institutional Class and Institutional II Class of
ARK Funds (the "Fund"). Please retain this document for future reference.
Capitalized terms used but not defined herein have the meanings given them in
the Prospectuses. The Fund's Annual Report (including financial statements for
the fiscal year ended April 30, 1997) and Semi-Annual Report (including
financial statements for the six months ended October 31, 1997) are
incorporated herein by reference. To obtain additional copies of the Retail
Class, Institutional Class or Institutional II Class Prospectus, the Annual
Report, the Semi-Annual Report or this Statement of Additional Information,
please call 1-800-ARK-FUND.

<TABLE>
<CAPTION>
Table of Contents Page
- ----------------- ----
<S> <C>
Investment Policies and Limitations 1
Investment Practices 7
Special Considerations 30
Portfolio Transactions 44
Valuation of Portfolio Securities 46
Portfolio Performance 48
Additional Purchase and Redemption Information 50
Taxes 51
Trustees and Officers 57
Investment Advisers 59
Administrator and Distributor 63
Transfer Agent 66
Description of the Fund 66
Independent Auditors 69
Financial Statements 69
Appendix A - Description of Indices and Ratings 70
Appendix B - 1997 Tax Rates 76
</TABLE>

<PAGE> 122
INVESTMENT POLICIES AND LIMITATIONS

The following policies and limitations supplement those set forth in
the Retail Class Prospectus, Institutional Class Prospectus, and Institutional
II Class Prospectus. Unless otherwise expressly noted, whenever an investment
policy or limitation states a maximum percentage of a Portfolio's assets that
may be invested in any security or other asset, or sets forth a policy
regarding quality standards, such percentage or standard will be determined
immediately after and as a result of the Portfolio's acquisition of such
security or other asset. Accordingly, any subsequent change in value, net
assets, or other circumstances will not be considered when determining whether
the investment complies with the Portfolio's investment policies and
limitations.

Unless otherwise expressly noted, a Portfolio's policies and
limitations are not fundamental. Fundamental investment policies and
limitations cannot be changed without approval by a "majority of the
outstanding voting securities" (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of a Portfolio. The Portfolios' investment
limitations are as follows:

Each Portfolio, as a matter of fundamental policy, may not:

(1) issue senior securities, except as permitted under the 1940
Act; and

Each Portfolio, as a matter of fundamental policy, may not:

(2) borrow money, except that the Portfolio may (i) borrow money
from a bank for temporary or emergency purposes (not for
leveraging or investment) and (ii) engage in reverse
repurchase agreements for any purpose; provided that (i) and
(ii) in combination do not exceed 33 1/3% of the value of the
Portfolio's total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come
to exceed this amount will be reduced within three business
days to the extent necessary to comply with the 33 1/3%
limitation.

Each Portfolio (other than the Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio), as a matter of fundamental policy, may not:

(3) with respect to 75% of the Portfolio's total assets, purchase
the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the
Portfolio's total assets would be invested in the securities
of that issuer, or (b) the Portfolio would hold more than 10%
of the outstanding voting securities of that issuer.

Each money market Portfolio and the Short-Term Treasury Portfolio,
Short-Term Bond Portfolio, U.S. Government Bond Portfolio, Income Portfolio,
Intermediate Fixed Income Portfolio, Balanced Portfolio, Equity Income
Portfolio, Value Equity Portfolio, Capital

<PAGE> 123

Growth Portfolio and International Equity Selection Portfolio, as a matter of
fundamental policy, may not:

(4) underwrite securities issued by others, except to the extent
that the Portfolio may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
portfolio securities.

The Maryland Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio,
Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio,
Stock Portfolio, Small-Cap Portfolio (formerly Special Equity Portfolio) and
International Equity Portfolio as a matter of fundamental policy, may not:

All Portfolios (other than the Money Market Portfolio, Tax-Free Money
Market Portfolio and International Equity Selection Portfolio), as a
fundamental policy, may not:

(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result, more than 25%
of the Portfolio's total assets would be invested in the
securities of companies whose principal business activities
are in the same industry.

The Money Market Portfolio, as a matter of fundamental policy, may
not:

The Tax-Free Money Market Portfolio, as a matter of fundamental
policy, may not:

(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities, or tax-exempt obligations
issued or guaranteed by a U.S. territory or possession or a
state or local government, or a political subdivision of any
of the foregoing) if, as a result, more than 25% of the
Portfolio's total assets would be invested in securities of
companies whose principal business activities are in the same
industry.

The International Equity Selection Portfolio, as a matter of
fundamental policy, may not:

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<PAGE> 124

companies whose principal business activities are in the same
industry, except that the Portfolio may invest in companies
that concentrate their assets within one industry.

All Portfolios, as a matter of fundamental policy, may not:

(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Portfolios from investing in securities or
other instruments backed by real estate or securities of
companies engaged in the real estate business).

All money market Portfolios, as a matter of fundamental policy, may
not:

(7) purchase or sell commodities unless acquired as a result of
ownership of securities or other instruments.

Each non-money-market Portfolio (other than the Value Equity Portfolio
and International Equity Selection Portfolio), as a matter of fundamental
policy, may not:

(7) purchase or sell commodities unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Portfolio from purchasing or selling futures
contracts or options on such contracts for the purpose of
managing its exposure to changing interest rates, security
prices, and currency exchange rates).

The Value Equity Portfolio and the International Equity Selection
Portfolio, as a matter of fundamental policy, may:

(7) engage in transactions involving financial and stock index
futures contracts or options on such futures contracts, and
the International Equity Fund may engage in foreign currency
transactions, invest in options and futures on foreign
currencies, and purchase or sell forward contracts with
respect to foreign currencies and related options.

Each Portfolio, as a matter of fundamental policy, may not:

(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements.

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<PAGE> 125
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL:

All Portfolios (other than the Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Value Equity Portfolio and International Equity
Selection Portfolio), as a matter of non-fundamental policy:

(i) do not currently intend to sell securities short, unless they
own or have the right to obtain securities equivalent in kind
and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed
to constitute selling securities short.

The U.S. Government Money Market Portfolio and Money Market Portfolio,
as a matter of non-fundamental policy:

(ii) do not currently intend to purchase a security (other than a
security issued or guaranteed by the U.S. government or any of
its agencies or instrumentalities) if, as a result, more than
5% of a Portfolio's total assets would be invested in the
securities of a single issuer; provided that each Portfolio
may invest up to 25% of its total assets in the first tier
securities of a single issuer for up to three business days.

The Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio,
as a matter of non-fundamental policy:

(ii) To meet federal tax requirements for qualification as a
"regulated investment company," the Portfolios limit their
investments so that at the close of each quarter of its
taxable year: (a) with regard to at least 50% of total assets,
no more than 5% of total assets are invested in the securities
of a single issuer, and (b) no more than 25% of total assets
are invested in the securities of a single issuer.
Limitations (a) and (b) do not apply to "Government
securities" as defined for federal tax purposes.

The International Equity Selection Portfolio, as a matter of
non-fundamental policy, may not:

(ii) does not currently intend, with respect to securities
comprising 75% of the value of its total assets, to invest
more than 5% in securities of any one issuer (other than cash,
cash items, securities of investment companies 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, and will not acquire more than 10%
of the outstanding voting securities of any one issuer.

All Portfolios, as a matter of non-fundamental policy:

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<PAGE> 126
(iii) will not purchase any security while borrowings (including
reverse repurchase agreements) representing more than 5% of
each Portfolio's total assets are outstanding.

All Portfolios, as a matter of non-fundamental policy:

(iv) do not currently intend to purchase securities on margin,
except that each Portfolio may obtain such short-term credits
as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures
contracts and options shall not constitute purchasing
securities on margin.

The U.S. Treasury Money Market Portfolio and Tax-Free Money Market
Portfolio, as a matter of non-fundamental policy:

(v) do not currently intend to engage in repurchase agreements or
make loans, but this limitation does not apply to purchases of
debt securities.

All Portfolios, as a matter of non-fundamental policy:

(vi) do not currently intend to purchase securities of other
investment companies, except to the extent permitted by the
1940 Act.

All non-money-market Portfolios, as a matter of non-fundamental
policy:

(vii) do not currently intend to purchase any security if, as a
result, more than 15% of each Portfolio's net assets would be
invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on
resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at
which they are valued.

All money market Portfolios, as a matter of non-fundamental policy:

(vii) do not currently intend to purchase any security if, as a
result, more than 10% of each Portfolio's net assets would be
invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on
resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at
which they are valued.

The Balanced Portfolio, Equity Income Portfolio, Equity Index
Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio, Stock
Portfolio, Capital Growth Portfolio, Small-Cap Portfolio (formerly Special
Equity Portfolio) and International Equity Portfolio, as a matter of
non-fundamental policy:

(viii) do not currently intend to invest in securities of real estate
investment trusts that are not readily marketable, or to
invest in securities of real estate limited

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<PAGE> 127
partnerships that are not listed on the New York Stock
Exchange or the American Stock Exchange or traded on the
NASDAQ National Market System;

(ix) do not currently intend to invest in oil, gas or other mineral
exploration or development programs or leases; and

(x) do not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) if,
as a result, more than 5% of each Portfolio's total assets
would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three
years of continuous operation.

The Balanced Portfolio, Equity Income Portfolio, Equity Index
Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio, Stock
Portfolio and Capital Growth Portfolio, as a matter of non-fundamental policy:

(xi) do not currently intend to purchase warrants, valued at the
lower of cost or market, in excess of 5% of each Portfolio's
net assets. Included in that amount, but not to exceed 2% of
each Portfolio's net assets, may be warrants that are not
listed on the New York Stock Exchange or the American Stock
Exchange. Warrants acquired by the Portfolios in units or
attached to securities are not subject to these restrictions.

The Small-Cap Portfolio (formerly Special Equity Portfolio) and
International Equity Portfolio, as a matter of non-fundamental policy:

(xii) do not currently intend to purchase warrants, valued at the
lower of cost or market, in excess of 10% of each Portfolio's
net assets. Included in that amount, but not to exceed 2% of
each Portfolio's net assets, are warrants whose underlying
securities are not traded on principal domestic or foreign
exchanges. Warrants acquired by the Portfolios in units or
attached to securities are not subject to these restrictions.

The Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio,
as a matter of non-fundamental policy:

(xiii) do not currently intend to invest more than 25% of their total
assets in industrial revenue bonds issued by entities whose
principal business activities are in the same industry.

For purposes of fundamental limitation (5) and non-fundamental
limitation (i) of the Maryland Tax-Free Portfolio and Pennsylvania Tax-Free
Portfolio, the Portfolio's investment adviser identifies the issuer of a
security depending on its terms and conditions. In identifying the issuer, the
adviser will consider the entity or entities responsible for payment and
repayment of principal and the source of such payments; the way in which assets
and revenues of an issuing

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<PAGE> 128
political subdivision are separated from those of other political entities; and
whether a governmental body is guaranteeing the security.

INVESTMENT PRACTICES

DEPOSITORY RECEIPTS

American Depositary Receipts and European Depositary Receipts ("ADRs"
and "EDRs") are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed for
use in the United States and European securities markets, respectively, ADRs
and EDRs are alternatives to the purchase of the underlying securities in their
national markets and currencies.

DELAYED DELIVERY TRANSACTIONS

The Portfolios may buy securities on a delayed-delivery or when-issued
basis and sell securities on a delayed-delivery basis. These transactions
involve a commitment by a Portfolio to purchase or sell specific securities at
a predetermined price and/or yield, with payment and delivery taking place
after the customary settlement period for that type of security (and more than
seven days in the future). Typically, no interest accrues to the purchaser
until the security is delivered. A Portfolio may receive fees for entering
into delayed-delivery transactions.

When purchasing securities on a delayed-delivery or when-issued basis,
a Portfolio assumes the rights and risks of ownership, including the risk of
price and yield fluctuations. Because a Portfolio is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with the Portfolio's other investments. If a Portfolio remains
substantially fully invested at a time when delayed-delivery or when-issued
purchases are outstanding, such purchases may result in a form of leverage.
When delayed-delivery or when-issued purchases are outstanding, a Portfolio
will set aside appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When a Portfolio has sold a security on a
delayed-delivery basis, the Portfolio does not participate in further gains or
losses with respect to the security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, a Portfolio could miss
a favorable price or yield opportunity, or could suffer a loss.

A Portfolio may renegotiate delayed-delivery or when-issued
transactions after they are entered into, and may sell underlying securities
before they are delivered, which may result in capital gains or losses.

FEDERALLY TAXABLE OBLIGATIONS

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio generally do not intend to invest in securities
whose interest is taxable; however, from time to time the Portfolios may invest
on a temporary basis in fixed-income obligations whose interest is subject to
federal income tax. For example, a Portfolio may invest

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<PAGE> 129
in obligations whose interest is taxable pending the investment or reinvestment
in municipal securities of proceeds from the sale of its shares or sales of
portfolio securities.

Should a Portfolio invest in taxable obligations, it would purchase
securities that, in the adviser's judgment, are of high quality. This would
include obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities, obligations of domestic banks, and repurchase agreements.
The Portfolios' standards for high-quality taxable obligations are essentially
the same as those described by Moody's in rating corporate obligations within
its two highest ratings of Prime-1 and Prime-2, and those described by S&P in
rating corporate obligations within its two highest ratings of A-1 and A-2.
The Portfolios may also acquire unrated securities determined by the adviser to
be of comparable quality in accordance with guidelines adopted by the Board of
Trustees.

The Supreme Court of the United States has held that Congress may
subject the interest on municipal obligations to federal income tax. Proposals
to restrict or eliminate the federal income tax exemption for interest on
municipal obligations are introduced before Congress from time to time.
Proposals may also be introduced before state legislatures that would affect
the state tax treatment of the Portfolios' distributions. If such proposals
were enacted, the availability of municipal obligations and the value of the
Portfolios' holdings would be affected and the Board of Trustees would
reevaluate the Portfolios' investment objectives and policies.

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio anticipate being as fully invested in municipal
securities as is practicable; however, there may be occasions when as a result
of maturities of portfolio securities, or sales of portfolio shares, or in
order to meet redemption requests, the Portfolios may hold cash that is not
earning income. In addition, there may be occasions when, in order to raise
cash to meet redemptions or to preserve credit quality, the Portfolios may be
required to sell securities at a loss.

FOREIGN CURRENCY EXCHANGE TRANSACTIONS

The International Equity Portfolio and International Equity Selection
Portfolio may conduct foreign currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market, or by entering into forward contracts to purchase or sell foreign
currencies at a future date and price (i.e., a "forward foreign currency
contract" or "forward contract"). The Portfolios will convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Portfolios at one rate, while offering
a lesser rate of exchange should the Portfolios desire to resell that currency
to the dealer. Forward contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. The parties to a forward contract may agree to offset or terminate
the contract before maturity, or may hold the contract to maturity and complete
the contemplated currency exchange.

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<PAGE> 130

The International Equity Portfolio and International Equity Selection
Portfolio may use currency forward contracts for any purpose consistent with
its investment objective. The following discussion summarizes some, but not
all, of the possible currency management strategies involving forward contracts
that could be used by the Portfolios. The Portfolios may also use options and
futures contracts relating to foreign currencies for the same purposes.

When a Portfolio agrees to buy or sell a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the Portfolios will be able to protect
themselves against an adverse change in foreign currency values between the
date the security is purchased or sold and the date on which payment on the
underlying security is made or received. The Portfolios may also enter into
forward contracts to purchase or sell a foreign currency in anticipation of
future purchases or sales of securities denominated in foreign currency, even
if the specific investments have not yet been selected by the adviser.

The Portfolios may also use forward contracts to hedge against a
decline in the value of existing investments denominated in foreign currency.
For example, if a Portfolio owned securities denominated in French francs, it
could enter into a forward contract to sell francs in return for U.S. dollars
to hedge against possible declines in the value of the French franc. Such a
hedge (sometimes referred to as a "position hedge") will tend to offset both
positive and negative currency fluctuations, but will not offset changes in
security values caused by other factors. The Portfolios could also hedge the
position by selling another currency expected to perform similarly to the
franc, for example, by entering into a forward contract to sell Deutsche marks
in exchange for U.S. dollars. This type of strategy, sometimes known as a
"proxy hedge", may offer advantages in terms of cost, yield or efficiency, but
generally will not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses to the Portfolios if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.

The Portfolios may enter into forward contracts to shift its
investment exposure from one currency into another currency that is expected to
perform better relative to the U.S. dollar. For example, if a Portfolio held
investments denominated in Deutsche marks, it could enter into forward
contracts to sell Deutsche marks and purchase Swiss francs. This type of
strategy, sometimes known as a "cross-hedge", will tend to reduce or eliminate
exposure to the currency that is sold, and increase exposure to the currency
that is purchased, much as if the Portfolio had sold a security denominated in
one currency and purchased an equivalent security denominated in another.
Cross-hedges protect against losses resulting from a decline in the hedged
currency, but will cause the Portfolios to assume the risk of fluctuations in
the value of the currency it purchases.

Under certain conditions, SEC guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
forward contracts. As required by SEC guidelines, the Portfolios will segregate
assets to cover forward contracts, if any, whose

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<PAGE> 131

purpose is essentially speculative. The Portfolios will not segregate assets to
cover forward contracts entered into for hedging purposes, including settlement
hedges, position hedges, and proxy hedges.

Successful use of forward contracts will depend on the adviser's skill
in analyzing and predicting currency values. Forward contracts may
substantially change the Portfolios' investment exposure to changes in currency
exchange rates, and could result in losses to the Portfolios if currencies do
not perform as the adviser anticipates. For example, if a currency's value rose
at a time when the adviser had hedged a Portfolio by selling that currency in
exchange for dollars, the Portfolio would be unable to participate in the
currency's appreciation. If the adviser hedges currency exposure through proxy
hedges, the Portfolio could realize currency losses from the hedge and the
security position at the same time if the two currencies do not move in tandem.
Similarly, if the adviser increases a Portfolio's exposure to a foreign
currency, and that currency's value declines, the Portfolio will realize a
loss. There is no assurance that the adviser's use of forward contracts will be
advantageous to a Portfolio or that they will hedge at an appropriate time.

FOREIGN INVESTMENTS

Each Portfolio (other than the U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, Short-Term Treasury Portfolio, Maryland
Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio and Equity Index Portfolio)
may invest in U.S. dollar-denominated securities of foreign issuers. The
Income Portfolio, Balanced Portfolio, Equity Income Portfolio, Blue Chip Equity
Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock Portfolio,
Capital Growth Portfolio, Small-Cap Portfolio (formerly Special Equity
Portfolio), International Equity Selection Portfolio and International Equity
Portfolio each may invest in foreign securities denominated in foreign
currencies. Foreign investments can involve significant risks in addition to
the risks inherent in U.S. investments. The value of securities denominated in
or indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. Foreign securities markets generally have
less trading volume and less liquidity than U.S. markets, and prices on some
foreign markets can be highly volatile. Many foreign countries lack uniform
accounting and disclosure standards comparable to those applicable to U.S.
companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial condition and operations. In addition, the
costs of foreign investing, including withholding taxes, brokerage commissions,
and custodial costs, are generally higher than for U.S. investments.

Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.

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Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that a Portfolio's adviser will
be able to anticipate these potential events or counter their effects.

The considerations noted above generally are intensified for
investments in developing countries. Developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade a small number of securities.

The Income Portfolio, Balanced Portfolio, Equity Income Portfolio,
Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio,
Stock Portfolio, Capital Growth Portfolio, Small-Cap Portfolio (formerly
Special Equity Portfolio), International Equity Selection Portfolio and
International Equity Portfolio may invest in foreign securities that impose
restrictions on transfer within the United States or to U.S. persons. Although
securities subject to transfer restrictions may be marketable abroad, they may
be less liquid than foreign securities of the same class that are not subject
to such restrictions.

ILLIQUID INVESTMENTS

Each Portfolio (other than the U.S. Treasury Money Market Portfolio)
may invest in illiquid investments. Illiquid investments cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, a
Portfolio's adviser determines the liquidity of each Portfolio's investments
and, through reports from the adviser, the Board monitors investment in
illiquid instruments. In determining the liquidity of a Portfolio's
investments, the adviser may consider various factors including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4)
the nature of the security (including any demand or tender features), (5) the
nature of the marketplace for trades (including the ability to assign or offset
a Portfolio's rights and obligations relating to the investment), and (6)
general credit quality. Investments currently considered by a Portfolio to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days, non-government stripped fixed-rate
mortgage-backed securities and government stripped fixed-rate mortgage-backed
securities, loans and other direct debt instruments, over-the-counter options
and swap agreements. Although restricted securities and municipal lease
obligations are sometimes considered illiquid, the Portfolio's adviser may
determine certain restricted securities and municipal lease obligations to be
liquid. In the absence of market quotations, illiquid investments are valued
for purposes of monitoring amortized cost valuation (for money market
Portfolios) and priced (for other Portfolios) at fair value as determined in
good faith by a committee appointed by the Board of Trustees. If, as a result
of a change in values, net assets or other circumstances, a Portfolio were in a
position

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where more than 10% (for money market Portfolios) or 15% (for other Portfolios)
of its assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.

Restricted Securities are securities that generally can only be sold
in privately negotiated transactions, pursuant to an exemption from
registration under the Securities Act of 1933, or in a registered public
offering. Where registration is required, the Portfolio may be obligated to
pay all or part of the registration expense and a considerable period may
elapse between the time it decides to seek registration and the time it may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Portfolio
might obtain a less favorable price than prevailed when it decided to seek
registration of the security.

INDEXED SECURITIES

Each Portfolio (other than the money market Portfolios) may purchase
securities whose prices are indexed to the prices of other securities,
securities indices, currencies, precious metals or other commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated
securities of equivalent issuers. Currency-indexed securities may be
positively or negatively indexed; that is, their maturity value may increase
when the specified currency value increases, resulting in a security that
performs similarly to a foreign-denominated instrument, or their maturity value
may decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. government agencies. Indexed securities may be more volatile than the
underlying instruments.

LOANS AND OTHER DIRECT DEBT INSTRUMENTS

Each Portfolio (other than the money market Portfolios, Short-Term
Treasury Portfolio, Equity Index Portfolio and International Equity Portfolio)
may invest in loans and other direct debt instruments. Direct debt instruments
are interests in amounts owed by a corporate,

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governmental or other borrower to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments are subject to a
Portfolio's policies regarding the quality of debt securities.

Purchasers of loans and other forms of direct indebtedness depend
primarily upon the creditworthiness of the borrower for payment of principal
and interest. Direct debt instruments may not be rated by any NRSRO. If a
Portfolio does not receive scheduled interest or principal payments on such
indebtedness, its share price and yield could be adversely affected. Loans
that are fully secured offer a Portfolio more protections than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligation, or that the collateral can be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Borrowers that are
in bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries also will involve a risk that the governmental entities responsible
for the repayment of the debt may be unable, or unwilling, to pay interest and
repay principal when due.

Investments in loans through direct assignment of a financial
institution's interests with respect to a loan may involve additional risks to
a Portfolio. For example, if a loan is foreclosed, the Portfolio could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, the
Portfolio could be held liable as a co-lender. Direct debt instruments also
may involve a risk of insolvency of the lending bank or other intermediary.
Direct debt instruments that are not in the form of securities may offer less
legal protection to a Portfolio in the event of fraud or misrepresentation. In
the absence of definitive regulatory guidance, a Portfolio's adviser will
conduct research and analysis in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Portfolio.

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A loan is often administered by a bank or other financial institution
which acts as agent for all holders. The agent administers the terms of the
loan, as specified in the loan agreement. Unless, under the terms of the loan
or other indebtedness, a Portfolio has direct recourse against the borrower, it
may have to rely on the agent to apply appropriate credit remedies against the
borrower. If assets held by the agent for the benefit of a Portfolio were
determined to be subject to the claims of the agent's general creditors, the
Portfolio might incur certain costs and delays in realizing payment on the loan
or loan participation and could suffer a loss of principal or interest.

The Portfolios limit the amount of total assets that they will invest
in any one issuer or in issuers within the same industry (see fundamental
limitations (1) and (5) for the Portfolios). For purposes of these limitations,
a Portfolio generally will treat the borrower as the "issuer" of indebtedness
held by the Portfolio. In the case of loan participations where a bank or other
lending institution serves as financial intermediary between a Portfolio and the
borrower, if the participation does not shift to the Portfolio the direct
debtor-creditor relationship with the borrower, SEC interpretations require the
Portfolio, in appropriate circumstances, to treat both the lending bank or other
lending institution and the borrower as "issuers" for the purposes of
determining whether the Portfolio has invested more than 5% of its total assets
in a single issuer. Treating a financial intermediary as an issuer of
indebtedness may restrict a Portfolio's ability to invest in indebtedness
related to a single financial intermediary, or a group of intermediaries engaged
in the same industry, even if the underlying borrowers represent many different
companies and industries.

LOWER-QUALITY MUNICIPAL SECURITIES

The Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio
may invest a portion of their assets in lower-quality municipal securities as
described in the Prospectus. While the markets for Maryland and Pennsylvania
municipal securities are considered to be adequate, adverse publicity and
changing investor perceptions may affect the ability of outside pricing
services used by the Portfolios to value their portfolio securities, and a
Portfolio's ability to dispose of lower-quality bonds. The outside pricing
services are monitored by a Portfolio's adviser to determine whether the
services are furnishing prices that accurately reflect fair value. The impact
of changing investor perceptions may be especially pronounced in markets where
municipal securities are thinly traded.

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A Portfolio may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise exercise its rights as a security holder to
seek to protect the interest of security holders if it determines this to be in
the best interest of the Portfolio's shareholders.

LOWER-RATED DEBT SECURITIES

A Portfolio may invest in lower-rated debt securities (i.e.,
securities rated Ba or lower by Moody's or BB or lower by S&P, or having
comparable ratings by other NRSROs) consistent with its investment objectives,
policies and restrictions. Lower-rated debt securities may have poor
protection with respect to the payment of interest and repayment of principal.
These securities are often considered to be speculative and involve greater
risk of loss or price changes due to changes in the issuer's capacity to pay.
The market prices of lower-rated debt securities may fluctuate more than those
of higher-rated debt securities and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest rates.

While the market for lower-rated, high-yield corporate debt securities
has been in existence for many years and has weathered previous economic
downturns, the 1980s brought a dramatic increase in the use of such securities
to fund highly leveraged corporate acquisitions and restructurings. Past
experience may not provide an accurate indication of the future performance of
the high-yield bond market, especially during periods of economic recession.
In fact, from 1989 to 1991, the percentage of lower-rated securities that
defaulted rose significantly above prior levels, although the default rate
decreased in 1992.

The market for lower-rated debt securities may be thinner and less
active than that for higher-rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not
available, lower-rated debt securities will be valued in accordance with
procedures established by the Board of Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing these debt
securities than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse

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publicity and changing investor perceptions may affect the ability of outside
pricing services to value, and of the Portfolio to dispose of, lower-rated debt
securities.

Since the risk of default is higher for lower-rated debt securities,
the research and credit analysis of a Portfolio's adviser are an especially
important part of managing the Portfolio's investment in securities of this
type. In considering investments in such securities for a Portfolio, its
Adviser will attempt to identify those issuers whose financial condition are
adequate to meet future obligations, have improved, or are expected to improve
in the future. The adviser's analysis focuses on relative values based on such
factors as interest or dividend coverage, asset coverage, earnings prospects,
and the experience and managerial strength of the issuer.

A Portfolio may choose, at its own expense or in conjunction with
others, to pursue litigation or otherwise to exercise its rights as a security
holder to seek to protect the interests of security holders if it determines
this to be in the best interest of the Portfolio's shareholders.

MUNICIPAL LEASE OBLIGATIONS

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio each may invest in municipal leases and
participation interests therein. These obligations, which may take the form of
a lease, an installment purchase, or a conditional sale contract, are issued by
state and local governments and authorities to acquire land and a wide variety
of equipment and facilities, such as fire and sanitation vehicles,
telecommunications equipment, and other capital assets. Generally, the
Portfolios will not hold such obligations directly as a lessor of the property,
but will purchase a participation interest in a municipal obligation from a
bank or other third party. A participation interest gives a Portfolio a
specified, undivided interest in the obligation in proportion to its purchased
interest in the total amount of the obligation.

Municipal leases frequently have risks distinct from those associated
with general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchases, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation" clauses providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a
yearly or other periodic basis. Non-appropriation clauses free the issuer from
debt issuance obligations.

In determining the liquidity of a municipal lease obligation, a
Portfolio's adviser will differentiate between direct municipal leases and
municipal lease-backed securities, the latter of which may take the form of a
lease-backed revenue bond, a tax-exempt asset-backed security, or any other
investment structure using a municipal lease-purchase agreement as its base.
While the former may present liquidity issues, the latter are based on a
well-established method of securing payment of a municipal lease obligation.

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MARKET DISRUPTION RISK

The value of municipal securities may be affected by uncertainties in
the municipal market related to legislation or litigation involving the
taxation of municipal securities or the rights of municipal securities holders
in the event of a bankruptcy. Municipal bankruptcies are relatively rare, and
certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are
unclear and remain untested. Further, the application of state law to
municipal issuers could produce varying results among the states or among
municipal securities issuers within a state. These legal uncertainties could
affect the municipal securities market generally, certain specific segments of
the market, or the relative credit quality of particular securities.

Any of these effects could have a significant impact on the prices of
some or all of the municipal securities held by a Portfolio. For the money
market Portfolios, investing in these securities may make it more difficult to
maintain a stable net asset value per share.

PORTFOLIOS' RIGHTS AS SHAREHOLDERS

The Portfolios do not intend to direct or administer the day-to-day
operations of any company whose shares they hold. A Portfolio, however, may
exercise its rights as a shareholder and may communicate its views on important
matters of policy to management, the board of directors or trustees, and the
shareholders of a company when its adviser determines that such matters could
have a significant effect on the value of the Portfolio's investment in the
company. The activities that a Portfolio may engage in, either individually or
in conjunction with other shareholders, may include, among others, supporting
or opposing proposed changes in a company's corporate structure or business
activities; seeking changes in a company's board of directors or trustees, or
management; seeking changes in a company's direction or policies; seeking the
sale or reorganization of the company or a portion of its assets; or supporting
or opposing third-party takeover efforts. This area of corporate activity is
increasingly prone to litigation and it is possible that a Portfolio could be
involved in lawsuits related to such activities. A Portfolio's adviser will
monitor such activities with a view to mitigating, to the extent possible, the
risk of litigation against the Portfolio and the risk of actual liability if
the Portfolio is involved in litigation. There is no guarantee, however, that
litigation against a Portfolio will not be undertaken or liabilities incurred.

REAL-ESTATE-RELATED INSTRUMENTS

Each Portfolio may, to the extent consistent with its investment
objectives, policies and restrictions, invest in real-estate-related
instruments, which include real estate investment trusts (REITs), commercial
and residential mortgage-backed securities and real estate financings.
Real-estate-related instruments are sensitive to factors such as changes in
real estate values and property taxes, interest rates, cash flow of underlying
real assets, overbuilding and the management and creditworthiness of the
issuer. Real-estate-related instruments may also be affected by tax and
regulatory requirements, such as those relating to the environment.

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REFUNDING CONTRACTS

The Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio
may purchase securities on a when-issued basis in connection with the
refinancing of an issuer's outstanding indebtedness. Refunding obligations
require the issuer to sell and the Portfolio to buy refunded municipal
obligations at a stated price and yield on a settlement date that may be
several months or years in the future. A Portfolio generally will not be
obligated to pay the full purchase price if it fails to perform under a
refunding contract. Instead, refunding contracts generally provide for payment
of liquidated damages to the issuer (currently 15% to 20% of the purchase
price). A Portfolio may secure its obligations under a refunding contract by
depositing collateral or a letter of credit equal to the liquidated damages
provisions of the refunding contract. When required by SEC guidelines, a
Portfolio will place liquid assets in a segregated custodial account equal in
amount to its obligations under refunding contracts.

REPURCHASE AGREEMENTS

Each Portfolio (other than the U.S. Treasury Money Market Portfolio
and Tax-Free Money Market Portfolio) may invest in repurchase agreements. In a
repurchase agreement, a Portfolio purchases a security and simultaneously
commits to resell it to the seller at an agreed upon price on an agreed upon
date. The resale price reflects the purchase price plus an agreed-upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed-upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed-upon resale price and
marked to market daily) of the underlying security. The risk associated with
repurchase agreements is that a Portfolio may be unable to sell the collateral
at its full value in the event of the seller's default. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to a Portfolio in connection
with bankruptcy proceedings), it is each Portfolio's current policy to limit
repurchase agreements to those parties whose creditworthiness has been reviewed
and found satisfactory by its adviser pursuant to procedures established by the
Board of Trustees.

REVERSE REPURCHASE AGREEMENTS

Each Portfolio may enter into reverse repurchase agreements. In a
reverse repurchase agreement, a Portfolio sells a portfolio instrument to
another party, such as a bank or broker-dealer, in return for cash and agrees
to repurchase the instrument at a particular price and time. While a reverse
repurchase agreement is outstanding, the Portfolio will maintain appropriate
liquid assets in a segregated custodial account to cover its obligation under
the agreement. A Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by its adviser.
These transactions may increase fluctuations in the market value of a
Portfolio's assets and may be viewed as a form of leverage.

SECURITIES LENDING

The Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S.
Government Bond Portfolio, Intermediate Fixed Income Portfolio and Income
Portfolio may lend securities to parties such as broker-dealers or
institutional investors. Securities lending allows a Portfolio to

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retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties whose creditworthiness has
been reviewed and found satisfactory by the Portfolio's adviser.

It is the current view of the SEC that a Portfolio may engage in loan
transactions only under the following conditions: (1) the Portfolio must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Portfolio must be able to terminate the loan at any time; (4) the Portfolio
must receive reasonable interest on the loan or a flat fee from the borrower,
as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5)
the Portfolio may pay only reasonable custodian fees in connection with the
loan; and (6) the Board of Trustees must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower. Cash received through loan
transactions may be invested in any security in which the Portfolio is
authorized to invest. Investing this cash subjects that investment, as well as
the security loaned, to market forces (i.e., capital appreciation or
depreciation).

SOVEREIGN DEBT OBLIGATIONS

A Portfolio may, to the extent consistent with its investment
objectives, policies and restrictions, purchase sovereign debt instruments
issued or guaranteed by foreign governments or their agencies, including debt
of Latin American nations or other developing countries. Sovereign debt may be
in the form of conventional securities or other types of debt instruments, such
as loans or loan participations. Sovereign debt of developing countries may
involve a high degree of risk, and may be in default or present the risk of
default. Governmental entities responsible for repayment of the debt may be
unable or unwilling to repay principal and interest when due, and may require
negotiations or rescheduling of debt payments. In addition, prospects for
repayment of principal and interest may depend on political as well as economic
factors. Although some sovereign debt, such as Brady Bonds, is collateralized
by U.S. government securities, repayment of principal and interest is not
guaranteed by the U.S. government.

The International Equity Selection Portfolio may invest in underlying
funds that invest in Sovereign debt obligations.

STANDBY COMMITMENTS

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio each may invest in standby commitments. These
obligations are puts that entitle holders to same day settlement at an exercise
price equal to the amortized cost of the underlying security plus accrued
interest, if any, at the time of exercise. The Portfolios may

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acquire standby commitments to enhance the liquidity of portfolio securities
when the issuers of the commitments present minimal risk of default.

Ordinarily a Portfolio will not transfer a standby commitment to a
third party, although it could sell the underlying municipal security to a
third party at any time. The Portfolios may purchase standby commitments
separate from or in conjunction with the purchase of securities subject to such
commitments. In the latter case, a Portfolio would pay a higher price for the
securities acquired, thus reducing their yield to maturity. Standby
commitments will not affect the dollar-weighted average maturity of a
Portfolio, or the valuation of the securities underlying the commitments.

Standby commitments are subject to certain risks, including the
ability of issuers of standby commitments to pay for securities at the time the
commitments are exercised; the fact that standby commitments are not marketable
by the Portfolio and the possibility that the maturities of the underlying
securities may be different from those of the commitments.

SWAP AGREEMENTS

Each Portfolio (other than the money market Portfolios, Short-Term
Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond Portfolio,
Equity Index Portfolio and Value Equity Portfolio) may invest in swap
agreements. Swap agreements can be individually negotiated and structured to
include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or
decrease a Portfolio's exposure to long- or short-term interest rates (in the
United States or abroad), foreign currency values, mortgage securities,
corporate borrowing rates, or other factors such as security prices or
inflation rates. Swap agreements can take many different forms and are known
by a variety of names. A Portfolio is not limited to any particular form of
swap agreement if its adviser determines it is consistent with the Portfolio's
investment objective and policies.

In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
rights to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated
to make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.

Swap agreements will tend to shift a Portfolio's investment exposure
from one type of investment to another. For example, if the Portfolio agreed
to exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the Portfolio's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps
and floors have an effect similar to buying or writing options. Depending on
how they are used, swap agreements may increase or decrease the overall
volatility a Portfolio's investments and its share price and yield.

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The most significant factor in the performance of swap agreements is
the change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from a Portfolio. If a swap
agreement calls for payments by a Portfolio, the Portfolio must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness declined, the value of a swap agreement would be likely to
decline, potentially resulting in losses. The Portfolios expect to be able to
reduce their exposure under swap agreements either by assignment or other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party.

A Portfolio will maintain appropriate liquid assets in segregated
custodial accounts to cover its current obligations under swap agreements. If
a Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If a
Portfolio enters into a swap agreement on other than a net basis, it will
segregate assets with a value equal to the full amount of the Portfolio's
accrued obligations under the agreement.

TENDER OPTION BONDS

The Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio may invest in tender option bonds. These bonds
are created by coupling an intermediate- or long-term fixed-rate tax-exempt
bond (generally held pursuant to a custodial agreement) with a tender agreement
that gives the holder the option to tender the bond at its face value. As
consideration for providing the tender option, the sponsor (usually a bank,
broker-dealer, or other financial institution) receives periodic fees equal to
the difference between the bond's fixed coupon rate and the rate (determined by
a remarketing or similar agent) that would cause the bond, coupled with the
tender option to trade at par on the date of such determination. After payment
of the tender option fee, a Portfolio effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate. Subject to
applicable regulatory requirements, the Tax-Free Money Market Portfolio may buy
tender option bonds if the agreement gives the Portfolio the right to tender
the bond to its sponsor no less frequently than once every 397 days. In
selecting tender option bonds for a Portfolio, the adviser will, pursuant to
procedures established by the Board of Trustees, consider the creditworthiness
of the issuer of the underlying bond, the custodian, and the third-party
provider of the tender option. In certain instances, a sponsor may terminate a
tender option if, for example, the issuer of the underlying bond defaults on
interest payments.

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VARIABLE OR FLOATING RATE INSTRUMENTS

Each money market Portfolio (other than the U.S. Treasury Money Market
Portfolio) may invest in variable or floating rate instruments that ultimately
mature in more than 397 days, if the Portfolio acquires a right to sell the
securities that meet certain requirements set forth in Rule 2a-7 under the 1940
Act. Variable rate instruments (including instruments subject to a demand
feature) that mature in 397 days or less may be deemed to have maturities equal
to the period remaining until the next readjustment of the interest rate. Other
variable rate instruments with demand features may be deemed to have a maturity
equal to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand. A floating rate instrument subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.

The non-money-market Portfolios (other than the Short-Term Treasury
Portfolio and Equity Index Portfolio) may invest in variable or floating rate
instruments.

VARIABLE OR FLOATING RATE DEMAND OBLIGATIONS

Each money market Portfolio (other than the U.S. Treasury Money Market
Portfolio) may invest in variable or floating rate demand obligations
(VRDOs/FRDOs). These obligations are tax-exempt obligations that bear variable
or floating interest rates and carry rights that permit holders to demand
payment of the unpaid principal balance plus accrued interest from the issuers
or certain financial intermediaries. Floating rate obligations have interest
rates that change whenever there is a change in a designated base rate while
variable rate obligations provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market value for the
VRDO or FRDO that approximates its par value.

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A demand obligation with a conditional demand feature must have
received both a short-term and a long-term high quality rating from a NRSRO or,
if unrated, have been determined by the Portfolio's adviser to be of comparable
quality pursuant to procedures adopted by the Board of Trustees. A demand
obligation with an unconditional demand feature may be acquired solely in
reliance upon a short-term high quality rating or, if unrated, upon finding of
comparable short-term quality pursuant to procedures adopted by the Board.

A Portfolio may invest in fixed-rate bonds that are subject to third
party puts and in participation interests in such bonds held by a bank in trust
or otherwise. These bonds and participation interests have tender options or
demand features that permit a Portfolio to tender (or put) the bonds to an
institution at periodic intervals of up to one year and to receive the
principal amount thereof. A Portfolio considers variable rate obligations
structured in this way (participating VRDOs) to be essentially equivalent to
other VRDOs that it may purchase. The Internal Revenue Service (the "IRS") has
not ruled whether or not the interest on participating VRDOs is tax-exempt and,
accordingly, the Portfolios intend to purchase these obligations based on
opinions of bond counsel.

A variable rate instrument that matures in 397 or fewer days may be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A variable rate obligation that matures in
more than 397 days but that is subject to a demand feature that is 397 days or
fewer may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand. A
floating rate obligation that is subject to a demand feature may be deemed to
have a maturity equal to the period remaining until the principal amount may be
recovered through demand. The money market Portfolios may purchase a demand
obligation with a remaining final maturity in excess of 397 days only if the
demand feature can be exercised on no more than 30 days' notice (a) at any time
or (b) at specific intervals not exceeding 397 days.

WARRANTS

Warrants are securities that give a Portfolio the right to purchase
equity securities from an issuer at a specific price (the "strike price") for a
limited period of time. The strike price of a warrant is typically much lower
than the current market price of the underlying securities, yet a warrant is
subject to greater price fluctuations. As a result, warrants may be more
volatile

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investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.

Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. These
factors can make warrants more speculative than other types of investments.

HEDGING STRATEGIES

FUTURES TRANSACTIONS

A Portfolio may use futures contracts and options on such contracts
for bona fide hedging purposes within the meaning of regulations promulgated by
the Commodity Futures Trading Commission ("CFTC"). A Portfolio may also
establish positions for other purposes provided that the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the liquidation value of the Portfolio after taking into account unrealized
profits and unrealized losses on any such instruments.

FUTURES CONTRACTS

When a Portfolio purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When a Portfolio
sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take
place is fixed when a Portfolio enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indices of securities prices,
such as the S&P 500. A futures contract can be held until its delivery date,
or can be closed out prior to its delivery date if a liquid secondary market is
available.

The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.

FUTURES MARGIN PAYMENTS

The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, both the purchaser and seller are required to
deposit "initial margin" with a futures broker, known as a futures commission
merchant ("FCM"), when the contract is entered into. Initial margin deposits

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are typically equal to a percentage of the contract's value. If the value of
either party's position declines, that party will be required to make
additional "variation margin" payments to settle the change in value on a daily
basis. The party that has a gain may be entitled to receive all or a portion
of this amount. Initial and variation margin payments do not constitute
purchasing securities on margin for purposes of a Portfolio's investment
limitations. In the event of the bankruptcy of a FCM that holds margin on
behalf of a Portfolio, the Portfolio may be entitled to return of margin owed
to it only in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Portfolio.

PURCHASING PUT AND CALL OPTIONS RELATING TO SECURITIES OR FUTURES
CONTRACTS

By purchasing a put option, a Portfolio obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed price (strike
price). In return for this right, a Portfolio pays the current market price
for the option (known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of securities
prices, and futures contracts. A Portfolio may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option.
If the option is allowed to expire, the Portfolio will lose the entire premium
it paid. If a Portfolio exercises the option, it completes the sale of the
underlying instrument at the strike price. A Portfolio may also terminate a
put option position by closing it out in the secondary market at its current
price, if a liquid secondary market exists.

The buyer of a typical put option can expect to realize a gain if the
price of the underlying security falls substantially. However, if the
underlying instrument's price does not fall enough to offset the cost of
purchasing the option, a put-buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).

The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call-buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if the price of the underlying instrument does not rise
sufficiently to offset the cost of the option.

WRITING PUT AND CALL OPTIONS

When a Portfolio writes a put option, it takes the opposite side of
the transaction from the option's purchaser. In return for receipt of the
premium, the Portfolio assumes the obligation to pay the strike price for the
option's underlying instrument if the other party to the option chooses to
exercise it. When writing an option on a futures contract a Portfolio will be
required to make margin payments to a FCM as described above for futures
contracts. A Portfolio may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option a
Portfolio has written, however, the Portfolio must continue to be prepared to
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.

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If the price of the underlying instrument rises, a put-writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If the price of the underlying instrument remains the
same over time, it is likely that the writer will also profit, because it
should be able to close out the option at a lower price. If the price of the
underlying instrument falls, the put-writer would expect to suffer a loss.
This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.

Writing a call option obligates a Portfolio to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing a call option is generally a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.

COMBINED POSITIONS

A Portfolio may purchase and write options in combination with each
other, or in combination with futures contracts or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, a
Portfolio may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower strike price, in order to reduce the
risk of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs and may be more difficult to open and close out.

CORRELATION OF PRICE CHANGES

Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a Portfolio's current or anticipated investments exactly. A
Portfolio may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics than those of the
securities in which it typically invests -- for example, by hedging
intermediate-term securities with a futures contract on an index of long-term
bond prices, or by hedging stock holdings with a futures contract on a
broad-based stock index such as the S&P 500 -- which involves a risk that the
options or futures position will not track the performance of the Portfolio's
other investments.

Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures prices are affected by such
factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect the price of the underlying
security the same way. Imperfect correlation may also result from differing
levels of demand in the options and futures markets

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and the securities markets, from structural differences in the trading of
options, futures and securities, or from imposition of daily price fluctuation
limits or trading halts. A Portfolio may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in a Portfolio's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or may result in losses that are not offset
by gains in other investments.

LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS

There is no assurance that a liquid secondary market will exist for
any particular options or futures contract at any particular time. Options may
have relatively-low trading volume and liquidity if their strike prices are not
close to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts, and
may halt trading if the price of an option or futures contract moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for a Portfolio to enter into new positions or close out existing
positions. If the secondary market for a contract is not liquid because of
price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require a Portfolio to continue to
hold a position until delivery or expiration regardless of changes in its
value. As a result, the Portfolio's access to other assets held to cover its
options or futures positions could also be impaired.

OTC OPTIONS

Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size and strike price, the
terms of over-the-counter ("OTC") options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option. While this type of arrangement allows a Portfolio greater flexibility
to tailor an option to its needs, OTC options generally involve greater credit
risk than exchange-traded options, which are guaranteed by the clearing
organization of the exchanges upon which they are traded.

OPTIONS AND FUTURES CONTRACTS RELATING TO FOREIGN CURRENCIES

Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call option obtains the right to
purchase the underlying currency, and the purchaser of a currency put option
obtains the right to sell the underlying currency.

The uses and risks of currency options and futures contracts are
similar to options and futures contracts relating to securities or securities
indices, as discussed above. A Portfolio may

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purchase and sell currency futures and may purchase and write currency options
to increase or decrease its exposure to different foreign currencies. A
Portfolio may also purchase and write currency options in conjunction with each
other or with currency futures or forward contracts. Currency futures and
option values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of the Portfolio's investments. A
currency hedge, for example, should protect a yen-denominated security from a
decline in the yen, but will not protect the Portfolio against a price decline
resulting from deterioration in the issuer's creditworthiness. Because the
value of the Portfolio's foreign-denominated investments changes in response to
many factors other than exchange rates, it may not be possible to match exactly
the amount of currency options and futures held by the Portfolio to the value
of its investments over time.

ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS

The Portfolios will comply with guidelines established by the SEC with
respect to coverage of options and futures strategies by mutual funds, and if
the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option position is
outstanding, unless they are replaced with other appropriate liquid assets. As
a result, there is a possibility that segregation of a large percentage of a
Portfolio's assets could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.

SHORT SALES

A Portfolio may enter into short sales with respect to securities it
owns, or with respect to stocks underlying its convertible bond holdings (short
sales "against the box"). For example, if the Portfolio's adviser anticipates
a decline in the price of the stock underlying a convertible security it holds,
the Portfolio may sell the stock short. If the stock price substantially
declines, the proceeds of the short sale could be expected to offset all or a
portion of the effect of the stock's decline on the value of the convertible
security.

When a Portfolio enters into a short sale against the box, it will be
required to set aside securities equivalent in kind and amount to those sold
short (or securities convertible or exchangeable into such securities) and will
be required to continue to hold them while the short sale is outstanding. A
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales against the box.

HEALTH CARE INDUSTRY

The health care industry is subject to regulatory action by a number
of private and governmental agencies, including federal, state, and local
governmental agencies. A major source of revenues for the health care industry
is payments from Medicare and Medicaid programs. As a result, the industry is
sensitive to legislative changes and reductions in governmental spending for
such programs. Numerous other factors may affect the industry, such

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as general and local economic conditions; demands for services; expenses
(including malpractice insurance premiums); and competition among health care
providers. In the future, the following elements may adversely affect health
care facility operations: adoption of legislation proposing a national health
insurance program; medical and technological advances that dramatically alter
the need for health services or the way in which such services are delivered;
and efforts by employers, insurers, and governmental agencies to reduce the
costs of health insurance and healthcare services.

TRANSPORTATION

Transportation debt may be issued to finance the construction of
airports, toll roads, and highways. Airport bonds are dependent on the general
stability of the airline industry and stability of a specific carrier which
uses the airport as a hub. Air traffic generally follows broader economic
trends and is also affected by the price and availability of fuel. Toll-road
bonds are also affected by the cost and availability of fuel as well as toll
levels, the presence of competing roads and the general economic health of an
area. Fuel costs and availability also affect other transportation-related
services, as do the presence of alternate forms of transportation, such as
public transportation.

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SPECIAL CONSIDERATIONS

The following information as to certain Maryland and Pennsylvania risk
factors has been provided in view of the policy of the Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio of concentrating in Maryland and
Pennsylvania municipal securities, respectively. This information constitutes
only a brief summary, does not purport to be a complete description of risk
factors and is principally drawn from official statements relating to
securities offerings of the State of Maryland and the Commonwealth of
Pennsylvania that were available as of the date of this Statement of Additional
Information.

MARYLAND TAX-FREE PORTFOLIO

According to 1990 Census reports, Maryland's population in that year
was 4,797,676, reflecting an increase of 13.8% from the 1980 Census.
Maryland's population in 1996 was 5,071,600. Maryland's population is
concentrated in urban areas: the eight counties and Baltimore City located in
the Baltimore-Washington Corridor contain 37.4% of the State's land area and
86.9% of its population. The estimated 1990 population for the Baltimore
Standard Metropolitan Statistical Area was 2,382,172 and for the Maryland
portion of the Washington Standard Metropolitan Statistical Area, 1,789,029.
Overall, Maryland's population per square mile in 1990 was 487.7.

Personal income in Maryland grew at annual rates between 8.1% and 9.2%
in each of the years 1986 through 1988, but fell from a rate of 8.7% in 1989 to
3.0% in 1991. Commencing in 1992, however, personal income growth rebounded,
increasing at annual rates of between 4.0% and 5.2% in each of the years 1992
through 1996. Similarly, per capita personal income, which had grown at rates
no lower than 6.4% for the period from 1972 to 1989, grew at a rate of 4.8% in
1990 and only 1.8% in 1991. Subsequently, per capita personal income has grown
at annual rates of between 3.0% and 4.3% in each of the years 1992 through
1996. Unemployment in Maryland peaked in 1982 at 8.4%, then decreased steadily
to a low of 3.7% in 1989. In 1990, unemployment increased to 4.7%, and
increased further to 6.0% in 1991, 6.7% in 1992 and 6.2% in 1993, before
dropping to 5.1% in 1994 and 1995, and 4.9% in 1996. In April, 1997, the
Maryland unemployment rate was 4.4%.

Retail sales in Maryland dropped by 2.2% in 1991, but rebounded
slightly and grew by 0.2% in 1992, 6.1% in 1993, 9.6% in 1994, 2.9% in 1995 and
1.5% in 1996, versus nationwide growth of 0.6%, 4.8%, 6.5%, 7.4%, 4.6% and 4.9%
in such years, respectively.

Services (including mining), wholesale and retail trade, government
and manufacturing (primarily printing and publishing, food and kindred
products, instruments and related products, industrial machinery, electronic
equipment and chemical and allied products) are the leading areas of employment
in the State of Maryland. In contrast to the nation as a whole, more people in
Maryland are employed in government than in manufacturing (19.1% versus 7.9% in
1996). Between 1976 and 1996, manufacturing wages decreased by 25.2%, while
non-manufacturing wages increased by 60.5%

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The State's total expenditures for the fiscal years ending June 30,
1993, 1994, 1995 and 1996 were $11.8 billion, $12.4 billion, $13.5 billion and
$14.2 billion, respectively. The State's General Fund, representing
approximately 55% to 60% of each year's total budget, had a surplus on a
budgetary basis of $55,000 in fiscal year 1991 and a deficit of $56.4 million
in fiscal year 1992. These results were due primarily to revenue collections
which fell short of projections, and increases in expenditures for public
assistance. The Governor of Maryland reduced fiscal year 1993 appropriations
by approximately $56 million to offset the fiscal year 1992 deficit. On a
budgetary basis, the State's General Fund surplus rose to $10.5 million in
fiscal year 1993, $60 million in 1994 and $26.5 million in 1995 (after
budgeting $106 million for 1996 expenses) and $13.1 million in 1996 (of which
$3.1 million was designated for fiscal 1997 operations). The State
Constitution mandates a balanced budget. Balances in the Revenue Stabilization
Account of the State Reserve Fund have also risen from $300,000 in 1992 to
$50.9 million in 1993, $161.8 million in 1994, $286.1 million in 1995 and
$461.2 million in 1996 (reflecting a net transfer to the General Fund of $56.4
million).

In April 1996, the General Assembly approved a $14.6 billion 1997
fiscal year budget. The budget as enacted includes funds sufficient to meet
all fiscal year 1996 deficiencies and to meet all specific statutory funding
requirements; the budget incorporates $29 million in savings from revisions to
the State personnel system and reform to the welfare and Medicare programs.
When this budget was enacted, the State estimated that the General Fund surplus
on a budgetary basis at June 30, 1996 would be approximately $22.5 million, in
addition to which the State projected that there would be $490.4 million in the
Revenue Stabilization Account of the State Reserve Fund. The State currently
projects a General Fund balance on a budgetary basis of $144.5 million.

In April 1997, the General Assembly approved a $15.4 billion 1998
fiscal year budget. This budget (i) includes funds sufficient to meet all
specific statutory funding requirements; (ii) incorporates the first year of a
five-year phase-in of a 10% reduction in personal income taxes (estimated to
reduce revenues by $38.5 million in fiscal year 1998 and $450 million when
fully phased in) and certain reductions in sales taxes on certain manufacturing
equipment (estimated to reduce revenues by $38.6 million when the reductions
are fully phased in, in fiscal year 2001); and (iii) includes the first year's
$30 million funding under an agreement to provide additional funds totaling
$230 million over a five-year period to schools in the City of Baltimore and
related grants to other subdivisions totaling $32 million. When this budget
was enacted, the State estimated the General Fund surplus on a budgetary basis
would be $28.2 million, in addition to which the State projected that there
would be a balance of $554 million in the Revenue Stabilization Account of the
State Reserve Fund.

The State of Maryland and its various political subdivisions issue a
number of different kinds of municipal obligations, including general
obligation bonds supported by tax collections, revenue bonds payable from
certain identified tax levies or revenue streams, conduit revenue bonds payable
from the repayment of certain loans to authorized entities such as hospitals
and universities, and certificates of participation in tax-exempt municipal
leases.

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The State of Maryland issues general obligation bonds, which are
payable from ad valorem property taxes. The State Constitution prohibits the
contracting of State debt unless the debt is authorized by law levying an
annual tax or taxes sufficient to pay the debt service within 15 years and
prohibiting the repeal of the tax or taxes or their use for another purpose
until the debt has been paid. The State also enters into lease-purchase
agreements, in which participation interests are often sold publicly as
individual securities.

As of March 1997, the State's general obligation bonds were rated
"Aaa" by Moody's, "AAA" by S&P, and "AAA" by Fitch Investors Service, Inc.
("Fitch").

The Maryland Department of Transportation issues Consolidated
Transportation Bonds, which are payable out of specific excise taxes, motor
vehicle taxes, and corporate income taxes, and from the general revenues of the
Department. Issued to finance highway, port, transit, rail or aviation
facilities, these bonds are rated "Aa" by Moody's, "AA" by S&P, and "AA" by
Fitch. The Maryland Transportation Authority, a unit of the Department, issues
its own revenue bonds for transportation facilities, which are payable from
certain highway, bridge and tunnel tolls. These bonds are rated "A+" by S&P.

Other State agencies which issue municipal obligations include the
Maryland Stadium Authority, which has issued bonds payable from sports facility
and other lease revenues and certain lottery revenues and convention center
lease revenue bonds; the Maryland Water Quality Financing Administration, which
issues bonds to provide loans to local governments for wastewater control
projects; the Community Development Administration of the Department of Housing
and Community Development, which issues mortgage revenue bonds for housing; the
Maryland Environmental Service, which issues bonds secured by the revenues from
its various water supply, wastewater treatment and waste management projects;
and the various public institutions of higher education in Maryland (which
include the University of Maryland System, Morgan State University and State
University, and St. Mary's College of Maryland) which issue their own revenue
bonds. None of these bonds constitute debts or pledges of the full faith and
credit of the State of Maryland. The issuers of these obligations are subject
to various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the quality of obligations
backed by the full faith and credit of the State.

In addition, the Maryland Health and Higher Educational Facilities
Authority and the Maryland Industrial Development Financing Authority issue
conduit revenue bonds, the proceeds of which are lent to borrowers eligible
under relevant state and federal law. The Northeast Maryland Waste Disposal
Authority, the Maryland Economic Development Corporation and the Maryland
Energy Financing Administration also issue conduit revenue bonds. These bonds
of these issuers are payable solely from the loan payments made by borrowers
and other financing participants, and their credit quality varies with the
financial strengths of these entities.

Maryland has 24 geographical subdivisions, composed of 23 counties
plus the independent City of Baltimore, which functions much like a county.
Some of the counties and the City of Baltimore operate pursuant to the
provisions of codes of their own adoption, while others operate pursuant to
State-approved charters and State statutes.

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Maryland counties and municipalities and the City of Baltimore receive
most of their revenues from ad valorem taxes on real and personal property,
individual income taxes, transfer taxes, miscellaneous taxes and aid from the
State. Their expenditures include public safety, public works, health, public
welfare, court and correctional services, education, and general governmental
costs.

The economic factors affecting the State, as discussed above, also
have affected the counties, municipalities and the City of Baltimore. In
addition, reductions in State aid caused by State budget deficits have caused
the local governments to trim expenditures and, in some cases, raise taxes.

According to recent available ratings, general obligation bonds of
Montgomery County (abutting Washington, D.C.) are rated "Aaa" by Moody's and
"AAA" by S&P. Prince George's County, also in the Washington, D.C. suburbs,
issues general obligation bonds rated "Aa" by Moody's and "AA-" by S&P, while
Baltimore County, a separate political subdivision surrounding the City of
Baltimore, issues general obligation bonds rated "Aaa" by Moody's and "AAA" by
S&P and Anne Arundel County issues general obligation bonds which are rated
"AA+" by both Fitch and S&P and "Aa1" by Moody's. The City of Baltimore's
general obligation bonds are rated "A1" by Moody's and "A" by S&P. The other
counties in Maryland all have general obligation bond ratings of "A" or better,
except for Allegheny County and Garrett County, the bonds of which are rated
"Baa2" and "Baa3", respectively, by Moody's. The Washington Suburban Sanitary
District, a bi-county agency providing water and sewerage services in
Montgomery and Prince George's counties, issues general obligation bonds rated
"Aa1" by Moody's and "AA" by S&P. Additionally, some of the large municipal
corporations in Maryland (such as the cities of Rockville, Annapolis and
Frederick) have issued general obligation bonds. There can be no assurance
that these ratings will continue.

Many of Maryland's counties and the City of Baltimore have established
subsidiary agencies with bond issuing powers, such as housing authorities,
parking revenue authorities, and industrial development authorities. In
addition, all Maryland municipalities have the authority under State law to
issue conduit revenue bonds. These entities are subject to various economic
risks and uncertainties and the credit quality of the securities issued by them
may vary considerably from the credit quality of obligations backed by the full
the faith and credit of the State.

PENNSYLVANIA TAX-FREE PORTFOLIO

GENERAL

Pennsylvania has historically been dependent on heavy industry,
although recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic
growth in Pennsylvania are in the service sector, including trade, medical and
health services, education and financial institutions. Agriculture continues
to be an important component of the Commonwealth's economic structure, with
nearly one-third of the Commonwealth's total land area devoted to cropland,
pasture and farm woodlands.

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In 1995, the population of Pennsylvania was 12.07 million people.
According to the U.S. Bureau of the Census, Pennsylvania's population
experienced a slight increase from the 1986 estimate of 11.8 million.
Pennsylvania has a high proportion of persons 65 years of age or older. The
Commonwealth is highly urbanized, with 79% of the 1990 census population
residing in metropolitan statistical areas. The cities of Philadelphia and
Pittsburgh, the Commonwealth's largest metropolitan statistical areas, together
comprise approximately 44% of the Commonwealth's total population.

Pennsylvania's average annual unemployment rate remained below the
national average between 1986 and 1990. Slower economic growth caused the rate
to rise to 6.9% in 1991 and 7.5% in 1992. The resumption of faster economic
growth resulted in a decrease in the Commonwealth's unemployment rate to 7.0%
in 1993. Seasonally adjusted data for March 1996, the most recent month for
which data is available, shows an unemployment rate of 5.6%, the same rate as
that for the United States.

FINANCIAL ACCOUNTING

Pennsylvania utilizes the fund method of accounting and over 150 funds
have been established for the purpose of recording receipts and disbursements,
of which the General Fund is the largest. Most operating and administrative
expenses are payable from the General Fund. The Motor License Fund is a
special revenue fund that receives tax and fee revenues relating to motor fuels
and vehicles (except one-half cent per gallon of the liquid fuels tax which is
deposited in the Liquid Fuels Tax Fund for distribution to local
municipalities) and all such revenues are required to be used for highway
purposes. Other special revenue funds have been established to receive
specified revenues appropriated to specific departments, boards, and/or
commissions. These funds include the Game, Fish, Boat, Banking Department,
Milk Marketing, State Farm Products Show, State Racing and State Lottery Funds.
The General Fund, all special revenue funds, the Debt Service Funds and the
Capital Project Funds combine to form the Governmental Fund Types.

Enterprise funds are maintained for departments or programs operated
like private enterprises. The largest of the Enterprise funds is the State
Stores Fund, which is used for the receipts sand disbursements of the
Commonwealth's liquor store system. Sale and distribution of all liquor within
Pennsylvania is a government enterprise.

Financial information for the funds is maintained on a budgetary basis
of accounting ("Budgetary"). Since 1984, the Commonwealth has also prepared
financial statements in accordance with generally accepted accounting
principles ("GAAP"). The GAAP statements have been audited jointly by the
Auditor General of the Commonwealth and an independent public accounting firm.
The Budgetary information is adjusted at fiscal year end to reflect appropriate
accruals for financial reporting in conformity with GAAP. The Commonwealth
maintains a June 30th fiscal year end.

The Constitution of Pennsylvania provides that operating budget
appropriations may not exceed the actual and estimated revenues and available
surplus in the fiscal year for which funds

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are appropriated. Annual budgets are enacted for the General Fund and for
certain special revenue funds which represent the majority of expenditures of
the Commonwealth.

REVENUES AND EXPENDITURES

Pennsylvania's Governmental Fund Types receive over 57% of their
revenues from taxes levied by the Commonwealth. Interest earnings, licenses
and fees, lottery ticket sales, liquor store profits, miscellaneous revenues,
augmentations and federal government grants supply the balance of the receipts
of these funds. Revenues not required to be deposited in another fund are
deposited in the General Fund. The major tax sources for the General Fund are
the 6% sales and use tax (34.1% of General Fund revenues in fiscal 1995), the
2.8% personal income tax (31.3% of General Fund revenues in fiscal 1995) and
the 9.99% corporate net income tax (11.7% of General Fund revenues in fiscal
1995). Tax and fee proceeds relating to motor fuels and vehicles are
constitutionally dedicated to highway purposes and are deposited into the Motor
License Fund. The major source of revenue for the Motor License Fund include
the liquid fuels tax, the oil company franchise tax, aviation taxes and
revenues from fees levied on heavy trucks. These revenues are restricted to
the repair and construction of highway bridges and aviation programs. Lottery
ticket sales revenues are deposited in the State Lottery Fund and are reserved
by statute for programs to benefit senior citizens.

Pennsylvania's major expenditures include funding for education ($6.7
billion of fiscal 1995 expenditures, the projected $6.9 billion of the fiscal
1996 budget and the proposed almost $7.0 billion of the fiscal 1997 budget) and
public health and human services ($12.4 billion of fiscal 1995 expenditures,
the projected $13.1 billion of the fiscal 1996 budget and the proposed
decreases of the fiscal 1997 $12.9 billion budget).

GOVERNMENTAL FUND TYPES: FINANCIAL CONDITION/RESULTS OF OPERATIONS
(GAAP BASIS)

Reduced revenue growth and increased expenses contributed to negative
unreserved-undesignated fund balances of the Governmental Fund Types at the end
of the 1990 and 1991 fiscal years, largely due to operating deficits in the
General Fund and State Lottery Fund during those years. Actions taken during
fiscal 1992, to bring the General Fund back into balance, including tax
increases and expenditure restraints, resulted in a $1.1 billion reduction to
the unreserved-undesignated fund deficit for combined Governmental Fund Types
and a return to a positive fund balance. The fund balance for the Governmental
Fund Types, as restated, has increased during the 1993, 1994 and 1995 fiscal
years. At June 30, 1995, the fund balance totaled $1,927.6 million including
an unreserved-undesignated fund balance of $104.8 million.

GENERAL FUND: FINANCIAL CONDITIONS/RESULTS OF OPERATIONS

FIVE-YEAR OVERVIEW (GAAP BASIS)

For the five-year period from fiscal 1991 through fiscal 1995, total
revenues and other sources rose at a 9.1% average annual rate while total
expenditures and other uses grew by 7.4% annually. Over two-thirds of the
increase in total revenues and other sources during this period

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occurred during fiscal 1992 when a $2.7 billion tax increase was enacted to
address a fiscal 1991 budget deficit and to fund increased expenditures for
fiscal 1992. For the four-year period fiscal 1992 through fiscal 1995, total
revenues and other sources increased at an annual average of 3.3%, less than
one-half the rate of increase for the five-year period beginning with fiscal
1991. This slower rate of growth was due, in part, to tax rate reductions and
other tax law revisions that restrained the growth of tax receipts for fiscal
years 1993, 1994 and 1995.

Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991 through
fiscal 1995 period. Program areas having the largest increase in costs for the
fiscal 1991 to fiscal 1995 period were for protection of persons and property,
due to an expansion of state prisons, and for public health and welfare, due to
rising caseloads, program utilization and increased prices. Recently, efforts
to restrain the rapid expansion of public health and welfare program costs have
resulted in expenditure increases at or below the total rate of increase for
total expenditures in each fiscal year. For the period fiscal 1992 through
fiscal 1995, public health and welfare costs increased by an average annual
rate of 3.5%, well below the 5.2% average for total expenditures and other uses
during the same period.

Tax revenues declined in fiscal 1991 as a result of the recession in
the economy. A $2.7 billion tax increase enacted for fiscal 1992 brought
financial stability to the General Fund. That tax increase included several
taxes with retroactive effective dates which generated some one-time revenues
during fiscal 1992. The absence of those revenues in fiscal 1993 contributed
to the decline in tax revenues shown for fiscal 1993. Fiscal 1994 tax revenues
increased by 4.1%, but a decline in other revenues caused by the end of medical
assistance pooled financing in fiscal 1993 held total revenues to a 1.8% gain.
Expenditures for fiscal 1994 rose by 4.3%.

During fiscal 1992 enactment of over $2.7 billion in General Fund tax
increases and implementation of expenditure control initiatives helped the
General Fund balance return to a surplus of $87.5 million at June 30, 1992.
The actions taken to increase revenues and restrain expenditure growth were
necessary to offset the effects on General Fund finances of a period of slow
economic growth including a national economic recession. The recession caused
tax revenues during fiscal 1991 to be below the amount received during fiscal
1990 while spending, particularly for public health and welfare programs to
support needy individuals, increased by over 21%. Public health and welfare
expenditures continued their rapid increase with a 23.9% increase during fiscal
1992 as caseloads and costs continued upward. Some of these increased costs
were met through the use of pooled financing techniques that use private
contributions and intergovernmental transfers to substitute for the state funds
match for federal governmental grants-in-aid. Debt service expenditures
escalated as the amount of tax anticipation note borrowing increased in
response to the fiscal pressures brought about by slow economic growth and the
recession.

FISCAL 1992 FINANCIAL RESULTS (GAAP BASIS)

During fiscal 1992, the General Fund recorded a $1.1 billion operating
surplus. This operating surplus was achieved through legislated tax rate
increases and tax base broadening measures enacted in August 1991, and by
controlling expenditures through numerous cost

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reduction measures implemented during the fiscal year. As a result of the
operating surplus, the General Fund balance increased to $87.5 million at June
30, 1992.

FISCAL 1993 FINANCIAL RESULTS (GAAP BASIS)

The fund balance of the General Fund increased by $611.4 million
during the fiscal year, led by an increase in the unreserved balance of $576.8
million over the prior fiscal year balance. At June 30, 1993, the fund balance
totaled $698.9 million and the unreserved-undesignated balance totaled $64.4
million.

FISCAL 1994 BUDGET (GAAP BASIS)

The fund balance of the General Fund increased by $194.0 million due
largely to an increased reserve for encumbrances and an increase in other
designated funds. The fund balance for June 30, 1994 was restated for the
fiscal 1995 financial statements. That restatement totals $116.7 million to
recognize previously unreported revenues and expenditures for fiscal 1994. The
fund balance for June 30, 1994, as restated, was $776.5 million and the
unreserved-undesignated balance totaled $79.1 million. A continuing recovery
of the Commonwealth's financial condition from the effects of the national
economic recession of 1990 and 1991 is demonstrated by this increase in the
balance and a return to a positive unreserved-undesignated balance. For the
third consecutive fiscal year the increase in the unreserved-undesignated
balance exceeded the increase recorded in the budgetary basis unappropriated
surplus during the fiscal year.

FISCAL 1995 BUDGET (GAAP BASIS)

Revenues and other sources totaled $23,771.6 million, an increase of
$1,135.0 million (0.5%) over the prior fiscal year. The largest increase was
$817.9 million in taxes which represents a 5.6% increase over taxes in the
prior fiscal year. Expenditures and other uses rose by $1,364.1 million to
$23,821.4 million, an increase over the prior fiscal year of 6.1%.
Consequently, an operating deficit of $49.8 million was recorded for the fiscal
year and led to a fund balance decline to $688.3 million at June 30, 1995. Two
items predominately contributed to the fund balance decline. First, a more
comprehensive procedure was used for fiscal 1995 to compute the liabilities for
certain public welfare programs leading to an increase for the year-end
accruals. Second, a change to the methodology to calculate the year-end
accrual for corporate tax payables increased the tax refund liability by $72
million for the 1995 fiscal year when compared to the previous fiscal year.

PROPOSED FISCAL 1996 BUDGET (BUDGETARY BASIS)

The approved fiscal 1996 budget provides for $16,165.7 million in
appropriations from Commonwealth funds, an increase of 2.7% over
appropriations, including supplemental appropriations, for fiscal 1995. The
budget includes a reform of the state-funded public assistance program that
added certain categories of eligibility to the program but also limited the
availability of such assistance to other eligible persons. Education subsidies
to local school

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districts were increased by $132.2 million to continue the increased funding
for the poorest school districts in the state.

The fiscal 1996 budget is based on anticipated Commonwealth revenues,
net of enacted tax changes, of $16,268.7 million, an increase over actual
fiscal 1995 Commonwealth revenues of 0.3%. Excluding the estimated effects of
the tax changes enacted in 1994 and 1995, Commonwealth revenues for fiscal 1996
are estimated to increase by approximately 2.9%. The fiscal 1996 revenue
estimate is based on a forecast of the national economy for gross domestic
product growth to slow from 4.1% in 1994 to an average annual rate for 1995 of
2.4% and then to 1.3% in 1996.

Tax changes enacted with the fiscal 1996 budget totaled a net
reduction of $282.9 million, representing an approximate 1.7% of base revenues.
The largest dollar value changes were in the corporate net income tax where the
scheduled 1997 reduction of the tax rate to 9.99% was accelerated to the 1995
tax year; a double-weighting was provided for the sales factor of the corporate
net income apportionment calculation; and the maximum annual allowance for the
net operating loss deduction was increased from $500,000 to $1 million. The
fiscal 1996 cost of these corporate income tax changes is estimated to be
$210.8 million representing approximately 75% of the fiscal year's tax
reduction. Other major components of the tax reduction include a $12.1 million
decrease for the capital stock and franchise tax from an increase in the basic
exemption; $24.7 million from the repeal of the tax on annuities; and $27.9
million from an acceleration of the scheduled phase-out of the inheritance tax
on transfers of certain property to a surviving spouse. A 90-day amnesty
program was also authorized in the tax bill. The amnesty program was available
to taxpayers from October 1995 through January 1996. Tax and interest revenues
received from the tax amnesty program after payment of administration costs
were credited to the appropriate fund. Receipts credited to the General Fund
in excess of $67 million, plus any shortfall in delinquent tax collections
below those in fiscal 1995, are to be deposited into a restricted account in
the General Fund for later distribution.

Increases in authorized spending for fiscal 1996 emphasize education.
Appropriations for the basic subsidy for public schools were increased $143
million representing a 4.4% increase. This increase reversed a four-year trend
of a declining budget share for education. A limited program to permit certain
residents to choose the school district or private school to provide their
children's education was funded in the budget, but enabling legislation for the
program has yet to be enacted. The budget also contemplates several changes to
certain public welfare programs. The enacted budget also included most of the
Governor's proposed consolidation and elimination of several organizations
and/or appropriations. The consolidated programs were absorbed within existing
organizations. Savings of $5.2 million are anticipated to result from these
consolidations and eliminations.

Revised estimates for the fiscal 1996 budget were included in the
Governor's February 1996 submission of his fiscal 1997 budget proposal.
Supplemental appropriations funding needs were recommended totaling $54.2
million, representing 0.3% of approved appropriations for fiscal 1996. The
majority of the supplemental appropriations are for the Department of
Corrections to meet the additional operational costs arising from a larger
inmate population than

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budgeted, and for the Department of Education to meet local school subsidy
costs which were underestimated in the adopted budget. All anticipated
supplemental appropriation needs for the Department of Public Welfare are
expected to be met from a re-allocation of appropriation authority within the
Department. Funding for the requested supplemental appropriations will be
provided by appropriation lapses anticipated during the fiscal year.
Appropriation lapses totaling $50 million from prior fiscal years'
appropriations and $90 million from current fiscal year appropriations are
expected. The $140 million total appropriation lapses estimated for fiscal
1996 compares to actual appreciation lapses totaling $205 million and $194
million during fiscal 1995 and fiscal 1994, respectively. The General Assembly
has not yet approved the requested supplemental appropriations.

Commonwealth revenues for fiscal 1996 are anticipated to be $2.5
million (less than 0.1%) over the official estimate of revenues for the fiscal
year. Within the revised estimate, receipts from the corporate net income tax
and interest earnings are anticipated to exceed the official estimate while
receipts from the sales and use tax, the personal income tax and the gross
receipts tax are anticipated to fall below their official estimate levels.

FISCAL 1997 PROPOSED BUDGET

In February 1996, the Governor presented his proposed fiscal 1997
budget to the General Assembly. Proposed appropriations from General Fund
Commonwealth revenues total $16,189.9 million, a reduction from the estimated
$16,219.9 million (including proposed supplemental appropriations) for fiscal
1996. The proposed reductions represent a decline of approximately 0.2% in
appropriations from the prior fiscal year. Revenue receipts are estimated to
increase by $403.9 million, or 2.5%, over anticipated receipts for fiscal 1996.
The anticipated increased revenues, together with the projected $140 million of
appropriation lapses during fiscal 1996 and the proposed drawdown of
approximately $95 million of surplus provide the funding sources for the
proposed budget. The proposed drawdown of the fiscal 1996 unappropriated
surplus produces a projected 1997 fiscal year-end surplus of under $5 million,
without any consideration of possible appropriation lapses for fiscal 1997.

The decline in appropriation authority over the prior fiscal year in
the proposed budget relies on several program changes. The largest changes
proposed are $329 million of cost containment efforts in public health and
welfare programs. The largest savings are generated by proposed changes in
eligibility criteria. Savings of $249 million are projected from the
elimination of medical assistance benefits for able-bodied adults without
children and $40 million from tightened standards of employability for those
collecting benefits. Other proposed changes, including changes contained in
proposed federal welfare reform measures, provide an additional $39 million of
budgetary savings. Program reductions are also planned for the residential
portion of the mental health/mental retardation program that could involve a
limited number of staff cuts at state institutions. The budget also relies on
certain provisions of proposed federal welfare reforms. In particular, an
increase in the proportion of federal funding for medical assistance is assumed
which is anticipated to provide $261.8 million of additional federal funds and
a commensurate reduction in required state funds. Other significant cost
restraints include reductions to appropriations for the state-aided colleges
and universities and no

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increases for the state-related colleges and universities. Funds for basic
education programs to local school districts are proposed to increase slightly.
The largest increase, $33.3 million, is proposed for an initiative to improve
the use of technology in learning. A restructuring of the economic development
programs and incentives of the Commonwealth are also proposed to combine and
improve the delivery of such programs. A proposed securitization of current
loans held by the Sunny Day Fund is budgeted to provide a portion of the
initial capitalization for the realigned programs. The current trend of
escalating costs of the corrections program continues in this budget. An
amount of $80.3 million is included to meet the increased costs of the rising
prison population.

The proposed fiscal 1997 budget includes tax reductions totaling $60.2
million. Included in the proposed reductions are a 0.25 mil reduction to the
tax rate for the capital stock and franchise taxes, an exemption of certain
computer services from the sales and use tax, and a $1,000 per job tax credit
for newly created jobs. All require legislative enactment.

The General Assembly is considering the Governor's proposed budget in
committee deliberations and floor action on implementing legislation. The
various legislative bills required to implement the proposed budget have begun
to move through the legislative process. However, legislation enacting medical
assistance program changes estimated in the proposed budget to produce
approximately $249 million in savings was approved by the Senate but rejected
by the House of Representatives. Delay in the enactment of the proposed
changes beyond March 1996 will impede timely implementation of the proposed
changes and, in the absence of other budgetary measures, result in higher
spending than anticipated in the proposed fiscal 1997 budget. Appropriations
committees of the General Assembly are considering 1997 fiscal year budget
appropriations and, upon committee approval, appropriation bills will be
considered by each house. The General Assembly may change, eliminate or add
amounts and items to the proposed budget submitted by the Governor and there
can be no assurance that the budget, as proposed by the Governor, will be
enacted into law.

COMMONWEALTH DEBT

Current constitutional provisions permit Pennsylvania to issue the
following types of debt: (i) debt to suppress insurrection or rehabilitate
areas affected by disaster, (ii) electorate approved debt, (iii) debt for
capital projects subject to an aggregate debt limit of 1.75 times the annual
average tax revenues of the preceding five fiscal years, and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts.

General obligation debt totaled $5,045.4 million at June 30, 1995, a
decrease of $30.4 million from June 30, 1994. Over the 10-year period ended
June 30, 1995, total outstanding general obligation debt increased at an annual
rate of 1.1% and for the five years ended June 30, 1994, at an annual rate of
1.7%. All outstanding general obligation bonds of the Commonwealth are rated
AA- by S & P's, A1 by Moody's and AA- by Fitch. The ratings reflect only the
views of the rating agencies.

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Pennsylvania engages in short-term borrowing to fund expenses within a
fiscal year through the sale of tax anticipation notes which must mature within
the fiscal year of issuance. The principal amount issued, when added to that
already outstanding, may not exceed in aggregate 20% of the revenues estimated
to accrue to the appropriate fund in the fiscal year. The Commonwealth is not
permitted to fund deficits between fiscal years with any form of debt. All
year-end deficit balances must be funded within the succeeding fiscal year's
budget. Pennsylvania issued a total of $500.0 million of tax anticipation
notes for the account of the General Fund in fiscal 1996, all of which matured
on June 30, 1996, and will be paid from fiscal 1996 General Fund receipts.

Pending the issuance of bonds, Pennsylvania may issue bond
anticipation notes subject to the applicable statutory and constitutional
limitations generally imposed on bonds. The term of such borrowings may not
exceed three years. Currently, there are no bond anticipation notes
outstanding.

STATE-RELATED OBLIGATIONS

Certain state-created agencies have statutory authorization to incur
debt for which no legislation providing for state appropriations to pay debt
service thereon is required. The debt of these agencies is supported by assets
of, or revenues derived from, the various projects financed and the debt of
such agencies is not an obligation of Pennsylvania although some of the
agencies are indirectly dependent on Commonwealth appropriations. In addition,
Pennsylvania may choose to take action to financially assist these
organizations. The following agencies had debt currently outstanding as of
December 31, 1995: Delaware River Joint Toll Bridge Commission ($55.1
million), Delaware River Port Authority ($185.5 million), Pennsylvania Economic
Development Financing Authority ($1,050.8 million), Pennsylvania Energy
Development Authority ($121,0 million), Pennsylvania Higher Education
Assistance Agency ($408.8 million), Pennsylvania Higher Educational Facilities
Authority ($2,115.1 million), Pennsylvania Industrial Development Authority
($344.8 million), Pennsylvania Infrastructure Investment Authority ($13.1
million), Pennsylvania Turnpike Commission ($1,228.7 million), Philadelphia
Regional Port Authority ($2.6 million), and the State Public School Building
Authority ($316.2 million). In addition, the Governor is statutorily required
to place in the budget of the Commonwealth an amount sufficient to make up any
deficiency in the capital reserve fund created for, or to avoid default on,
bonds issued by the Pennsylvania Housing Finance Agency ($164.8 million of
revenue bonds outstanding as of December 31, 1995), and an amount of funds
sufficient to alleviate any deficiency that may arise in the debt service
reserve fund for bonds issued by The Hospitals and Higher Education Facilities
Authority of Philadelphia ($1.49 million of the loan principal was outstanding
as of December 31, 1995). The budget as finally adopted by the legislation may
or may not include the amounts requested by the Governor.

LITIGATION

Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations, including suits relating to the following matters: (a)
approximately 3,500 suits are pending against the Commonwealth pursuant to the
General Assembly's 1978 approval of a limited waiver of sovereign immunity

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which permits recovery of damages for any loss up to $250,000 per person and
$1,000,000 per accident ($32.0 million appropriated from the Motor License Fund
in fiscal 1994 has been decreased to $27.0 million for fiscal 1995); (b) the
ACLU filed suit in April 1990 in federal court demanding additional funding for
child welfare services (no available estimates of potential liability), the
Commonwealth then sought dismissal based on, among other things, the settlement
in a similar Commonwealth court action that provided for more funding in fiscal
1991 as well as a commitment to pay to counties $30.0 million over five years
(On April 12, 1993, the court dismissed all claims except for the
constitutional claims of some of the plaintiffs and two Americans with
Disabilities Act claims. The district court has since denied the ACLU's motion
for class certification. The parties have stipulated to a judgment against the
plaintiffs in order for plaintiffs to appeal the denial of class certification
to the Third Circuit. In December of 1994, the Third Circuit reversed Judge
Kelly's ruling, finding that he erred in refusing to certify the class.
Consistent with the Third Circuit's ruling, the district court recently
certified the class, and the parties have resumed discovery.); (c) in 1987, the
Supreme Court of Pennsylvania held that the statutory scheme for county funding
of the judicial system was in conflict with the Pennsylvania Constitution but
stayed judgment pending enactment by the legislature of funding consistent with
the opinion (the legislature has yet to consider legislation implementing the
judgment); (d) several banks have filed suit against the Commonwealth
contesting the constitutionality of a 1989 law imposing a bank shares tax on
banking institutions (Pursuant to a Settlement Agreement dated as of April 2,
1995, the Commonwealth agreed to enter a credit in favor of one plaintiff bank
in the amount of $4,100,000 in settlement of the constitutional and
non-constitutional issues including interest. Pursuant to a separate
Settlement Agreement dated as of April 21, 1995, the Commonwealth settled with
the intervening banks, referred to as "New Banks." As part of the settlement,
the Commonwealth agreed neither to assess nor attempt to recoup any new bank
tax credits which had been granted or taken by any of the intervening banks.);
(e) in November 1990, the ACLU brought a class action suit on behalf of the
inmates in thirteen Commonwealth correctional institutions challenging
confinement conditions and including a variety of other allegations (On August
1, 1994, the parties submitted a proposed settlement agreement to the court for
its review. The court held hearings on the proposed Settlement Agreement in
December 1994. The court approved the Settlement Agreement with a January 17,
1995 Memorandum. On February 3, 1995, the Commonwealth paid $1.3 million in
attorneys' fees to the plaintiffs' attorneys in accordance with the Agreement.
The remaining $100,000 in attorneys' fees will be paid upon dismissal of the
preliminary injunction relating to certain health issues. The parties are
currently complying with monitoring provisions outlined in the Agreement. The
monitoring phase will expire on January 6, 1998.); (f) in 1991, a consortium of
public interest law firms filed a class action suit alleging that the
Commonwealth had failed to comply with the 1989 federal mandate with respect to
certain services for Medicaid-eligible children under the age of 21 (In July
1994, the court denied the plaintiffs' request to proceed as a class action and
dismissed five of the eighteen plaintiff organizations from the case. The
parties have reached a tentative settlement agreement which they have submitted
to the court for approval.); (g) litigation has been filed in both state and
federal court by an association of rural and small schools and several
individual school districts and parents challenging the constitutionality of
the Commonwealth's system for funding local school districts (The federal case
has been stayed pending resolution of the state case and the state case is in
the pre-trial discovery stage. The trial has not yet been scheduled.
Following a status conference among

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counsel, Judge Pellegrini issued an Order, dated May 30, 1996, to consider,
inter alia, the report of the Governor's Commission on Public School Finance
and the course of future proceedings including trial.); (h) the Pennsylvania
Medical Society sued the Commonwealth for payment of the full Medicare co-pay
and deductible for outpatient services to medical assistance clients who are
also eligible for Medicare (The Commonwealth received a favorable decision in
U.S. District Court but the Pennsylvania Medical Society appealed the decision
and won a reversal in the Third Circuit. After similarly unfavorable decisions
by every other appellate court that addressed the issue, the Commonwealth
implemented a new payment system effective January 23, 1995. Preliminary
estimated costs to the Commonwealth are approximately $50 million per year.);
and (i) on November 11, 1993, the Department of Transportation and
Envirotest/Synterra Partners ("Envirotest"), a partnership, entered into a
"Contract for Centralized Emissions Inspection Facilities." Thereafter,
Envirotest acquired certain land and constructed approximately 85 automobile
emissions inspection facilities throughout various regions of the
Commonwealth. By Act of the General Assembly in October 1994 (Act No.
1994-95), the program was suspended and the Department of Transportation was
prohibited from expending funds to implement the program. On December 15,
1995, Envirotest Systems Corporation, Envirotest Partners (successor to
Envirotest/Synterra Partners) and the Commonwealth entered into a Settlement
Agreement pursuant to which the parties settled all claims which Envirotest
might have had against the Commonwealth arising from the suspension of the
emissions testing program. Under the Agreement, Envirotest is to receive $145
million, with interest at 6% per annum, payable $25 million in 1995 and $40
million in each of 1996, 1997 and 1998. An additional $15 million may be
required to be paid in 1998, depending upon the results of property
liquidations by Envirotest.

PHILADELPHIA

For the fiscal year ending June 30, 1991, Philadelphia experienced a
cumulative General Fund balance deficit of $153.5 million. The audit findings
for the fiscal year ending June 30, 1992 place the cumulative General Fund
balance deficit at $224.9 million.

Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist Philadelphia in
remedying fiscal emergencies was enacted by the General Assembly and approved
by the Governor in June 1991. PICA is designed to provide assistance through
the issuance of funding debt and to make factual findings and recommendations
to the assisted city concerning its budgetary and fiscal affairs. At this
time, Philadelphia is operating under a five-year fiscal plan approved by PICA
on April 17, 1995.

To date, PICA has issued $1,418,680,000 of its Special Tax Revenue
Bonds. This financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation of
the Cumulative General Fund balance deficit of $224.9 million as of June 30,
1992. The audited General Fund balance of the city as of June 30, 1995 showed
a surplus of approximately $80.5 million, up from approximately $1.54 million
as of June 30, 1994.

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No further bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing
a cash flow deficit expires on December 31, 1996.

PORTFOLIO TRANSACTIONS

The Portfolios' advisers seek the most favorable execution result with
respect to transactions. In seeking the most favorable execution, the adviser,
having in mind a Portfolio's best interest, considers all factors it deems
relevant, including, by way of illustration: price; the size of the
transaction; the nature of the market for the security; the amount of the
commission; the timing of the transaction, taking into account market process
and trends; the reputation, experience and financial stability of the
broker-dealer involved; and the quality of service rendered by the
broker-dealer in other transactions.

Transactions on U.S. stock exchanges and other agency transactions
involve the payment by a Portfolio of negotiated brokerage commissions. Such
commissions vary by the price and the size of the transaction along with the
quality of service. Transactions in foreign securities often involve the
payment of fixed brokerage commissions, that are generally higher than those in
the United States. There is generally no stated commission in the case of
securities traded in the OTC markets, but the price paid by a Portfolio usually
includes an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by a Portfolio includes a disclosed, fixed commission
or discount retained by the underwriter or dealer.

For each Portfolio, the adviser places all orders for the purchase and
sale of portfolio securities and buys and sells securities for the Portfolio
through a number of brokers and dealers.

It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other institutional
investors to receive research, statistical, and quotation services from
broker-dealers that execute portfolio transactions for the clients of such
advisers. Consistent with this practice, a Portfolio's adviser may receive
research, statistical, and quotation services from broker-dealers with which it
places the Portfolio's portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as general economic
and security market reviews, industry and company reviews, evaluations of
securities, and recommendations as to the purchase and sale of securities.
Some of these services are of value to the adviser and its affiliates in
advising various of their clients (including the Portfolios), although not all
of these services are necessarily useful and of value in managing the
Portfolios. The fee paid by a Portfolio to the adviser is not reduced because
the adviser and its affiliates receive such services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
as amended, the adviser of a Portfolio may cause the Portfolio to pay a
broker-dealer that provides brokerage and research services to the adviser a
commission in excess of the commission charged by another broker-dealer for
effecting a particular transaction. To cause a Portfolio to pay any such
greater commissions, the adviser must determine in good faith that such
commissions are reasonable in relation to the value of the brokerage or
research service provided by such executing broker-dealers viewed in terms of a
particular transaction or the adviser's overall responsibilities to the

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Portfolio or its other clients. In reaching this determination, an adviser
will not attempt to place a specific dollar value on the brokerage or research
services provided or to determine what portion of the compensation should be
related to those services.

Certain investments may be appropriate for a Portfolio and for other
clients advised by the investment adviser. Investment decisions for a
Portfolio and other clients are made with a view to achieving their respective
investment objectives and after consideration of such factors as their current
holdings, availability of cash for investment, and the size of their
investments generally. A particular security may be bought or sold for only
one client or in different amounts and at different times for more than one but
fewer than all clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling the security. In
addition, purchases or sales of the same security may be made for two or more
clients of the adviser on the same day. In each of these situations, the
transactions will be allocated among the clients in a manner considered by the
adviser to be equitable to each. In some cases, this procedure could have an
adverse effect on the price or amount of the securities purchased or sold by a
Portfolio. Purchase and sale orders for a Portfolio may be combined with those
of other clients of the adviser in the interest of achieving the most favorable
execution for the Portfolio.

For the fiscal year ended April 30, 1995, the Balanced Portfolio,
Capital Growth Portfolio and International Equity Portfolio paid brokerage
commissions of $130,320, $285,365 and $728, respectively. For the fiscal year
ended April 30, 1996, the Balanced Portfolio, Blue Chip Equity Portfolio,
Capital Growth Portfolio and Small-Cap Portfolio (formerly Special Equity
Portfolio) paid brokerage commissions of $236,236, $12,478, $568,585 and
$139,254, respectively. For the fiscal year ended April 30, 1997, the Balanced
Portfolio, Capital Growth Portfolio, Small-Cap Portfolio (formerly Special
Equity Portfolio), Blue Chip Equity Portfolio, Equity Income Portfolio, Mid-Cap
Equity Portfolio, Stock Portfolio and International Equity Portfolio paid
brokerage commissions of $251,132, $204,310, $274,131, $61,450, $65,133,
$14,645, $63,306 and $5,747, respectively. For the fiscal year ended April 30,
1997, the Small-Cap Portfolio (formerly Special Equity Portfolio), Blue Chip
Equity Portfolio and Stock Portfolio paid brokerage commissions of $28, $112
and $350 to affiliated brokers.

The Fund is required to identify any securities of its "regular
brokers or dealers" (as such term is defined in the 1940 Act) which the Fund
has acquired during its most recent fiscal year. As of April 30, 1997, the
Portfolios held securities of the Fund's "regular brokers or dealers" as
follows: the Money Market Portfolio held corporate obligations issued by
Goldman Sachs valued at $19,960,000, Smith Barney valued at $39,957,000,
Merrill Lynch valued at $15,000,000, and CS First Boston valued at $29,002,000;
the U.S. Government Money Market Portfolio held $96,000,000 in repurchase
agreements issued by Goldman Sachs, held $180,000,000 in repurchase agreements
issued by Smith Barney, and held $228,763,000 in repurchase agreements issued
by CS First Boston; the Income Portfolio held $28,324,000 in repurchase
agreements issued by CS First Boston; the Intermediate Fixed Income Portfolio
held corporate obligations issued by Lehman Brothers Holdings valued at
$1,242,000 and issued by Merrill Lynch valued at $2,129,000 and held $770,000
in repurchase agreements issued by CS First Boston; the Balanced Portfolio held
common stock issued by Dean Witter Discover valued at $1,148,000 and held
$3,744,000 in repurchase agreements issued by CS First Boston; the

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Equity Income Portfolio held $994,000 in repurchase agreements issued by CS
First Boston; the Stock Portfolio held common stock issued by Dean Witter
Discover valued at $689,000 and held $117,000 in repurchase agreements issued
by CS First Boston; the Capital Growth Portfolio held $2,175,000 in repurchase
agreements issued by CS First Boston; the Mid-Cap Equity Portfolio held common
stock issued by PaineWebber Group valued at $129,000 and held $106,000 in
repurchase agreements issued by CS First Boston; and the Small-Cap Portfolio
(formerly Special Equity Portfolio) held $2,958,000 in repurchase agreements
issued by CS First Boston.

VALUATION OF PORTFOLIO SECURITIES

MONEY MARKET PORTFOLIOS

Each money market Portfolio values its investments on the basis of
amortized cost. This technique involves valuing an instrument at its cost as
adjusted for amortization of premium or accretion of discount rather than its
value based on current market quotations or appropriate substitutes which
reflect current market conditions. The amortized cost value of an instrument
may be higher or lower than the price the Portfolio would receive if it sold
the instrument.

Valuing a Portfolio's instruments on the basis of amortized cost and
use of the term "money market portfolio" are permitted by Rule 2a-7 under the
1940 Act. Each money market Portfolio must adhere to certain conditions under
Rule 2a-7.

The Board of Trustees oversees the adviser's adherence to SEC rules
concerning money market portfolios, and has established procedures designed to
stabilize each money market's Portfolio's net asset value per share ("NAV") at
$1.00. At such intervals as they deem appropriate, the trustees consider the
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. If the trustees believe that a deviation from the Portfolio's
amortized cost per share may result in material dilution or other unfair
results to shareholders, the trustees will take such corrective action, if any,
as they deem appropriate to eliminate or reduce, to the extent reasonably
practicable, such dilution or other unfair result. Such corrective action
could include selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio maturity; withholding
dividends; redeeming shares in kind; establishing NAV by using available market
quotations; and such other measures as the trustees may deem appropriate.

During periods of declining interest rates, a Portfolio's yield based
on amortized cost may be higher than the yield based on market valuations.
Under these circumstances, a shareholder in the Portfolio would be able to
obtain a somewhat higher yield than would result if the Portfolio utilized
market valuations to determine its NAV. The converse would apply in a period
of rising interest rates.

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SHORT-TERM TREASURY PORTFOLIO, SHORT-TERM BOND PORTFOLIO, U.S. GOVERNMENT BOND
PORTFOLIO, INTERMEDIATE FIXED INCOME PORTFOLIO, INCOME PORTFOLIO, MARYLAND
TAX-FREE PORTFOLIO AND PENNSYLVANIA TAX-FREE PORTFOLIO

Valuations of portfolio securities furnished by the pricing service
utilized by the Fund are based upon a computerized matrix system and/or
appraisals by the pricing service, in each case in reliance upon information
concerning market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the quality of valuations
so established are reviewed by officers of the Fund and each Portfolio's
respective pricing agent under general supervision of the Board of Trustees.
There are a number of pricing services available, and the Board, on the basis
of evaluation of these services, may use other pricing services or discontinue
the use of any pricing service in whole or in part.

BALANCED PORTFOLIO, EQUITY INCOME PORTFOLIO, EQUITY INDEX PORTFOLIO, BLUE CHIP
EQUITY PORTFOLIO, MID-CAP EQUITY PORTFOLIO, VALUE EQUITY PORTFOLIO, STOCK
PORTFOLIO, CAPITAL GROWTH PORTFOLIO, SMALL-CAP PORTFOLIO (FORMERLY SPECIAL
EQUITY PORTFOLIO), INTERNATIONAL EQUITY SELECTION PORTFOLIO AND INTERNATIONAL
EQUITY PORTFOLIO

Securities owned by each of these Portfolios are valued by various
methods depending on the market or exchange on which they trade. Securities
traded on a national securities exchange are valued at the last sale price, or
if no sale has occurred, at the closing bid price. Securities traded in the
over-the-counter market are valued at the last sale price, or if no sale has
occurred, at the closing bid price. Securities and other assets for which
market quotations are not readily available are valued at their fair value as
determined under procedures established by the Board of Trustees.

Generally, the valuation of foreign and domestic equity securities, as
well as corporate bonds, U.S. government securities, money market instruments,
and repurchase agreements, is substantially completed each day at the close of
the NYSE. The values of any such securities held by a Portfolio are determined
as of such time for the purpose of computing a Portfolio's NAV. Foreign
security prices are furnished by independent brokers or quotation services
which express the value of securities in their local currency. The pricing
agent gathers all exchange rates daily at 2:00 p.m., Eastern Time, and using
the last quoted price of the security in the local currency, translates the
value of foreign securities from their local currency into U.S. dollars. Any
changes in the value of forward contracts due to exchange rate fluctuations and
days to maturity are included in the calculation of NAV. If an extraordinary
event that is expected to affect materially the value of a portfolio security
occurs after the close of an exchange on which that security is traded, then
the security will be valued pursuant to the procedures established by the Board
of Trustees.

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PORTFOLIO PERFORMANCE

YIELD CALCULATIONS

In computing the yield of shares of a money market Portfolio for a
period, the net change in value of a hypothetical account containing one share
reflects the value of additional shares purchased with dividends from the one
original share and dividends declared on both the original share and any
additional shares. The net change is then divided by the value of the account
at the beginning of the period to obtain a base period return. This base
period return is annualized to obtain a current annualized yield. A money
market Portfolio may also calculate a compounded effective yield for its shares
by compounding the base period return over a one-year period. In addition to
the current yield, the money market Portfolios may quote yields in advertising
based on any historical seven-day period. Yields for the shares of the money
market Portfolios are calculated on the same basis as other money market
portfolios, as required by regulation.

For shares of the non-money-market Portfolios, yields used in
advertising are computed by dividing the interest income for a given 30-day or
one-month period, net of the Portfolio's expenses, by the average number of
shares entitled to receive dividends during the period, dividing this figure by
the Portfolio's NAV at the end of the period and annualizing the result
(assuming compounding of income) in order to arrive at an annual percentage
rate. Income is calculated for purposes of the yield quotations in accordance
with standardized methods applicable to all stock and bond funds. In general,
interest income is reduced with respect to bonds trading at a premium over
their par value by subtracting a portion of the premium from income on a daily
basis, and is increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and losses generally
are excluded from the calculation.

Income calculated for the purposes of determining yield differs from
income as determined for other accounting purposes. Because of the different
accounting methods used, and because of the compounding of income assumed in
yield calculations, a Portfolio's yield may not equal its distribution rate,
the income paid to your account, or income reported in the Portfolio's
financial statements.

For the Tax-Free Money Market Portfolio, Maryland Tax-Free Portfolio
and Pennsylvania Tax-Free Portfolio, a tax-equivalent yield is the rate an
investor would have to earn from a fully taxable investment before taxes to
equal the Portfolio's tax-free yield. Tax-equivalent yields are calculated by
dividing a Portfolio's yield by the result of one minus a stated federal or
combined federal, state and city tax rate. (If only a portion of a Portfolio's
yield was tax-exempt, only that portion is included in the calculation.) If any
portion of a Portfolio's income is derived from obligations subject to state or
federal income taxes, its tax-equivalent yield will generally be lower.

See Appendix B for tables showing the effect of a shareholder's tax
status on effective yield under the federal income tax laws for 1997.

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For the seven-day period ended October 31, 1997, the yields and
effective yields for the U.S. Treasury Money Market Portfolio were 4.74% and
4.85% (Retail Class), 5.05% and 5.18% (Institutional Class), and 4.95% and
5.08% (Institutional II Class); for the U.S. Government Money Market Portfolio
were 5.22% and 5.36% (Institutional Class), and 5.12% and 5.25% (Institutional
II Class); for the Money Market Portfolio were 5.12% and 5.25% (Retail Class),
5.43% and 5.57% (Institutional Class), and 5.33% and 5.47% (Institutional II
Class); and for the Tax-Free Money Market Portfolio were 3.65% and 3.71%
(Retail Class), 3.96% and 4.03% (Institutional Class), and 3.86% and 3.93%
(Institutional II Class).

For the 30-day period ended October 31, 1997, the yields for the
Retail and Institutional Class shares of the non-money-market Portfolios were
as follows: Income Portfolio - 6.00% and 6.54%; Balanced Portfolio - 2.39% and
2.75%; Capital Growth Portfolio - .10% and .35%; Small-Cap Portfolio (formerly
Special Equity Portfolio) - .48% and .75%; Blue Chip Equity Portfolio - 1.01%
and 1.29%; and Short-Term Treasury Portfolio - 5.50% and 5.75%. For the same
30-day period the yields for the Institutional Class shares were as follows:
Intermediate Fixed Income Portfolio - 6.20%; Maryland Tax-Free Portfolio -
4.78%; Pennsylvania Tax-Free Portfolio - 4.72%; Equity Income Portfolio -
2.63%; Mid-Cap Equity Portfolio - .70%; and Stock Portfolio - .80%.

TOTAL RETURN

The average annual total returns for the one-year period ended October
31, 1997 for the Retail and Institutional Class shares of the Income Portfolio
were 6.32% and 6.51%, respectively, and since inception (April 12, 1994 and
June 14, 1993) were 6.71% and 5.61%, respectively.

The average annual total returns for the one-year period ended April
30, 1997 for the Retail and Institutional Class shares of the Balanced
Portfolio and Capital Growth Portfolio were 7.66% and 7.85%, respectively, and
13.39% and 13.46%, respectively, and since inception (March 9, 1994 and July
16, 1993) were 8.30% and 9.31%, respectively, and 9.81% and 11.04%,
respectively.

The average annual total returns for the one-year period ended April
30, 1997 and since inception (July 13, 1995) for the Institutional Class shares
of the Small-Cap Portfolio (formerly Special Equity Portfolio) were (23.43%)
and 7.34%. The cumulative total return of the Retail Class shares of the
Small-Cap Portfolio (formerly Special Equity Portfolio) for the period from May
16, 1996 (inception) to April 30, 1997 was (27.14%).

The average annual total returns for the one-year period ended April
30, 1997 and since inception (April 30, 1996) for the Institutional Class
shares of the Blue Chip Equity Portfolio were 24.41% and 23.79%.

The cumulative total return of the Retail Class shares of the Blue
Chip Equity Portfolio for the period from May 16, 1996 (inception) to April 30,
1997 was 21.74%.

The cumulative total return for the period from September 9, 1996
(inception) to October 31, 1997 for the Retail Class shares of the Short-Term
Treasury Portfolio was 3.39%.

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The average annual total return for the one-year period ended April 30, 1997
and since inception (March 20, 1996) for the Institutional Class shares of the
Short-Term Treasury Portfolio were 5.13% and 4.75%.

The cumulative total returns for the period from January 2, 1997
(inception) to April 30, 1997 for the Retail Class shares of the Maryland
Tax-Free Portfolio and the Pennsylvania Tax-Free Portfolio were 0.63% and
0.60%, respectively.

The cumulative total returns for the period from November 18, 1996
(inception) to April 30, 1997 for the Institutional Class shares of the
Intermediate Fixed Income Portfolio, Maryland Tax-Free Portfolio, Pennsylvania
Tax-Free Portfolio, Equity Income Portfolio, Mid-Cap Equity Portfolio and Stock
Portfolio were: 0.78%, 0.89%, 1.32%, 7.88%, 1.98% and 8.04%, respectively.

No performance information is provided for the Short-Term Bond
Portfolio, U.S. Government Bond Portfolio, Value Equity Portfolio and
International Equity Selection Portfolio because they had not yet commenced
operations as of the date of this Statement of Additional Information.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Each Portfolio is open for business and its NAV is calculated each day
that the Federal Reserve Bank of New York ("FRB") and the New York Stock
Exchange ("NYSE") are open for trading (a "Business Day"). The NAV of the
Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio, Balanced Portfolio, Equity
Income, Equity Index Portfolio, Blue Chip Equity Portfolio, Large-Cap Value
Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock Portfolio,
Capital Growth Portfolio, Small-Cap Portfolio (formerly Special Equity
Portfolio), International Equity Selection Portfolio and International Equity
Portfolio is determined at the close of business of the NYSE, normally 4:00
p.m., Eastern Time ("4:00 p.m."). Shares purchased at 4:00 p.m. begin to
earn dividends on the following Business Day.

The NAV of the U.S. Treasury Money Market Portfolio and Tax-Free Money
Market Portfolio is determined at 12:00 noon, Eastern Time ("12:00 noon"), and
the close of business of the NYSE, normally 4:00 p.m. The NAV of the U.S.
Government Money Market Portfolio and Money Market Portfolio is determined at
5:00 p.m., Eastern Time ("5:00 p.m.").

The following holiday closings have been scheduled for 1997 and the
Fund expects the schedule to be the same in the future: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.
When the NYSE or the FRB is closed, or when trading is restricted for any
reason other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the SEC to merit such action, each Portfolio
will determine its NAV at the close of business, the time of which will
coincide with the closing of the NYSE. To the extent that securities held by a
Portfolio are traded in other markets on days

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the NYSE or FRB is closed (when investors do not have access to the Portfolio
to purchase or redeem shares), the Portfolio's NAV may be significantly
affected.

If, in the opinion of the Board of Trustees, conditions exist which
make cash payment undesirable, redemption payments may be made in whole or in
part in securities or other property, valued for this purpose as they are
valued in computing the NAV of the Portfolio. Shareholders receiving
securities or other property on redemption may realize a gain or loss for tax
purposes and will incur any costs of sale as well as the associated
inconveniences.

TAXES

The following is only a summary of certain additional federal income
tax considerations generally affecting the Portfolios and their shareholders
that are not described in the Prospectuses. No attempt is made to present a
detailed explanation of the federal, state or local tax treatment of the
Portfolios or their shareholders, and the discussion here and in the
Prospectuses is not intended as a substitute for careful tax planning.

The following discussion of federal income tax consequences is based
on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.

Each Portfolio calculates dividend and capital gain distributions
separately, and is treated as a separate entity in all respects for tax
purposes.

TAXATION OF THE PORTFOLIOS

Each Portfolio intends to qualify as a regulated investment company
("RIC") under Subchapter M of the Code. In order to qualify as a RIC for any
taxable year, a Portfolio must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and
gains from the sale or other disposition of stock, securities or foreign
currencies and other income (including, but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement"). In
addition, at the close of each quarter of the Portfolio's taxable year, (1) at
least 50% of the value of its assets must consist of cash and cash items, U.S.
Government securities, securities of other RICs, and securities of other
issuers (as to which the Portfolio has not invested more than 5% of the value
of its total assets in securities of such issuer and as to which the Portfolio
does not hold more than 10% of the outstanding voting securities of such
issuer), and (2) no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other RICs), or in two or more issuers that the
Portfolio controls and that are engaged in the same or similar trades or
businesses or related trades or businesses (the "Asset Diversification Test").
Generally, a Portfolio will not lose its status as a RIC if it fails to meet
the Asset Diversification Test solely as a result of a fluctuation in value of
portfolio assets not attributable to a purchase.

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Under Subchapter M of the Code, a Portfolio is exempt from federal
income tax on its taxable net investment income and net capital gains that it
distributes to shareholders, provided generally that it distributes at least
90% of its investment company taxable income (net investment income and the
excess of net short-term capital gains over net long-term capital loss) for the
year (the "Distribution Requirement") and complies with the other requirements
of the Code described above. The Distribution Requirement for any year may be
waived if a RIC establishes to the satisfaction of the Internal Revenue Service
that it is unable to satisfy the Distribution Requirement by reason of
distributions previously made for the purpose of avoiding liability for federal
excise tax (discussed below).

If for any taxable year a Portfolio does not qualify as a RIC, all of
its taxable income will be subject to tax at regular corporate rates without
any deduction for distributions to shareholders, and such distributions
generally will be taxable as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. However, in the case of
corporate shareholders, such distributions generally will be eligible for the
70% dividends received deduction for "qualifying dividends".

The Code imposes a nondeductible 4% excise tax on RICs that do not
distribute in each calendar year an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gains net income for the
one-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the next calendar year. For the
foregoing purposes, a RIC will include in the amount distributed any amount
taxed to the RIC as investment company taxable income or capital gains for any
taxable year ending in such calendar year. Each Portfolio intends to make
sufficient distributions of its ordinary income and capital gains net income
prior to the end of each calendar year to avoid liability for excise tax.
However, a Portfolio may in certain circumstances be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability.

TAXATION OF SHAREHOLDERS

Distributions from each Portfolio's taxable net investment income and
short-term capital gain are taxed as dividends. Distributions out of the "net
capital gain" (the excess of net long-term capital gain over net short-term
capital loss), if any, of a Portfolio will be taxed to shareholders as
long-term capital gains at a maximum marginal rate of 28%, regardless of the
length of time a shareholder has held shares, whether such gain was reflected
in the price paid for the shares, or whether such gain was attributable to
bonds bearing tax-exempt interest. All other distributions, to the extent they
are taxable, are taxed as ordinary income at a maximum marginal rate of 39.6%.
Corporate taxpayers are currently taxed at the same maximum marginal rates on
both ordinary income and capital gains. A portion of the dividends may qualify
for the dividends received deduction for corporations. The Portfolios'
distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in October,
November or December and payable to shareholders of record in such month, if
paid in January of the following year, will be taxed as though paid on December
31. The Portfolios will send non-corporate shareholders a tax statement by
January 31 showing the tax status of the distributions received in the prior
year. Shareholders also will be notified as to the portion of

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distributions from the Tax-Free Money Market Portfolio, Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio that are exempt from federal
income taxes. It is suggested that shareholders keep all statements received
to assist in personal record keeping.

Shareholders may realize a capital gain or loss when they redeem
(sell) or exchange shares of the Portfolios. For most types of accounts, the
Portfolios will report the proceeds of a shareholder's redemptions to the
shareholder and the IRS annually. However, because the tax treatment also
depends on the purchase price and the shareholder's personal tax position,
shareholders should keep their regular account statements for use in
determining their tax. Long-term capital gains earned by the Portfolios on the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless of the length of time that shareholders
have held their shares. If a shareholder receives a long-term capital gain
distribution on shares of the Portfolios, and such shares are held six months
or less and are sold at a loss, the portion of the loss equal to the amount of
the long-term capital gain distribution will be considered a long-term loss for
tax purposes. Short-term capital gains distributed by the Portfolios are
taxable to shareholders as dividends, not as capital gains.

If capital gain distributions have been made with respect to shares of
a Portfolio that are sold at a loss after being held for six months or less,
then the loss is treated as a long-term capital loss to the extent of the
capital gain distributions. Any gain or loss recognized on a sale or
redemption of shares of a Portfolio by a shareholder who is not a dealer in
securities generally will be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise generally will
be treated as a short-term capital gain or loss.

On the record date for a distribution or dividend, the applicable
Portfolio's share value is reduced by the amount of the distribution. If a
shareholder were to buy shares just before the record date ("buying a
dividend"), they would pay the full price for the shares and then receive a
portion of the price back as a taxable distribution.

INTERNATIONAL EQUITY SELECTION PORTFOLIO

Income the International Equity Selection Portfolio receives from
sources within various foreign countries may be subject to foreign income taxes
withheld at the source. If the Portfolio has at least 50% of its assets
invested in foreign securities at the end of its taxable year, it may elect to
pass through the foreign tax credit to its shareholders. It is expected that
the Portfolio will not have more than 50% of the value of its total assets at
the close of its taxable year invested in foreign securities, and therefore
will not be permitted to make this election and "pass through" to its
shareholders. Each shareholder's respective pro rata share of foreign taxes
the Portfolio pays will, therefore, be netted against their share of the
Portfolio's gross income.

The Portfolio may invest in any non-U.S. corporations which could be
treated as passive foreign investment companies ("PFICs"). This could result
in adverse tax consequences upon the disposition of, or the receipt of "excess
distributions" with respect to, such equity investments. To the extent the
Portfolio does invest in PFICs, it may adopt certain tax strategies to reduce
or eliminate the adverse effects of certain federal tax provisions governing
PFIC investments. Many non-U.S. banks and insurance companies may not be
treated as PFICs if they satisfy

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certain technical requirements under the Code. To the extent that the
Portfolio does invest in foreign securities which are determined to be PFIC
securities and is required to pay a tax on such investments, a credit for this
tax would not be allowed to be passed through to its shareholders. Therefore,
the payment of this tax would reduce the Portfolio's economic return from its
PFIC shares, and excess distributions received with respect to such shares are
treated as ordinary income rather than capital gains.

An underlying fund may inadvertently invest in non-U.S. corporations
which would be treated as PFICs or become a PFIC under the Code. This could
result in adverse tax consequences upon the disposition of, or the receipt of
"excess distributions" with respect to, such equity investments. To the extent
an underlying fund does invest in PFICs, it may elect to treat the PFIC as a
"qualified electing fund" or mark-to-market its investments in PFICs annually.
In either case, the underlying fund may be required to distribute amounts in
excess of its realized income and gains. To the extent that the underlying
fund itself is required to pay a tax on income or gain from investment in
PFICs, the payment of this tax would reduce the Portfolio's economic return.

TAX-FREE MONEY MARKET PORTFOLIO, MARYLAND TAX-FREE PORTFOLIO
AND PENNSYLVANIA TAX-FREE PORTFOLIO

Dividends paid by these Portfolios to shareholders out of tax-exempt
interest income earned by the Portfolios (exempt-interest dividends) generally
will not be subject to federal income tax paid by the Portfolios' shareholders.
However, persons who are "substantial users" or "related persons" of facilities
financed by private activity bonds held by the Portfolios may be subject to tax
on their pro-rata share of the interest income from such bonds and should
consult their tax advisers before purchasing shares of the Portfolios.
Realized market discount on tax-exempt obligations purchased after April 30,
1993 is treated as ordinary income and not as a capital gain. Dividends paid
by Portfolio out of its taxable net investment income (including realized net
short-term capital gains, if any) are taxable to shareholders as ordinary
income notwithstanding that such dividends are reinvested in additional shares
of the Portfolio. The "exempt interest dividend" portion of a distribution is
determined by the ratio of the tax-exempt income to total income realized by a
Portfolio for the entire year and, thus, is an annual average, rather than a
day-to-day determination for each shareholder. Distributions of long-term
capital gains, if any, are taxable as long-term capital gains to the
shareholder receiving them regardless of the length of time he or she may have
held his or her shares. Under current tax law (1) interest on certain private
activity bonds is treated as an item of tax preference for purposes of the
federal alternative minimum tax imposed on individuals and corporations,
although for regular federal income tax purposes such interest remains fully
tax-exempt, and (2) interest on all tax-exempt obligations is included in
"adjusted current earnings" of corporations for federal alternative minimum tax
purposes. Because the Portfolios expect to purchase private activity bonds, a
portion (not expected to exceed 20%) of each Portfolio's exempt-interest
dividends may constitute an item of tax preference for those shareholders
subject to the federal alternative minimum tax.

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Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Portfolios generally is not deductible for federal income tax
purposes. Under IRS rules for determining when borrowed funds are used for
purchasing or carrying particular assets, shares of the Portfolios may be
considered to have been purchased or carried with borrowed funds even though
those funds are not directly linked to the shares.

The exemption for federal income tax purposes of dividends derived
from interest on municipal securities does not necessarily result in an
exemption under the income or other tax laws of any state or local taxing
authority. Shareholders of the Portfolio may be exempt from state and local
taxes on distributions of tax-exempt interest income derived from obligations
of the state and/or municipalities of the state in which they reside but may be
subject to tax on income derived from the municipal securities of other
jurisdictions. Shareholders are advised to consult with their tax advisers
concerning the application of state and local taxes to investments in the
Portfolio which may differ from the federal income tax consequences described
above.

Shareholders are required to report tax-exempt income on their federal
tax returns. Shareholders who earn other income, such as Social Security
benefits, may be subject to federal income tax on up to 85% of such benefits to
the extent that their income, including tax-exempt income, exceeds certain base
amounts.

The Portfolios purchase municipal obligations based on opinions of
bond counsel regarding the federal income tax status of the obligations. These
opinions generally will be based upon covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenant at any time, interest on the
obligation could become federally taxable retroactive to the date the
obligation was issued.

Corporate investors should note that a tax preference item for
purposes of the corporate Alternative Minimum Tax is 75% of the amount by which
adjusted current earnings (which includes tax-exempt interest) exceeds the
alternative minimum taxable income of the corporation. If a shareholder
receives an exempt-interest dividend and sells shares at a loss after holding
them for a period of six months or less, the loss will be disallowed to the
extent of the amount of exempt-interest dividend.

Shares of the Tax-Free Money Market Portfolio, Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Internal Revenue Code, H.R. 10 plans and individual
retirement accounts, because such plans and accounts are generally tax-exempt.
Therefore, such plans and accounts would not gain any additional benefit from
the tax-exempt status of the Portfolios' dividends and, moreover, such
dividends would be taxable when distributed to the beneficiary.

MARYLAND TAX MATTERS

To the extent that dividends paid by the Portfolios qualify as
exempt-interest dividends of a regulated investment company, the portion of
exempt-interest dividends that represents interest

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received by the Portfolios on obligations (a) of Maryland or its political
subdivisions and authorities, or (b) of the United States or an authority,
commission, instrumentality, possession or territory of the United States, will
be exempt from Maryland state and local income taxes when allocated or
distributed to a shareholder of the Portfolios.

In addition, gains realized by the Portfolios from the sale or
exchange of a bond issued by Maryland or a political subdivision of Maryland,
or by the United States or an authority, commission or instrumentality of the
United States, will not be subject to Maryland state and local income taxes.
To the extent that distributions of the Portfolios are attributable to sources
other than those described in the preceding sentences, such as interest
received by the Portfolios on obligations issued by states other than Maryland
or capital gains realized on obligations issued by U.S. territories and
possessions and from states other than Maryland, and income earned on
repurchase agreements, such distributions will be subject to Maryland state and
local income taxes. Income earned on certain private activity bonds which the
Portfolios might hold will constitute a Maryland tax preference for individual
shareholders. In addition, capital gains realized by a shareholder upon a
redemption or exchange of Portfolio shares will be subject to Maryland state
and local income taxes.

PENNSYLVANIA TAX MATTERS

To the extent that dividends paid by the Portfolios qualify as
exempt-interest dividends of a regulated investment company, the portion of
exempt-interest dividends that represents interest received by the Portfolios
on obligations (a) of Pennsylvania or its political subdivisions and
authorities, or (b) of the United States or an authority, commission,
instrumentality, possession or territory of the United States, will be exempt
from Pennsylvania state and local income taxes when allocated or distributed to
a shareholder of the Portfolios.

In addition, gains realized by the Portfolios from the sale or
exchange of a bond issued by Pennsylvania or a political subdivision of
Pennsylvania, or by the United States or an authority, commission or
instrumentality of the United States, will not be subject to Pennsylvania state
and local income taxes. To the extent that distributions of the Portfolios are
attributable to sources other than those described in the preceding sentences,
such as interest received by the Portfolios on obligations issued by states
other than Pennsylvania or capital gains realized on obligations issued by U.S.
territories and possessions and from states other than Pennsylvania, and income
earned on repurchase agreements, such distributions will be subject to
Pennsylvania state and local income taxes. Income earned on certain private
activity bonds which the Portfolios might hold will constitute a Pennsylvania
tax preference for individual shareholders. In addition, capital gains
realized by a shareholder upon a redemption or exchange of Portfolio shares
will be subject to Pennsylvania state and local income taxes.

OTHER TAX INFORMATION

In addition to federal taxes, shareholders may be subject to state or
local taxes on their investment, depending on state law.

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The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of distributions payable to any shareholder who (1) has
provided the Fund either an incorrect tax identification number or no number at
all, (2) is subject to backup withholding by the Internal Revenue Service for
failure to properly report payments of interest or dividends, or (3) has failed
to certify to the Fund that such shareholder is not subject to backup
withholding.

TRUSTEES AND OFFICERS

The trustees and officers of the Fund and their principal occupations
during the past five years are set forth below. Each trustee who is an
"interested person" of the Fund (as defined in the 1940 Act) is indicated by an
asterisk (*). Unless otherwise indicated the business address of each is One
Freedom Valley Drive, Oaks, PA 19456.

William H. Cowie, Jr., 1408 Ruxton Road, Baltimore, MD 21204. Date of
Birth: 1/24/31. Trustee since 1993. Prior to retirement, Mr. Cowie was Chief
Financial Officer (1991-1995) of Pencor, Inc. (developers of environmental
projects). Prior to 1991, Mr. Cowie was Vice Chairman of Signet Banking
Corporation.

Charlotte R. Kerr, American City Building, 10227 Wincopin Circle,
Suite 108, Columbia, MD 21044. Date of Birth: 9/26/46. Trustee since 1993.
Ms. Kerr is Practitioner and faculty member at the Traditional Acupuncture
Institute.

*David D. Downes, 210 Allegheny Ave., Towson, MD 21204. Date of Birth
7/16/35. President and Trustee since 1995. Mr. Downes is an attorney in
private practice (since October 1996). Prior thereto he was a partner
(1989-1995) and of counsel (1995-Sept. 1996) of Venable, Baetjer & Howard (law
firm).

George K. Reynolds, III, 233 East Redwood Street, Baltimore, MD 21286.
Date of Birth: 3/12/46. Trustee since 1993. Mr. Reynolds is Chairman of the
Trusts & Estates Department at, and a Partner of, Gordon, Feinblatt, Rothman,
Hoffberger & Hollander (law firm). Prior to 1991, Mr. Reynolds was a Partner
of Venable, Baetjer & Howard (law firm).

Thomas Schweizer, 6 Betty Bush Lane, Baltimore, MD 21212. Date of
Birth: 8/21/22. Trustee since 1993. Prior to his retirement in 1987, Mr.
Schweizer was self-employed. He currently is a board member of various charity
organizations and hospitals.

James F. Volk, Controller. Date of Birth 8/28/62. Controller,
Treasurer and Chief Financial Officer since March 1997. Mr. Volk is Director
of Investment Accounting Operations. He joined Fund Resources in February 1996
and is co-director of the International Fund Accounting Group. From December
1993 to January 1996, Mr. Volk was Assistant Chief Accountant of the Securities
and Exchange Commission's Division of Investment Management. Prior to December
1993, Mr. Volk spent nine years with Coopers & Lybrand L.L.P., most recently as
a senior manager.

Kathryn L. Stanton. Date of Birth 11/18/58. Vice President and
Assistant Secretary since November 1995. Secretary since June 1996. Ms.
Stanton is Vice President and Assistant

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Secretary of SEI Investments, since 1994. Prior to 1994, Ms. Stanton was an
Associate with Morgan, Lewis & Bockius (law firm) since 1989.

Sandra K. Orlow. Date of Birth: 10/18/53. Vice President and
Assistant Secretary since November 1995. Ms. Orlow is Vice President and
Assistant Secretary of SEI Corporation since 1983.

Kevin P. Robins. Date of Birth 4/15/61. Vice President and Assistant
Secretary since November 1995. Mr. Robins is Senior Vice President, General
Counsel and Secretary of SEI Investments since 1994. Prior to 1994, Mr. Robins
was Vice President and Assistant Secretary of SEI Investments. Prior to 1992,
Mr. Robins was an Associate with Morgan Lewis & Bockius (law firm) since 1988.

Todd Cipperman. Date of Birth: 2/14/66. Vice President and Assistant
Secretary since November 1995. Mr. Cipperman is Vice President and Assistant
Secretary of SEI Investments since 1995. From 1994 to May 1995, Mr. Cipperman
was an Associate with Dewey Ballentine (law firm). Prior to 1994, Mr.
Cipperman was an Associate with Winston & Strawn (law firm) since 1991.

Barbara A. Nugent. Date of Birth: 6/18/56. Vice President and
Assistant Secretary since June 1996. Ms. Nugent is Vice President and
Assistant Secretary of SEI Investments since April 1996. Prior to April 1996,
Ms. Nugent was an Associate with Drinker, Biddle & Reath (law firm) from 1994
to 1996. Prior to 1994, Ms. Nugent was Assistant Vice President/Administration
of Delaware Service Company, Inc. (from 1992 to 1993) and Assistant Vice
President-Operations of Delaware Service Company, Inc. (from 1988 to 1992).

Marc H. Cahn. Date of Birth: 6/19/57. Vice President and Assistant
Secretary since June 1996. Mr. Cahn is Vice President and Assistant Secretary
of SEI Investments since May 1996. Prior to May 1996, Mr. Cahn was Associate
General Counsel for Barclays Bank PLC (from May 1995 to May 1996). Prior to
joining Barclays, Mr. Cahn was ERISA counsel for First Fidelity Bancorporation
(from 1994 to 1995). Prior to 1994, Mr. Cahn was an Associate with Morgan,
Lewis & Bockius (law firm) from 1989 to 1994.

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The following table sets forth information describing the
compensation of each current trustee of the Fund for his or her services as
trustee for the fiscal year ended April 30, 1997

TRUSTEE COMPENSATION TABLE

<TABLE>
<CAPTION>
Estimated
Pension or Annual Total
Aggregate Retirement Retirement Compensation
Compensation Benefits Accrued from from
from the from the the Fund the Fund
Name of Trustee Fund Fund Complex* Complex* Complex*
- --------------- ---- ------------- -------- --------
<S> <C> <C> <C> <C>
William H. Cowie, Jr. $7,500 $0 $0 $7,500
David D. Downes $7,500 0 0 $7,500
Charlotte Kerr $7,500 0 0 $7,500
George K. Reynolds, III $7,500 0 0 $7,500
Thomas Schweizer $7,500 0 0 $7,500
</TABLE>

* The Fund's trustees do not receive any pension or retirement benefits from
the Fund as compensation for their services as trustees of the Fund. The Fund,
a Massachusetts business trust, is the sole investment company in the fund
complex.

INVESTMENT ADVISERS

Pursuant to an advisory agreement with the Fund dated January ___,
1998, Allied Investment Advisors, Inc. ("AIA") furnishes, at its own expense,
all services, facilities and personnel necessary to manage each applicable
Portfolio's investments and effect portfolio transactions on its behalf.
Pursuant to an advisory contract with the Fund dated June 7, 1994, AIB
Investment Managers Limited ("AIBIM") furnishes at its own expense, all
services, facilities and personnel necessary to manage the International Equity
Portfolio's investments and effect portfolio transactions on its behalf.

The advisory contract has been approved by the Board of Trustees and
will continue in effect with respect to a Portfolio only if such continuance is
specifically approved at least annually by the Board or by vote of the
shareholders of the Portfolio, and in either case by a majority of the trustees
who are not parties to the advisory contract or interested persons of any such
party, at a meeting called for the purpose of voting on the advisory contract.
The advisory contract is terminable with respect to a Portfolio without penalty
on 60 days' written notice when authorized either by vote of the shareholders
of the Portfolio or by a vote of a majority of the trustees, or by the adviser,
on 60 days' written notice, and will automatically terminate in the event of
its assignment.

The advisory contract provides that, with respect to each Portfolio,
neither the adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any act or omission in the performance of its duties
to a Portfolio, except for willful misfeasance, bad faith or gross negligence
in the performance by the adviser of its duties or by

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<PAGE> 181

reason of reckless disregard of its obligations and duties under the advisory
contract. The advisory contract provides that the adviser may render services
to others.

The fees paid pursuant to the advisory contract is accrued daily and
paid monthly. For its services, an adviser is entitled to receive the fee with
respect to a Portfolio at the annual rates set forth below:

<TABLE>
<CAPTION>
% of
Portfolio Average Net Assets
--------- ------------------
<S> <C>
Money Market Portfolios .25
Short-Term Treasury Portfolio .80
Short-Term Bond Portfolio .75
U.S. Government Bond Portfolio .75
Intermediate Fixed Income Portfolio .60
Income Portfolio .60
Maryland Tax-Free Portfolio .65
Pennsylvania Tax-Free Portfolio .65
Balanced Portfolio .65
Equity Income Portfolio .70
Equity Index Portfolio .20
Blue Chip Equity Portfolio .70
Mid-Cap Equity Portfolio .80
Value Equity Portfolio 1.00
Stock Portfolio .70
Capital Growth Portfolio .70
Small-Cap Portfolio .80
International Equity Selection Portfolio .65
International Equity Portfolio .80
</TABLE>

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<PAGE> 182

Prior to January ___, 1998, AIA served pursuant to an investment
advisory agreement which provided a different fee schedule.

For the fiscal year ended April 30, 1997, the advisory fee payable to
AIA with respect to the U.S. Treasury Money Market Portfolio was $868,468 of
which $208,427 was waived; with respect to the U.S. Government Money Market
Portfolio was $2,979,910 of which $1,311,172 was waived; with respect to the
Money Market Portfolio was $1,152,587 of which $688,387 was waived; with
respect to the Tax-Free Money Market Portfolio was $293,764 of which $188,010
was waived; with respect to the Income Portfolio was $1,065,590; with respect
to the Balanced Portfolio was $534,609; with respect to the Capital Growth
Portfolio was $230,061 of which $171,884 was waived; with respect to the
Small-Cap Portfolio (formerly Special Equity Portfolio) was $149,991; with
respect to the Short-Term Treasury Portfolio was $113,265 of which $16,181 was
waived; with respect to the Blue Chip Equity Portfolio was $155,125 of which
$51,706 was waived; with respect to the Intermediate Fixed Income Portfolio was
$210,973 of which $52,655 was waived; with respect to the Maryland Tax-Free
Portfolio was $190,624 of which $18,909 was waived; with respect to the
Pennsylvania Tax-Free Portfolio was $52,803 of which $13,698 was waived; with
respect to the Equity Income Portfolio was $262,270 of which $37,287 was
waived; with respect to the Mid-Cap Equity Portfolio was $83,933 of which
$5,948 was waived; and with respect to the Stock Portfolio was $134,106 of
which $9,472 was waived.

For the fiscal year ended April 30, 1997, the advisory fee payable to
AIBIM with respect to the International Equity Portfolio was $28,959 of which
$13,067 was waived.

For the fiscal year ended April 30, 1996, the advisory fee payable to
the AIA with respect to the U.S. Treasury Money Market Portfolio was $789,999
of which $229,349 was waived; with respect to U.S. Government Money Market
Portfolio was $2,141,782 of which $912,609 was waived; with respect to the
Money Market Portfolio was $1,032,206 of which $584,933 was waived; with
respect to the Tax-Free Money Market Portfolio was $240,665 of which $155,812
was waived; with respect to the Income Portfolio was $561,728; with respect to
the Balanced Portfolio was $566,946; with respect to the Capital Growth
Portfolio was $271,262 of which $271,262 was waived; with respect to the
Small-Cap Portfolio (formerly Special Equity Portfolio) was $65,324; with
respect to the Short-Term Treasury Portfolio was $7,030 of which $1,004 was
waived; and with respect to the Blue Chip Equity Portfolio was $5,183 of which
$5,183 was waived.

For the fiscal year ended April 30, 1996, the advisory fee payable to
AIBIM with respect to the International Equity Portfolio was $25,825 of which
$25,825 was waived.

In addition to receiving its advisory fee an adviser may also act and
be compensated as investment manager for its clients with respect to assets
which are invested in a Portfolio. In some instances an adviser may elect to
credit against any investment management fee received from a client who is also
a shareholder in a Portfolio an amount equal to all or a portion of the fee
received by the adviser, or its affiliate, from a Portfolio with respect to the
client's assets invested in the Portfolio.

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Each Portfolio has, under its advisory contract, confirmed its
obligation to pay all expenses, including interest charges, taxes, brokerage
fees and commissions; certain insurance premiums; fees, interest charges and
expenses of the custodian, transfer agent and dividend disbursing agent;
telecommunications expenses; auditing, legal and compliance expenses;
organization costs and costs of maintaining existence; costs of preparing and
printing the Portfolios' prospectuses, statements of additional information and
shareholder reports and delivering them to existing and prospective
shareholders; costs of maintaining books of original entry for portfolio
accounting and other required books and accounts of calculating the NAV of
shares of the Portfolios; costs of reproduction, stationery and supplies;
compensation of trustees and officers of the Portfolios and costs of other
personnel performing services for the Portfolios who are not officers of the
Administrator or Distributor, or their respective affiliates; costs of
shareholder meetings; SEC registration fees and related expenses; state
securities laws registration fees and related expenses; fees payable under the
advisory contracts and under the administration agreement, and all other fees
and expenses paid by the Portfolios.

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<PAGE> 184
ADMINISTRATOR AND DISTRIBUTOR

ADMINISTRATOR

SEI Fund Resources serves as administrator (the "Administrator") to
the Fund. The Administrator assists in supervising all operations of the
Portfolios, except those performed by the advisers under the advisory
contracts, by the Distributor under the distribution agreement and by the
Custodian under the custodian agreement.

Under its administration agreement with the Fund, the Administrator
has agreed to maintain office facilities for the Fund. The Administrator
prepares annual and semi-annual reports to the SEC, prepares federal and state
tax returns, prepares filings with state securities commissions, and generally
assists in all aspects of the Fund's operations other than those discussed
above. Under the administration agreement, the Administrator also provides
fund accounting and related accounting services. The Administrator may
delegate its responsibilities under the administration agreement with the
Fund's written approval.

The Administrator, a Delaware business trust, has its principal
business offices at One Freedom Valley Drive, Oaks, PA 19456. SEI Investments
Management Corporation, a wholly-owned subsidiary of SEI Investments Company
("SEI"), is the owner of all beneficial interest in the Administrator. SEI and
its subsidiaries and affiliates are leading providers of funds evaluation
services, trust accounting systems, and brokerage and information services to
financial institutions, institutional investors and money managers. The
Administrator also serves as administrator to the following other mutual funds:
SEI Daily Income Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, SEI Index
Funds, SEI Institutional Managed Trust, SEI International Trust, SEI Asset
Allocation Trust, The Advisors' Inner Circle Fund, The Pillar Funds, CUFund,
STI Classic Funds, CoreFunds, Inc., First American Funds, Inc., First American
Investment Funds, Inc., The Arbor Fund, Boston 1784 Funds(R), Marquis Funds(R),
Morgan Grenfell Investment Trust, The PBHG Funds, Inc., Investor Funds, Inc.,
The Achievement Funds Trust, Bishop Street Funds, Monitor Funds, FMB Funds,
Inc., STI Classic Variable Trust, TIP Funds, CrestFunds, Inc., First American
Strategy Funds, Inc., HighMark Funds and Expedition Funds.

For the fiscal year ended April 30, 1997, the administration fee
payable to the Administrator with respect to the U.S. Treasury Money Market
Portfolio was $451,599; with respect to the U.S. Government Money Market
Portfolio was $1,549,513; with respect to the Money Market Portfolio was
$599,341 of which $15,103 was waived; with respect to the Tax-Free Money Market
Portfolio was $153,254; with respect to the Income Portfolio was $277,052; with
respect to the Balanced Portfolio was $126,362; with respect to the Capital
Growth Portfolio was $49,846; with respect to the Small-Cap Portfolio (formerly
Special Equity Portfolio) was $32,496; with respect to Blue Chip Equity
Portfolio was $34,734; with respect to the Short-Term Treasury Portfolio was
$42,070; with respect to the Intermediate Fixed Income Portfolio was $45,699;
with respect to the Maryland Tax-Free Portfolio was $49,562; with respect to
the Pennsylvania Tax-Free Portfolio was $13,729; with respect to the Equity
Income Portfolio was $48,707; with respect to the Mid-Cap Equity Portfolio was
$15,587; with respect

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to the Stock Portfolio was $24,905; and with respect to the International
Equity Portfolio was $4,706.

For the period from November 1, 1995 to April 30, 1996, the
administration fee payable to the Administrator with respect to the U.S.
Treasury Money Market Portfolio was $225,676; with respect to the U.S.
Government Money Market Portfolio was $650,384; with respect to the Money
Market Portfolio was $247,642; with respect to the Tax-Free Money Market
Portfolio was $49,434; with respect to the Income Portfolio was $97,928; with
respect to the Balanced Portfolio was $69,636; with respect to the Capital
Growth Portfolio was $27,723; with respect to the Small-Cap Portfolio (formerly
Special Equity Portfolio) was $11,805; with respect to the Short-Term Treasury
Portfolio was $2,611; and with respect to the International Equity Portfolio
was $2,178. Prior to November 1, 1995, Fidelity Distributors Corporation
served as administrator of the Fund.

DISTRIBUTOR

SEI Investments Distribution Co. (formerly SEI Financial Services
Company) serves as the distributor (the "Distributor") of the Fund. The
Distributor offers shares continuously and has agreed to use its best efforts
to solicit purchase orders.

DISTRIBUTION PLAN

The Board of Trustees has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule") on behalf of the Retail
Class of each Portfolio and Institutional II Class of each money market
Portfolio. The Plan allows the Retail Class and Institutional II Class of a
Portfolio to pay the Distributor a distribution fee at the annual rate of up to
.75% of the average net assets of such class, or such lesser amount as approved
from time to time by the Board. These fees may be used to pay expenses
associated with the promotion and administration of activities primarily
intended to result in the sale of Retail Class and Institutional II Class
shares, including, but not limited to: advertising the availability of services
and products; designing material to send to customers and developing methods of
making such materials accessible to customers; providing information about the
product needs of customers; providing facilities to solicit sales and to answer
questions from prospective and existing investors about the Retail Class and
Institutional II Class; receiving and answering correspondence from prospective
investors, including requests for sales literature, prospectuses and statements
of additional information; displaying and making sales literature and
prospectuses available; acting as liaison between Retail Class or Institutional
II Class shareholders and the Portfolios, including obtaining information from
the Portfolios regarding the Retail Class and Institutional II Class and
providing Retail Class and Institutional II Class performance and other
information about the Portfolios; and providing additional distribution-related
services.

The Plan has been approved by the Board of Trustees, including the
majority of disinterested trustees, and by the sole shareholder of the Retail
Class and Institutional II Class. As required by the Rule, the Board
considered all pertinent factors relating to the implementation of the Plan
prior to its approval, and the trustees have determined that there is a
reasonable likelihood that the Plan will benefit the Retail Class and
Institutional II Class and their respective

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shareholders. To the extent that the Plan provides greater flexibility in
connection with the distribution of Retail Class and Institutional II Class
shares, additional sales of Retail Class and Institutional II Class shares may
result.

The Board has approved a distribution fee of .10% of the average net
assets of the Institutional II Class. For the fiscal year ended April 30,
1997, the Institutional II Class of the U.S. Treasury Money Market Portfolio,
U.S. Government Money Market Portfolio, Money Market Portfolio and Tax-Free
Money Market Portfolio paid distribution fees of $66,804, $36,168, $50,764 and
$15,761, respectively.

The Board has approved distribution fees based on the following
percentages of the average daily net assets of the Retail Class: .25% for each
money market Portfolio; .30% for the Short-Term Bond Portfolio, U.S. Government
Bond Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio; .40% for the Short-Term
Treasury Portfolio, Balanced Portfolio, Equity Income Portfolio, Equity Index
Portfolio, Mid-Cap Equity Portfolio, Capital Growth Portfolio, Small-Cap
Portfolio (formerly Special Equity Portfolio), International Equity Selection
Portfolio and International Equity Portfolio; .55% for the Blue Chip Equity
Portfolio; and __% for the Value Equity Portfolio. For the fiscal year ended
April 30, 1997, the Retail Class of the Portfolios paid distribution fees in
the following amounts: $22,015 for the U.S. Treasury Money Market Portfolio,
$289,567 for the Money Market Portfolio, $37,126 for the Tax-Free Money Market
Portfolio, $9,079 for the Income Portfolio, $9,941 for the Balanced Portfolio,
$3,078 for the Capital Growth Portfolio, $816 for the Small-Cap Portfolio
(formerly Special Equity Portfolio), $6,078 for the Blue Chip Equity Portfolio,
$14,292 for the Short-Term Treasury Portfolio, $3,451 for the Maryland Tax-Free
Portfolio and $314 for the Pennsylvania Tax-Free Portfolio.

As of the date of this Statement of Additional Information, all
distribution fees received by the Distributor under the Plan are paid to
qualified securities brokers or financial institutions or other investment
professionals in respect of their Retail Class and Institutional II Class share
accounts. The Plan is a compensation plan because the Distributor is paid a
fixed fee and is given discretion concerning what expenses are payable under
the Plan. The Distributor may spend more for marketing and distribution than
it receives in fees. However, to the extent fees received exceed expenses,
including indirect expenses such as overhead, the Distributor could be said to
have received a profit. For example, if the Distributor pays $1 for
distribution-related expenses and receives $2 under the Plan, the $1 difference
could be said to be a profit for the Distributor. If, after payments by the
Distributor for marketing and distribution, there are any remaining fees which
have been paid under the Plan, they may be used as the Distributor may elect.
Since the amounts payable under the Plan are commingled with the Distributor's
general funds, including the revenues it receives in the conduct of its
business, it is possible that certain of the Distributor's overhead expenses
will be paid out of distribution fees and that these expenses may include the
costs of leases, depreciation, communications, salaries, training and supplies.

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SHAREHOLDER SERVICES PLAN

The Board of Trustees has adopted a Shareholder Services Plan on
behalf of the Retail Class and Institutional Class of the Portfolios to
compensate qualified recipients for individual shareholder services and account
maintenance. These functions include, but are not limited to, answering
shareholder questions and handling correspondence, assisting customers, and
account record keeping and maintenance. For these services the participating
qualified recipients are paid a service fee at the annual rate of up to .25% of
average net assets of the Retail Class of each Portfolio or such lesser amount
as may be approved by the Board and .15% of average net assets of the
Institutional Class. Currently, the Board has approved a fee for shareholder
services of .06% of average net assets.

For the fiscal year ended April 30, 1997, the Retail Class of the U.S.
Treasury Money Market Portfolio, Money Market Portfolio and Tax-Free Money
Market Portfolio paid shareholder servicing fees of $6,142, $69,190 and
$10,416, respectively.

For the period from November 1, 1995 to April 30, 1996, the Retail
Class of the U.S. Treasury Money Market Portfolio, Money Market Portfolio and
Tax-Free Money Market Portfolio paid shareholder servicing fees of $907,
$28,324 and $4,073, respectively.

TRANSFER AGENT

The Fund has a Transfer Agency and Services Agreement dated November
1, 1995, with SEI Fund Resources. SEI Fund Resources has subcontracted
transfer agency services to State Street Bank and Trust Company ("State Street
Bank"). State Street Bank maintains an account for each shareholder, provides
tax reporting for each Portfolio, performs other transfer agency functions and
acts as dividend disbursing agent for each Portfolio.

DESCRIPTION OF THE FUND

TRUST ORGANIZATION

The U.S. Government Money Market Portfolio, U.S. Treasury Money
Market Portfolio, Money Market Portfolio, Tax-Free Money Market Portfolio,
Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income Portfolio, Income Portfolio, Maryland
Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio, Balanced Portfolio, Equity
Income Portfolio, Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap
Equity Portfolio, Value Equity Portfolio, Stock Portfolio, Capital Growth
Portfolio, Small-Cap Portfolio (formerly Special Equity Portfolio),
International Equity Selection Portfolio and International Equity Portfolio are
series of ARK Funds, an open-end management investment company organized as a
Massachusetts business trust by a Declaration of Trust dated October 22, 1992,
and amended and restated on March 19, 1993. A supplement to the Declaration of
Trust was executed and filed on March 23, 1993. The Declaration of Trust
permits the Board to create additional series and classes of shares.

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In the event that an affiliate of Allied Irish Banks, p.l.c. ceases to
be the investment adviser to the Portfolios, the right of the Fund and
Portfolio to use the identifying name "ARK" may be withdrawn.

The assets of the Fund received for the issue or sale of shares of a
Portfolio and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are allocated to the Portfolio, and constitute the
underlying assets thereof. The underlying assets of a Portfolio are segregated
on the books of account, and are to be charged with the liabilities with
respect to the Portfolio and with a share of the general expenses of the Fund.
General expenses of the Fund are allocated in proportion to the asset value of
the respective Portfolios, except where allocations of direct expense can
otherwise fairly be made. The officers of the Fund, subject to the general
supervision of the Board of Trustees, have the power to determine which
expenses are allocable to a given Portfolio, or which are general or allocable
to all of the Portfolios. In the event of the dissolution or liquidation of
the Fund, shareholders of a Portfolio are entitled to receive as a class the
underlying assets of the Portfolio available for distribution.

SHAREHOLDER AND TRUSTEE LIABILITY

The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable for the obligations of
the trust. The Declaration of Trust provides that the Fund shall not have any
claim against shareholders, except for the payment of the purchase price of
shares, and requires that each agreement, obligation or instrument entered into
or executed by the Fund or the trustees shall include a provision limiting the
obligations created thereby to the Fund and its assets. The Declaration of
Trust provides for indemnification out of a Portfolio's property of any
shareholders of the Portfolio held personally liable for the obligations of the
Portfolio. The Declaration of Trust also provides that a Portfolio shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Portfolio and satisfy any judgment thereon. Thus, the
risk of a shareholder incurring financial loss because of shareholder liability
is limited to circumstances in which the Portfolio itself would be unable to
meet its obligations. AIA and AIBIM believe that, in view of the above, the
risk of personal liability to shareholders is remote.

The Declaration of Trust further provides that the trustees, if they
have exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects a trustee against
any liability to which he or she would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his or her office.

Shares of a Portfolio of any class are fully paid and non-assessable,
except as set forth under the heading "Shareholder and Trustee Liability"
above. Shareholders may, as set forth in the Declaration of Trust, call
meetings for any purpose related to the Fund, a Portfolio or a class,
respectively, including in the case of a meeting of the entire Fund, the
purpose of voting on removal of one or more trustees. The Fund or any
Portfolio may be terminated upon the sale of

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its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the holders
of a majority of the outstanding shares of the Fund or the Portfolio. If not
so terminated, the Fund and the Portfolios will continue indefinitely.

As of August 6, 1997, the officers and trustees of the Fund owned less
than 1% of the outstanding shares of any Portfolio and the following persons
owned beneficially more than 5% of the outstanding shares of:

U.S. TREASURY MONEY MARKET PORTFOLIO:

Institutional Class - First National Bank of Maryland F.I.L.M.
Investment Account (51.88%).

Institutional II Class - World Wildlife Fund LPC (6.27%).

MONEY MARKET PORTFOLIO:

Institutional Class - Capital Re-Insurance (22.80%).

Institutional II Class - Roman Catholic Clergy MD Province of Society
of Jesus (34.22%) and Piper & Marbury L.L.P. Estates and Trusts Group, Client
Custody Accounts (8.98%).

TAX-FREE MONEY MARKET PORTFOLIO:

Institutional Class - Industrial Development Authority of Mayor City
Council of Baltimore (16.10%).

Institutional II Class - Charles-Fulton Trustee PC-TTE (5.57%) and
Gaye G. Haynes, PC (8.61%).

INTERMEDIATE FIXED INCOME PORTFOLIO:

Institutional Class - Georgetown University Workers Compensation Plan
(6.82%).

INCOME PORTFOLIO:

Institutional Class - International Brotherhood of Electrical Workers
Officers, Representatives and Assistants Pension Plan (19.33%) and
International Brotherhood of Electrical Workers Office Employee Pension Plan
(6.07%).

PENNSYLVANIA TAX-FREE PORTFOLIO:

Institutional Class - Coastal Steel Co., Inc. (9.43%).

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BLUE CHIP EQUITY PORTFOLIO:

Institutional Class - International Brotherhood of Electrical Workers
Officers, Representatives and Assistants Pension Plan (11.14%).

CAPITAL GROWTH PORTFOLIO:

Institutional Class - First Maryland Bancorp Capital Accumulation
Retirement Plan Core Equity Account (41.52%).

SMALL-CAP PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO):

Institutional Class - International Brotherhood of Electrical Workers
Officers, Representatives and Assistants Pension Plan (19.55%), First Maryland
Bancorp Pension Plan (19.61%), International Brotherhood of Electrical Workers
Office Employees Pension Plan (5.63%), SHD-York Health System Pension Plan
(6.66%) and First Maryland Bancorp Cap Aggr Sp Equity (6.98%).

INTERNATIONAL EQUITY PORTFOLIO:

Institutional Class - AIB FBO Sisters of St. Joseph of Orange
(99.55%).

A shareholder owning beneficially more than 25% of a particular
Portfolio's shares may be considered to be a "controlling person" of that
Portfolio. Accordingly, its vote could have a more significant effect on
matters presented at shareholder meetings than the votes of the Portfolio's
other shareholders. First Maryland or its affiliates, however, may receive
voting instructions from certain underlying customer accounts and will vote the
shares in accordance with those instructions. In the absence of such
instructions, First Maryland or its affiliates will vote those shares in the
same proportion as it votes the shares for which it has received instructions
from its customers and fiduciary accounts.

INDEPENDENT AUDITORS

KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
independent auditors, has been selected as the auditor for the Fund. KPMG Peat
Marwick LLP will examine financial statements of the Portfolios and will
provide other audit, tax and related services.

FINANCIAL STATEMENTS

The Portfolios' financial statements and financial highlights for the
fiscal year ended April 30, 1997 are included in the Annual Report and for the
six month period ended October 31, 1997 are included in the Semi-Annual Report,
which reports are supplied with this Statement of Additional Information. The
Portfolios' financial statements and financial highlights are incorporated
herein by reference.

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<PAGE> 191
APPENDIX A

DESCRIPTION OF SELECTED INDICES

Dow Jones Industrial Average is an unmanaged index of common stock prices
representing stocks of major industrial companies and includes reinvestment of
dividends.

Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of
common stock prices and includes reinvestment of dividends.

Standard & Poor's MidCap 400 Index is an unmanaged index of common stock prices
and includes reinvestment of dividends.

NASDAQ Composite Index is an unmanaged index of over-the-counter stock prices
and does not assume reinvestment of dividends.

Russell 2000 Index is an unmanaged index of small capitalization stocks that
includes reinvestment of dividends.

Morgan Stanley Capital International Europe, Australia, Far East (EAFE)

Index is an unmanaged index of over 1,000 foreign securities in Europe,
Australia and the Far East, and includes reinvestment of dividends.

Morgan Stanley Capital World Index is an unmanaged index of over 1,500 foreign
securities, and includes reinvestment of dividends.

Lehman Brothers Aggregate Bond Index, an unmanaged index, is a broad measure of
bond performance and includes reinvestment of dividends. It is comprised of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Yankee Bond Index.

Lehman Brothers Government Bond Index is an index comprised of all public
obligations of the U.S. Treasury, U.S. government agencies, quasi-federal
corporations, and of corporate debt guaranteed by the U.S. government. The
index excludes flower bonds, foreign targeted issues, and mortgage-backed
securities.

Lehman Brothers Corporate Bond Index is an index comprised of all public,
fixed-rate, non-convertible investment-grade domestic corporate debt. Issues
included in this index are rated at least Baa by Moody's or BBB by S&P or, in
the case of unrated bonds, BBB by Fitch Investors Service. Collateralized
mortgage obligations are not included in the Corporate Bond Index.

The Lehman Brothers Government Bond Index and the Lehman Brothers Corporate
Bond Index combine to form the Government/Corporate Bond Index.

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Lehman Brothers Intermediate Corporate Bond Index is an index comprised of all
public, fixed-rate, non-convertible investment-grade domestic corporate debt.
Issues included in this index have remaining maturities of one to ten years and
are rated at least Baa by Moody's or BBB by S&P, or, in the case of unrated
bonds, BBB by Fitch Investors Service.

Lehman Brothers Long-Term Corporate Bond Index is an index comprised of all
public, fixed-rate, non-convertible investment-grade domestic corporate debt.
Issues included in this index have remaining maturities greater than ten years
and are rated at least Baa by Moody's or BBB by S&P, or, in the case of unrated
bonds, BBB by Fitch Investors Service.

Salomon Brothers High Grade Corporate Bond Index is an index of high quality
corporate bonds with a minimum maturity of at least ten years and with total
debt outstanding of at least $50 million. Issues included in the index are
rated AA or better by Moody's or AA or better by S&P.

Merrill Lynch High and Medium Quality Intermediate-Term Corporate Index is an
index comprised of all public, fixed-rate, non-convertible corporate debt.
Issues included in this index have remaining maturities of between one year and
9.99 years. Issues included in the index are rated at least BBB by S&P.

DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES

Moody's ratings for state and municipal and other short-term obligations are
designated Moody's Investment Grade ("MIG," or "VMIG" for variable rate
obligations). This distinction is in recognition of the difference between
short-term credit risk and long-term credit risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
Symbols used will be as follows:

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

MIG-2/VMIG-2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.

DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES

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

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

DESCRIPTION OF MOODY'S MUNICIPAL 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

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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 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 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.

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B 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.

DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS

AAA - Debt rated AAA has the highest rating assigned by S&P. 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 highest rated debt 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.

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 categories.

The ratings from AA to BBB may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.

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DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

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 structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and with high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.

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.

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS

A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety.

A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be 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.

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

Aaa - Bonds 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 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 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

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

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

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

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

Ca - Bonds rated Ca represent obligations which are speculative to a high
degree. Such issues are often in default or have other marked short-comings.

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

DESCRIPTION OF S&P'S CORPORATE BOND RATINGS

AAA - Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. 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 highest-rated issues only to a small degree.

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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.

BB - Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.

B - Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB-rating.

CCC - Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.

CC - Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.

C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.

CI - The rating CI is reserved for income bonds on which no interest is being
paid.

D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

The ratings from AA to CCC may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.

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APPENDIX B

1997 TAX RATES

The following tables show the effect of a shareholder's tax status on
effective yield under the federal and applicable state and local income tax
laws for 1997. The second table shows the approximate yield a taxable security
must provide at various income brackets to produce after-tax yields equivalent
to those of hypothetical tax-exempt obligations yielding from 3% to 7%. Of
course, no assurance can be given that a Portfolio will achieve any specific
tax-exempt yield. While the Portfolios invest principally in obligations whose
interest is exempt from federal income tax (and, in the case of the Maryland
Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio, from Maryland and
Pennsylvania state income tax, respectively, as well) other income received by
a Portfolio may be taxable.

Use the first table to find your approximate effective tax bracket
taking into account federal and state taxes for 1997.

<TABLE>
<CAPTION>
COMBINED COMBINED COMBINED
FEDERAL MARYLAND MARYLAND AND PENNSYLVANIA PENNSYLVANIA PENNSYLVANIA
SINGLE RETURN JOINT RETURN INCOME MARGINAL FEDERAL MARGINAL AND FEDERAL AND FEDERAL
TAXABLE INCOME TAXABLE INCOME TAX BRACKET RATE EFFECTIVE TAX RATE EFFECTIVE TAX EFFECTIVE TAX
BRACKET** BRACKET** BRACKET**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
24,651 59,750 41,201 99,600 28.00% 5.00% 33.76%*** 2.8% 33.50%**** 30.02%*****
59,751 124,650 99,601 151,750 31.00% 5.00% 36.52%*** 2.8% 36.27%**** 32.93%*****
124,651 271,050 151,751 271,050 36.00% 5.00% 41.12%*** 2.8% 40.89%**** 37.79%*****
271,051 271,051 39.60% 5.00% 44.43%*** 2.8% 44.21%**** 41.29%*****
</TABLE>

* Net amount subject to federal income tax after deductions and
exemptions. Assumes ordinary income only.

** Excludes the impact of the phaseout of personal exemptions,
limitations on itemized deductions, and other credits, exclusions, and
adjustments which may increase a taxpayer's marginal tax rate. An
increase in a shareholder's marginal tax rate would increase that
shareholder's tax-equivalent yield.

*** Combined Maryland and federal effective tax brackets take into account
the highest combined Maryland state and county income tax rate of
8.00% (applicable to residents of Allegheny, Caroline, Montgomery,
Prince George's, Somerset, St. Mary's and Wicomico Counties). For
Allegheny, Caroline, Montgomery, Prince George's, Somerset, St. Mary's
and Wicomico, the county income tax rate is equal to 60% of Maryland
state taxes. For Carroll County, the county income tax rate is 58% of
the state tax. For Baltimore County and Queen Anne's County, the
county income tax rate is 55% of the state tax. For Talbot County,
the county income tax rate is 40% of the state tax. For Worcester
County, the county income tax rate is 30% of the state tax. The
county income tax rate for the remaining counties of the State of
Maryland, as well as the City of Baltimore, is 50% of the state tax.
Figures are tax-effected to reflect the federal tax benefit for
persons who itemized deductions.

**** Combined Pennsylvania and federal effective tax brackets take into
account the highest combined Pennsylvania state income tax rate of
2.8% and Philadelphia school district investment income tax rate of
4.84%. Figures are tax-effected to reflect the federal tax benefit
for persons who itemized deductions. Having determined your effective
tax bracket above, use the following table to determine the tax
equivalent yield for a given tax-free yield.

***** Combined Pennsylvania and federal effective tax brackets take into
account the highest Pennsylvania state income tax rate of 2.8% but
does not take into account any local income tax rate since only
residents of the school district of Philadelphia are subject to a
local income tax on the net income from the ownership, sale or other
disposition of tangible and intangible personal property. Figures are
tax-effected to reflect the federal tax benefit for persons who
itemized deductions.

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If your combined effective federal, Maryland state and county personal income
tax rate in 1997 is:

To match these tax free rates: Your taxable investment would have to earn the
following yield:

If your combined effective federal, Pennsylvania state and Philadelphia school
district investment income tax rate in 1997 is:

Your taxable investment would have to earn the following yield:

If your combined effective federal and Pennsylvania state income tax rate in
1997 is:

Your taxable investment would have to earn the following yield:

A Portfolio may invest a portion of its assets in obligations that are subject
to federal, state, or county (or City of Baltimore) income taxes. When the
Portfolio invests in these obligations, its tax-equivalent yield will be lower.
In the table above, tax-equivalent yields are calculated assuming investments
are 100% federal- and state- tax-free.

Yield information may be useful in reviewing a Portfolio's performance and in
providing a basis for comparison with other investment alternatives. However,
each Portfolio's yield fluctuates, unlike investments that pay a fixed interest
rate over a stated period of time. When comparing investment alternatives,
investors should also note the quality and maturity of the portfolio securities
of the respective investment companies that they have chosen to consider.

Investors should recognize that in periods of declining interest rates a
Portfolio's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
Portfolio's holdings, thereby reducing the Portfolio's current yield. In
periods of rising interest rates, the opposite can be expected to occur. The
yields of the Retail Class, Institutional Class or Institutional II Class of a
Portfolio are each calculated separately. The yields of the Retail Class and
Institutional II Class of a Portfolio will be lower than those of the
Institutional Class of the same Portfolio, due to higher expenses in general.

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Part C - Other Information

Item 24. Financial Statements and Exhibits

(a) Financial Statements

Included in Part A:

Financial Highlights

Included in Part B:

The Registrant's financial statements (statements of assets
and liabilities, statements of operations, statements of
changes in net assets, financial highlights and independent
auditors' report) for the fiscal year ended April 30,
1997 and for the six months ended October 31, 1997 are
incorporated herein by reference to the Annual Report
dated April 30, 1997 and the Semi-Annual Report dated October
31, 1997, respectively, filed with the Securities and Exchange
Commission pursuant to Rule 30b2-1 under the Investment

Company Act of 1940.

(b) Exhibits:

(1) (a) Declaration of Trust dated October 22, 1992
is incorporated by reference to Exhibit 1 to
the Registration Statement.

(b) Amended and Restated Declaration of Trust
dated March 19, 1993 is incorporated by
reference to Exhibit 1(b) to Pre-Effective
Amendment No. 2.

(c) Supplement dated March 23, 1993 to the
Amended and Restated Declaration of Trust
dated March 19, 1993 is incorporated by
reference to Exhibit 1(c) to Pre-Effective
Amendment No. 2.

(2) By-Laws of the Registrant are incorporated by
reference to Exhibit 1(d) to Pre-Effective
Amendment No. 2.

(3) Not applicable.

(4) Not applicable.

(5) (a) Investment Advisory Agreement dated April 12,
1993, between the Registrant and Allied
Investment Advisors, Inc. is incorporated
herein by reference to Exhibit 5(a) to
Pre-Effective Amendment No. 2.

(b) Investment Advisory Agreement dated June 7,
1994, between the Registrant and AIB
Investment Managers Limited is incorporated
herein by reference to Exhibit 5(b) to
Post-Effective Amendment No. 3.

(c) Investment Advisory Agreement dated July 13,
1995, between the Registrant and Allied
Investment Advisors, Inc. is incorporated by
reference to Exhibit 1(d) of Post-Effective
Amendment No. 7.

(6) (a) Distribution Agreement dated November 1,
1995, between the Registrant and SEI
Financial Services Company is incorporated
herein by reference to Exhibit 6(a) to
Post-Effective Amendment No. 6.
<PAGE> 200
(b) Administration Agreement dated November 1,
1995, between the Registrant and SEI
Financial Management Corporation is
incorporated herein by reference to Exhibit
6(b) to Post-Effective Amendment No. 6.

(7) Not applicable.

(8) (a) Custody Agreement dated September 28, 1995,
between the Registrant and The First National
Bank of Maryland is incorporated herein by
reference to Exhibit 8(a) to Post-Effective
Amendment No. 6.

(b) Custodian Agreement dated November 9, 1995,
between The First National Bank of Maryland
and Bankers Trust Company is incorporated
herein by reference to Exhibit 8(b) to
Post-Effective Amendment No. 6.

(9) Transfer Agency and Service Agreement dated
November 1, 1995, between the Registrant and
SEI Financial Management Corporation is
incorporated herein by reference to Exhibit 9
to Post-Effective Amendment No. 6.

(10) Opinion and consent of legal counsel is
incorporated herein by reference to Exhibit
10 to Pre-Effective Amendment No. 3.

(11) Consent of independent auditors.

(12) Not applicable.

(13) Written assurance dated May 27, 1993 that
purchase representing initial capital was
made for investment purposes without any
present intention of redeeming or reselling
is incorporated herein by reference to
Exhibit 13 to Pre-Effective Amendment No. 3.

(14) Not applicable.

(15) (a) Distribution Plan is incorporated herein by
reference on Exhibit 15(a) to Post-Effective
Amendment No. 2.

(b) Shareholder Servicing Plan is incorporated
herein by reference to Exhibit 15(b) to
Post-Effective Amendment No. 1.

(16) Schedule for Computation of Performance
Calculations is incorporated herein by
reference to Exhibit 16 to Pre-Effective
Amendment No. 3.

(17) Financial Data Schedule is incorporated
herein by reference to Exhibit 17 of
Post-Effective Amendment No. 15.

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

<PAGE> 201
(18) Rule 18f-3 Plan is incorporated herein by
reference to Exhibit 18 of Post-Effective
Amendment No. 5.

Item 25. Persons Controlled by or Under Common Control with Registrant

None.

Item 26. Number of Holders of Securities To be updated

<TABLE>
<CAPTION>
NUMBER OF RECORD
PORTFOLIO TITLE OF CLASS HOLDERS*
<S> <C> <C>
U.S. Treasury Money Market Portfolio Institutional Class 3
Institutional II Class 1
Retail Class 10

U.S. Government Money Market Portfolio Institutional Class 2
Institutional Class II 1

Money Market Portfolio Institutional Class 3
Institutional II Class 1
Retail Class 57

Tax-Free Money Market Portfolio Institutional Class 3
Institutional Class II 1
Retail Class 12

Short-Term Treasury Portfolio Institutional Class 4
Retail Class 9

Short-Term Bond Portfolio Institutional Class 0
Retail Class 0

U.S. Government Bond Portfolio Institutional Class 0
Retail Class 0

Intermediate Fixed Income Portfolio Institutional Class 5
Retail Class 1

Income Portfolio Institutional Class 7
Retail Class 9

Maryland Tax-Free Portfolio Institutional Class 5
Retail Class 11

Pennsylvania Tax-Free Portfolio Institutional Class 5
Retail Class 6
</TABLE>

<PAGE> 202

<TABLE>
<S> <C> <C>
Balanced Portfolio Institutional Class 5
Retail Class 29

Equity Income Portfolio Institutional Class 5
Retail Class 15

Equity Index Portfolio Institutional Class 3
Retail Class 4

Blue Chip Equity Portfolio Institutional Class 6
Retail Class 134

Mid-Cap Value Portfolio Institutional Class 6
Retail Class 0

Value Equity Portfolio Institutional Class 0
Retail Class 0

Stock Portfolio Institutional Class 5
Retail Class 0

Capital Growth Portfolio Institutional Class 5
Retail Class 69

Small Cap Portfolio Institutional Class 8
Retail Class 17

International Equity Selection Portfolio Institutional Class 0
Retail Class 0

International Equity Portfolio Institutional Class 4
Retail Class 16
</TABLE>

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

* As of November 18, 1997

Item 27. Indemnification

Article XI, Section 2 of the Declaration of Trust sets forth the reasonable and
fair means for determining whether indemnification shall be provided to any
past or present trustee or officer. It states that the Registrant shall
indemnify any present or past trustee or officer to the fullest extent
permitted by law against liability and all expenses reasonably incurred by him
in connection with any claim, action, suit or proceeding in which he is
involved by virtue of his service as a trustee, an officer, or both.
Additionally, amounts paid or incurred in settlement of such matters are
covered by this indemnification. Indemnification will not be provided in
certain circumstances, however. These include instances of willful
misfeasance, bad faith, gross negligence, and reckless disregard of the duties
involved in the conduct of the particular office involved.

Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore,
<PAGE> 203
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

Item 28. Business and Other Connections of Investment Adviser

Allied Investment Advisors, Inc. ("AIA") serves as investment adviser to all
Portfolios of the Registrant except the International Equity Portfolio. A
description of the directors and officers of AIA and other required information
is included in the Form ADV and schedules thereto of AIA, as amended, on file
with the Securities and Exchange Commission (File No. 801-50883) and is
incorporated herein by reference.

AIB Investment Managers Limited ("AIBIM") serves as investment adviser to
International Equity Portfolio of the Registrant. A description of the
directors and officers of AIBIM and other required information is included in
the Form ADV and schedules thereto of AIBIM, as amended, on file with the
Securities and Exchange Commission (File No. 801-41173) and is incorporated
herein by reference.

Item 29. Principal Underwriters

(a) SEI Investments Distribution Co. (formerly SEI Financial
Services Company) acts as distributor for the Registrant. SEI
Investments Distribution Co. also acts as distributor for:
SEI Daily Income Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Asset Allocation Trust, Stepstone
Funds, The Advisors' Inner Circle Fund, The Pillar Funds,
CUFund, STI Classic Funds, CoreFunds, Inc., First American
Funds, Inc., First American Investment Funds, Inc., The Arbor
Fund, Boston 1784 Funds(R), Marquis Funds(R), Morgan Grenfell
Investment Trust, The PBHG Funds, Inc., The Achievement Funds
Trust, Bishop Street Funds, Monitor Funds, FMB Funds, Inc.,
STI Classic Variable Trust, TIP Funds, CrestFunds, Inc., First
American Strategy Funds, Inc., HighMark Funds and Expedition
Funds.

SEI Investments Distribution Co. provides numerous financial
services to investment managers, pension plan sponsors, and
bank trust departments. These services include portfolio
evaluation, performance measurement and consulting services,
and automated execution, clearing and settlement of securities
transactions.

(b) Directors, officers and partners of SEI Investments
Distribution Co. are as follows:

<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* With Underwriter With Registrant
<S> <C>
Alfred P. West, Jr. Director, Chairman and Chief Executive
Officer
</TABLE>
<PAGE> 204

<TABLE>
<S> <C> <C>
Henry H. Greer Director, President and Chief Operating
Officer

Carmen V. Romeo Director, Executive Vice President,
President - Investment Advisory Group

Gilbert L. Beebower Executive Vice President

Richard B. Lieb Executive Vice President, President
-Investment Services Division

Dennis J. McGonigle Executive Vice President

Leo J. Dolan, Jr. Senior Vice President

Carl A. Guarino Senior Vice President

Larry Hutchison Senior Vice President

David G. Lee Senior Vice President

Jack May Senior Vice President

A. Keith McDowell Senior Vice President

Hartland J. McKeown Senior Vice President

Barbara J. Moore Senior Vice President

Kevin P. Robins Senior Vice President, General Counsel Vice President and
and Secretary Assistant Secretary

Robert Wagner Senior Vice President

Patrick K. Walsh Senior Vice President

Robert Crudup Vice President and Managing Director

Barbara Dayne Vice President

Vic Galef Vice President and Managing Director

Kim Kirk Vice President and Managing Director

John Krzeminski Vice President and Managing Director

Carolyn McLaurin Vice President and Managing Director

Donald Pepin Vice President and Managing Director

Mark Samuels Vice President and Managing Director

Wayne M. Withrow Vice President and Managing Director
</TABLE>

<PAGE> 205

<TABLE>
<S> <C> <C>
Robert Aller Vice President

Gordon W. Carpenter Vice President

Marc H. Cahn Vice President and Assistant Secretary Vice President and
Assistant Secretary
Todd Cipperman Vice President and Assistant Secretary Vice President and
Assistant Secretary
Barbara A. Nugent Vice President and Assistant Secretary Vice President and
Assistant Secretary
Jeff Drennen Vice President

Kathy Heilig Vice President and Treasurer

Michael Kantor Vice President

Samuel King Vice President

W. Kelso Morril Vice President

Joanne Nelson Vice President

Sandra K. Orlow Vice President and Assistant Secretary Vice President and
Assistant Secretary
Cynthia M. Parrish Vice President and Assistant Secretary

Kim Rainey Vice President

Steve Smith Vice President

Kathryn L. Stanton Vice President and Assistant Secretary Vice President and
Secretary
Daniel Spaventa Vice President

James Dougherty Director of Brokerage Services
</TABLE>

* One Freedom Valley Drive, Oaks, PA 19456

<PAGE> 206
(c) Not applicable.

Item 30. Location of Accounts and Records

The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office located at One Freedom Valley Drive, Oaks, PA 19456.
Certain records, including records relating to the Registrant's shareholders,
may be maintained pursuant to Rule 31a-3 at the offices of the Registrant's
investment advisers, Allied Investment Advisors, Inc., located at 100 E. Pratt
Street, Baltimore, MD 21202, and AIB Investment Managers Limited, located at
AIB Investment House, Percy Place, Dublin 4, Ireland, respectively; and its
transfer agent, SEI Fund Resources, located at One Freedom Valley Drive, Oaks,
PA 19456. Certain records relating to the physical possession of the
Registrant's securities may be maintained at the offices of the Registrant's
custodian, The First National Bank of Maryland, located at 25 South Charles
Street, Baltimore, MD 21201, or at the offices of its sub-custodian, Bankers
Trust Company, located at 16 Wall Street, New York, NY 10005.

Item 31. Management Services

Not applicable.

Item 32. Undertakings

(a) Not applicable.

(b) The Registrant hereby undertakes to file a post-effective
amendment, including financial statements which need not be
audited, within four to six months from the effective date of
this post-effective amendment to the Registration Statement.

(c) The Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual
report to shareholders (which will contain a section with
management's discussion and analysis of the fiscal year
results), upon request and without charge.

(d) The Registrant undertakes: 1) to call a meeting of
shareholders for the purpose of voting upon the question of
removal of a trustee or trustees, when requested to do so by
record holders of not less than 10% of its outstanding shares;
and 2) to assist in communications with other shareholders
pursuant to Section 16(c)(1) and (2) of the Investment Company
Act of 1940, whenever shareholders meeting the qualifications
set forth in Section 16(c) seek the opportunity to communicate
with other shareholders with a view toward requesting a
meeting
<PAGE> 207
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 16 to the Registration Statement to be signed on its behalf by
the undersigned, hereunto duly authorized, in the City of Baltimore, and State
of Maryland, on the 26 day of November, 1997.

ARK FUNDS

By: /s/ David D. Downes
--------------------------
David D. Downes
President

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 16 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.

<TABLE>
<S> <C>
* President (principal executive officer) and Trustee
- -----------------------------------------
David D. Downes

/s/ James F. Volk Treasurer, Controller and Chief Financial Officer
- ----------------------------------------- (principal financial and accounting officer)
James F. Volk

* Trustee
- -----------------------------------------
William H. Cowie, Jr.

* Trustee
- -----------------------------------------
Charlotte Kerr

* Trustee
- -----------------------------------------
George K. Reynolds, III

* Trustee
- -----------------------------------------
Thomas Schweizer
</TABLE>

* By: /s/ Alan C. Porter
--------------------------------
November 26, 1997
Alan C. Porter
Attorney-in-Fact

An original power-of-attorney authorizing Alan C. Porter to execute amendments
to this Registration Statement for each trustee of the Registrant on whose
behalf this amendment to the Registration Statement is filed has been executed
and filed with the Securities and Exchange Commission.

<PAGE> 1

Exhibit 11

CONSENT OF INDEPENDENT AUDITORS

The Trustees and Shareholders
ARK Funds

We consent to the use of our report dated June 6, 1997, incorporated by
reference herein and to the references to our Firm under the captions "Financial
Highlights" in the Retail Class, Institutional Class and Institutional II Class
prospectuses and "AUDITOR" in the statement of additional information.

KPMG Peat Marwick LLP

Boston, Massachusetts
November 26, 1997

<PAGE> 1

Exhibit 15(c)

SHAREHOLDER SERVICES PLAN
ARK Funds: INSTITUTIONAL CLASS

1. This Shareholder Services Plan (the "Plan") is the Shareholder Services
Plan of the Institutional Class of each series of ARK Funds (the "Trust"), a
Massachusetts business trust, registered as an open-end investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), issuing
separate series of shares designated as follows: U.S. Treasury Money Market
Portfolio, U.S. Government Money Market Portfolio, Money Market Portfolio,
Tax-Free Money Market Portfolio, Short-Term Treasury Portfolio, Short-Term Bond
Portfolio, U.S. Government Bond Portfolio, Intermediate Fixed Income Portfolio,
Income Portfolio, Maryland Tax-Free Portfolio, Pennsylvania Tax-Free Portfolio,
Balanced Portfolio, Equity Income Portfolio, Equity Index Portfolio, Blue Chip
Equity Portfolio, Mid-Cap Equity Portfolio, Value Equity Portfolio, Stock
Portfolio, Capital Growth Portfolio, Special Equity Portfolio, International
Equity Selection Portfolio, and International Equity Selection
Portfolio, and any future series established and designated by the Board of
Trustees (each a "Portfolio").

2. The Trust has entered into an Administration Agreement with SEI Fund
Resources (the "Administrator") and a Distribution Agreement with SEI
Investments Distribution Co. (the "Distributor") under which the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchasers for the Portfolio's shares of beneficial interest. The Trust has
entered into an Investment Advisory Contract with Allied Investment Advisors,
Inc. The Trust has further entered into a Custody Agreement with FMB Trust
Company, National Association, and a Transfer Agency Agreement with SEI Fund
Resources. Payments under this Plan shall not be made for investment advisory,
administrative, custodial or transfer agency services.

3. Each Portfolio's shares of beneficial interest are divided into classes,
including a class of shares designated Institutional Class ("Institutional
Shares"). Institutional Shares are subject to this Plan and the eligible
investors in the Institutional Shares shall be as described in the current
prospectus for the Institutional Class, as amended or supplemented from time to
time.

4. The Portfolios may make periodic payments to parties (each a
"Shareholder Servicing Agent") that have entered into a Shareholder Services
Contract, in the form attached hereto, with the Trust in respect of
Institutional Shares at an annualized rate of up to (and including) 0.15% of
Institutional Class's average net assets attributable to the Shareholder
Servicing Agent. The personal and account maintenance services to be provided
under this Plan by each Shareholder Servicing Agent may include, but are not
limited to: maintaining account records for each shareholder who beneficially
owns Institutional Shares; answering questions and handling correspondence from
shareholders about their accounts; handling the transmission of funds
representing the purchase price

<PAGE> 2

or redemption proceeds; issuing confirmations for transactions in Institutional
Shares by shareholders; assisting customers in completing application forms;
communicating with the transfer agent; and providing account maintenance and
account level support for all transactions. The Distributor may act as the
Trust's agent for transmitting or arranging for transmission of fees to
Shareholder Servicing Agents under the Shareholder Services Contract.

5. This Plan shall become effective upon having been approved by a vote of
a majority of the Trustees of the Trust, including a majority of Trustees who
are not interested persons of the Trust (as defined in the 1940 Act) and who
have no direct or indirect financial interest in the operation of this Plan or
in any agreements related to this Plan (the "Independent Trustees"), cast in
person at a meeting called for the purpose of voting on this Plan.

6. This Plan shall, unless terminated as hereinafter provided, remain in
effect from the date specified below until March 31, 1998, and from year to year
thereafter; provided, however, that such continuance is subject to approval
annually by a vote of a majority of the Trustees of the Trust, including a
majority of the Independent Trustees, cast in person at a meeting called for the
purpose of voting on this Plan.

7. This Plan may be amended with respect to the Institutional Class of a
Portfolio at any time by the Board of Trustees, provided that any material
amendment of this Plan shall be effective only upon approval in the manner
provided in paragraph 5 above.

8. This Plan may be terminated at any time, without the payment of any
penalty, by vote of a majority of the Independent Trustees.

9. Consistent with the limitation of shareholder and Trustee liability as
set forth in the Trust's Declaration of Trust, any obligations assumed by the
Trust, a Portfolio or Institutional Class thereof pursuant to this Plan and any
agreements related to this Plan shall be limited in all cases to the
proportionate ownership of the Institutional Class of the affected Portfolio and
its assets, and shall not constitute obligations of any shareholder of any other
class of the affected Portfolio or Portfolios of the Trust or of any Trustee.

10. During the existence of this Plan, the Trust shall require the
Administrator to provide the Trust, for review by the Trust's Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended under the Plan and the purposes for which such expenditures were made.

11. If any provision of this Plan shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of the Plan shall not be
affected thereby.