ARK FUNDS/MA, 497, 1998-07-29

ARK FUNDS/MA
497, 1998-07-29

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<PAGE> 1

Rule 497(c)
File No. (33-53690)

ARK FUNDS
CLASS A AND CLASS B
- ---------------------------------------------------------
TABLE OF CONTENTS
- ---------------------------------------------------------

<TABLE>
<S> <C>
Summary........................... 2
Fees and Expenses................. 4
Financial Highlights.............. 11
Investment Objectives and
Policies....................... 14
Risks to Consider................. 23
Performance....................... 26
Purchases, Exchanges and
Redemptions.................... 27
Management of the Fund............ 36
Tax Matters....................... 41
General Information............... 43
Appendix.......................... 44
- ---------------------------------------
</TABLE>
<PAGE> 2

ARK FUNDS -- CLASS A AND CLASS B

- --------------------------------------------------------------------------------
PROSPECTUS
JULY 27, 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
* U.S. Government Bond Portfolio * Value Equity Portfolio
* Intermediate Fixed Income Portfolio * Capital Growth Portfolio
* Income Portfolio * Small-Cap Equity Portfolio
* Maryland Tax-Free Portfolio * International Equity Selection Portfolio
* Pennsylvania Tax-Free Portfolio
</TABLE>

ARK Funds (the "Fund") is an open-end management investment company composed of
separately managed diversified and non-diversified portfolios. Class A and Class
B shares of the portfolios are offered through this Prospectus to all investors
investing through qualified securities dealers or other financial institutions
or by calling the Fund's distributor at 1-888-4ARK-FUND.

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.

SHARES OF THE PORTFOLIOS 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 July 27, 1998 and Annual Report (including
financial statements for the fiscal year ended April 30, 1998) have been filed
with the Securities and Exchange Commission ("SEC") and are incorporated herein
by reference. The Statement of Additional Information and Annual Report, and
additional information about classes of shares not offered through this
Prospectus, are available upon request without charge by calling 1-800-ARK-FUND.
The SEC maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other information
regarding the Fund.

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> 3

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 Class A and Class B shares of the
portfolios listed below. Only the Income Portfolio, Balanced Portfolio, Blue
Chip Equity Portfolio, Value Equity Portfolio and Capital Growth Portfolio are
currently offering Class B shares. Class B shares of the Money Market Portfolio
are available only in exchange for Class B shares of another portfolio. The U.S.
Government Money Market Portfolio, Intermediate Fixed Income Portfolio and
Mid-Cap Equity Portfolio are not currently offering Class A or Class B 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 of
these money market portfolios 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.

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 bonds which are issued or guaranteed as to payment of
principal and interest by the U.S. government or its agencies or
instrumentalities.

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 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.

2
<PAGE> 4

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.

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

SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO) -- seeks to
provide capital appreciation by investing primarily in equity securities of
smaller companies.

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.

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 program. See "Risks to Consider".

PURCHASE, EXCHANGE AND REDEMPTION OF SHARES. Investors may purchase Class
A shares of a portfolio at their net asset value plus the applicable sales
charge through qualified securities dealers or financial institutions
("Investment Professionals") or by calling the Fund's distributor at
1-888-4ARK-FUND and requesting an Account Application. No sales charges are
imposed on Class A shares of the money market portfolios and the Short-Term
Treasury Portfolio. Class B shares of a portfolio are sold without an initial
sales charge but are subject to a contingent deferred sales charge ("CDSC") if
they are redeemed within six years after purchase. Shares of a portfolio may be
exchanged for shares of the same class 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 in good
order. See "Purchases, Exchanges and Redemptions".

INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR. Allied Investment
Advisors, Inc. ("AIA") serves as investment adviser to the Fund. SEI Investments
Distribution Co. serves as the distributor of the portfolios' shares and SEI
Investments Mutual Fund Services serves as the Fund's administrator. See
"Management of the Fund".

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

3
<PAGE> 5

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>
CLASS A
----------------------------------------------------------
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
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)................ 0.19% 0.14% 0.11% 0.09%
12b-1 Fees...................................... 0.25% 0.25% 0.25% 0.25%
Shareholder Services Fees (after waiver)(2)..... 0.06% 0.06% 0.06% 0.06%
Other Expenses(3)............................... 0.19% 0.17% 0.17% 0.19%
- ------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(4)..... 0.69% 0.62% 0.59% 0.59%
- ------------------------------------------------------------------------------------------------------------
</TABLE>

+ Class A shares of this portfolio are currently not being offered.
(1) AIA 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.
AIA 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 0.25%.
(2) A portion of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.
(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.
(4) Absent the voluntary fee waivers described above, total operating expenses
for Class A 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 0.84%, 0.82%, 0.82% and 0.84%, respectively.

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

An investor in Class A 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 86
U.S. Government Money Market Portfolio...................... 6 20 35 77
Money Market Portfolio...................................... 6 19 33 74
Tax-Free Money Market Portfolio............................. 6 19 33 74
</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> 6

<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
SHORT- U.S. INTERMEDIATE
TERM GOVERNMENT FIXED
TREASURY BOND INCOME INCOME
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 4.50%* 4.50%* 4.50%*
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)................... 0.35% 0.66% 0.49% 0.51%
12b-1 Fees (after waivers)(2)...................... 0.25% 0.25% 0.25% 0.25%
Shareholder Services Fees (after waivers)(3)....... 0.00% 0.00% 0.00% 0.00%
Other Expenses(4).................................. 0.22% 0.19% 0.20% 0.19%
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(5)........ 0.82% 1.10% 0.94% 0.95%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

+ Class A shares of this portfolio are not currently being offered.
* A portion of the 4.50% sales load 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) AIA has agreed to waive, on a voluntary basis, a portion of its fees for the
U.S. Government Bond Portfolio, Intermediate Fixed Income Portfolio and
Income Portfolio and the advisory fees shown reflect those voluntary
waivers. AIA reserves the right to terminate its fee waivers at any time in
its sole discretion. Absent such waivers, advisory fees for the U.S.
Government Bond Portfolio, Intermediate Fixed Income Portfolio and Income
Portfolio would be 0.75%, 0.60% and 0.60%, respectively.
(2) The Distributor has agreed to waive, on a voluntary basis, a portion or all
of its distribution fees for each portfolio. Absent such waivers, the
distribution fees would be 0.40% for the Short-Term Treasury Portfolio and
0.30% for the U.S. Government Bond Portfolio, Intermediate Fixed Income
Portfolio and Income Portfolio.
(3) All of the shareholder services fees are being waived for each portfolio.
Absent such waivers, the shareholder services fees would be 0.15%.
(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.
(5) Absent the voluntary fee waivers described above, the total operating
expenses for Class A shares of the Short-Term Treasury Portfolio, U.S.
Government Bond Portfolio, Intermediate Fixed Income Portfolio and Income
Portfolio would be 1.12%, 1.39%, 1.25%, and 1.24%, respectively.

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

An investor in Class A 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 4.50% sales charge:

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Short-Term Treasury Portfolio.......................... 8 26 46 101
U.S. Government Bond Portfolio......................... 56 78 103 173
Intermediate Fixed Income Portfolio.................... 54 74 95 155
Income Portfolio....................................... 54 74 95 156
</TABLE>

5
<PAGE> 7

<TABLE>
<CAPTION>
CLASS A
-------------------------
MARYLAND PENNSYLVANIA
TAX-FREE TAX-FREE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... 4.50%* 4.50%*
Exchange Fee................................................ None None
Redemption Fee.............................................. None None
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waiver)(1)............................. 0.49% 0.65%
12b-1 Fees (after waivers)(2)............................... 0.25% 0.25%
Shareholder Services Fees (after waivers)(3)................ 0.00% 0.00%
Other Expenses(4)........................................... 0.19% 0.20%
- -----------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(5)................. 0.93% 1.10%
- -----------------------------------------------------------------------------------------
</TABLE>

* A portion of the 4.50% sales load 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) AIA has agreed to waive, on a voluntary basis, a portion of its fees for the
Maryland Tax-Free Portfolio and the advisory fees shown reflect this
voluntary waiver. AIA reserves the right to terminate its fee waivers at any
time in its sole discretion. Absent such waiver, the advisory fees for the
Maryland Tax-Free Portfolio would be 0.65%.
(2) The Distributor has agreed to waive, on a voluntary basis, a portion of its
distribution fees for each portfolio. Absent such waivers, the distribution
fees would be 0.30%.
(3) A portion or all of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.
(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.
(5) Absent the voluntary fee waivers described above, the total operating
expenses for Class A shares of the Maryland Tax-Free Portfolio and
Pennsylvania Tax-Free Portfolio would be 1.29% and 1.30%, respectively.

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Maryland Tax-Free Portfolio................................. 54 73 94 154
Pennsylvania Tax-Free Portfolio............................. 56 78 103 173
</TABLE>

6
<PAGE> 8

<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
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%*
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)............................ 0.56% 0.64% 0.03% 0.60%
12b-1 Fees (after waivers)(2)............................... 0.25% 0.25% 0.25% 0.25%
Shareholder Services Fees (after waivers)(3)................ 0.00% 0.00% 0.00% 0.00%
Other Expenses(after waivers)(4)............................ 0.20% 0.17% 0.17% 0.22%
- ------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(5)................. 1.01% 1.06% 0.45% 1.07%
- ------------------------------------------------------------------------------------------------------------
</TABLE>

* A portion of the 4.75% sales load 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) AIA 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.
AIA 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 0.65%, 0.70%, 0.20% and 0.70%, respectively.
(2) The Distributor has agreed to waive, on a voluntary basis, a portion of its
distribution fees for each portfolio. Absent such waivers, the distribution
fees would be 0.40% for the Balanced Portfolio, Equity Income Portfolio and
Equity Index Portfolio, and 0.55% for the Blue Chip Equity Portfolio.
(3) A portion or all of the shareholder service fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.
(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 Administrator has agreed to waive, on a
voluntary basis, 0.13% of its fee for the Equity Index Portfolio. Absent
such waiver, other expenses for the Equity Index Portfolio would be 0.30%.
(5) Absent the voluntary fee waivers described above, total operating expenses
for Class A shares of the Balanced Portfolio, Equity Income Portfolio,
Equity Index Portfolio and Blue Chip Equity Portfolio would be 1.40%, 1.42%,
1.05%, and 1.62%, respectively.

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Balanced Portfolio.......................................... 57 78 101 165
Equity Income Portfolio..................................... 58 80 103 171
Equity Index Portfolio...................................... 52 61 72 101
Blue Chip Equity Portfolio.................................. 58 80 104 172
</TABLE>

7
<PAGE> 9

<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
INTERNATIONAL
MID-CAP VALUE CAPITAL SMALL-CAP EQUITY
EQUITY EQUITY GROWTH EQUITY SELECTION
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO+ PORTFOLIO PORTFOLIO PORTFOLIO++ PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................... 4.75%* 4.75%* 4.75%* 4.75%* 1.50%
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)........................ 0.74% 0.87% 0.65% 0.79% 0.55%
12b-1 Fees (after waivers)(2)........................... 0.25% 0.25% 0.25% 0.25% 0.25%
Shareholder Services Fees (after waivers)(3)............ 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (4)...................................... 0.23% 0.19% 0.21% 0.30% 0.24%
- --------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after waivers)(5)............. 1.22% 1.31% 1.11% 1.34% 1.04%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

+ Class A shares of this portfolio are not currently being offered.
++ Formerly Special Equity Portfolio.
* A portion of the 4.75% sales load 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) AIA 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.
AIA reserves 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
Equity Portfolio and International Equity Selection Portfolio would be
0.80%, 1.00%, 0.70%, 0.80%, and 0.65%, respectively.
(2) The Distributor has agreed to waive, on a voluntary basis, a portion or all
its distribution fees for each portfolio. Absent such waivers, the
distribution fees would be 0.40%.
(3) A portion or all of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.
(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.
(5) Absent the voluntary fee waivers described above, the total operating
expenses for Class A shares of the Mid-Cap Equity Portfolio, Value Equity
Portfolio, Capital Growth Portfolio, Small-Cap Equity Portfolio and
International Equity Selection would be 1.58%, 1.74%, 1.46%, 1.65%, and
1.44%, respectively.

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

<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
---- ----- ----- ------
<S> <C> <C> <C> <C>
Mid-Cap Equity Portfolio.................................... 59 84 111 188
Value Equity Portfolio...................................... 60 87 116 198
Capital Growth Portfolio.................................... 58 81 106 176
Small-Cap Equity Portfolio.................................. 60 88 117 201
International Equity Selection Portfolio.................... 25 48 72 140
</TABLE>

8
<PAGE> 10
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION MONEY MARKET INCOME BALANCED BLUE CHIP EQUITY VALUE EQUITY
EXPENSES PORTFOLIO* PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Contingent Deferred
Sales Charge (as a percentage
of the lower of original
purchase price or redemption
price)........................ 5% in the first 5% in the first 5% in the first 5% in the first 5% in the first
year, declining year, declining year, declining year, declining year, declining
to 1% in the to 1% in the to 1% in the to 1% in the to 1% in the
sixth year and sixth year and sixth year and sixth year and sixth year and
eliminated eliminated eliminated eliminated eliminated
thereafter thereafter thereafter thereafter thereafter
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)................... 0.11% 0.51% 0.56% 0.60% 0.87%
12b-1 Fees...................... 0.75% 0.75% 0.75% 0.75% 0.75%
Shareholder Services Fees....... 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (2).............. 0.17% 0.19% 0.20% 0.22% 0.19%
- --------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses (after
waivers)(3)................... 1.28% 1.70% 1.76% 1.82% 2.06%
- --------------------------------------------------------------------------------------------------------------------------

<CAPTION>
CLASS B
---------------
SHAREHOLDER TRANSACTION CAPITAL GROWTH
EXPENSES PORTFOLIO
- -------------------------------------------------
<S> <C>
Maximum Contingent Deferred
Sales Charge (as a percentage
of the lower of original
purchase price or redemption
price)........................ 5% in the first
year, declining
to 1% in the
sixth year and
eliminated
thereafter
Exchange Fee.................... None
Redemption Fee.................. None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees (after
waivers)(1)................... 0.65%
12b-1 Fees...................... 0.75%
Shareholder Services Fees....... 0.25%
Other Expenses (2).............. 0.21%
- ---------------------------------------------------------------------------------
Total Operating Expenses (after
waivers)(3)................... 1.86%
- ---------------------------------------------------------------------------------
</TABLE>

* Class B shares of the Money Market Portfolio are only available in exchange
for Class B shares of another portfolio. The deferred sales charge applied
to Class B shares of the Money Market Portfolio at the time of redemption
will be equal to the deferred sales charge that would have been applied to
the shares of such other portfolio.
(1) AIA 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.
AIA reserves the right to terminate its fee waivers at any time in its sole
discretion. Absent such waivers, the advisory fees for the Money Market
Portfolio, Income Portfolio, Balanced Portfolio, Blue Chip Equity Portfolio,
Value Equity Portfolio and Capital Growth Portfolio would be 0.25%, 0.60%,
0.65%, 0.70%, 1.00% and 0.70%, respectively.
(2) Other expenses are estimated based on amounts incurred during the previous
fiscal year and include all expenses except non-recurring account fees,
brokerage commissions and other capital items, and advisory, 12b-1 and
shareholder services fees.
(3) Absent the voluntary fee waivers described above, the total operating
expenses for Class B shares of the Money Market Portfolio, Income Portfolio,
Balanced Portfolio, Blue Chip Equity Portfolio, Value Equity Portfolio and
Capital Growth Portfolio would be 1.42%, 1.79%, 1.85%, 1.92%, 2.19% and
1.91%, respectively.

9
<PAGE> 11

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

An investor in Class B 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>
Money Market Portfolio
(assuming a complete redemption at end of period)......... 63 71 90 126
(assuming no redemptions)................................. 13 41 70 126
-----------------------------
Income Portfolio
(assuming a complete redemption at end of period)......... 67 84 112 171
(assuming no redemptions)................................. 17 54 92 171
-----------------------------
Balanced Portfolio
(assuming a complete redemption at end of period)......... 68 85 115 178
(assuming no redemptions)................................. 18 55 95 178
-----------------------------
Blue Chip Equity Portfolio
(assuming a complete redemption at end of period)......... 68 87 119 184
(assuming no redemptions)................................. 18 57 99 184
-----------------------------
Value Equity Portfolio
(assuming a complete redemption at end of period)......... 71 95 131 210
(assuming no redemptions)................................. 21 65 111 210
-----------------------------
Capital Growth Portfolio
(assuming a complete redemption at end of period)......... 69 88 121 189
(assuming no redemptions)................................. 19 58 101 189
-----------------------------
</TABLE>

10
<PAGE> 12

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

The following table provides information about the financial history of
Class A of each portfolio (excluding portfolios which as of April 30, 1998 did
not offer Class A shares). As of the date of this Prospectus, Class B shares of
the Money Market Portfolio, Income Portfolio, Balanced Portfolio, Blue Chip
Equity Portfolio, Value Equity Portfolio and Capital Growth Portfolio had not
commenced operations. The table expresses the information in terms of a single
share outstanding throughout the year or period. The information for each of the
years or periods in the five-year period ended April 30, 1998 (as applicable)
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, 1998 is included in the Annual Report. The Annual Report is
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.

The U.S. Government Bond Portfolio, Short-Term Bond Portfolio, Pennsylvania
Tax-Free Portfolio, Value Equity Portfolio and International Equity Selection
Portfolio commenced operations on April 1, 1996 as separate investment
portfolios (collectively, the "Predecessor Funds") of Marketvest Funds, Inc., a
Maryland corporation, and Marketvest Funds, a Massachusetts business trust. On
March 20, 1998 and March 27, 1998, the Predecessor Funds were reorganized as new
portfolios of the Fund. Prior to the reorganization, the Predecessor Funds
offered and sold only one class of shares.

The financial highlights presented below set forth information concerning
the investment results of the Predecessor Funds' shares for each of the fiscal
periods from inception of each of the Predecessor Funds to April 30, 1998. As
part of the reorganization, the fiscal year of the Predecessor Funds' was
changed to coincide with the Fund's April 30 fiscal year. The information for
the fiscal periods ended on or before February 28, 1998 was audited by the
Predecessor Funds' independent auditors, whose report for the fiscal period
ended February 28, 1998 is contained in Marketvest Funds' Annual Report. Such
financial highlights should be read in conjunction with the financial statements
and notes thereto contained in Marketvest Fund's Annual Report.

For a Share Outstanding Throughout the Year or Period Ended April 30,
<TABLE>
<CAPTION>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return+ (000) Assets Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------
Class A
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 4.77% $ 35,302 0.70% 4.66%
1997 1.00 0.05 -- (0.05) -- 1.00 4.71 13,673 0.64 4.62
1996(1) 1.00 0.02 -- (0.02) -- 1.00 1.82++ 8,758 0.55* 4.71*
- -------------------
MONEY MARKET PORTFOLIO
- -------------------
Class A
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.25% $188,048 0.62% 5.13%
1997 1.00 0.05 -- (0.05) -- 1.00 5.03 128,693 0.59 4.92
1996 1.00 0.05 -- (0.05) -- 1.00 5.44 104,703 0.58 5.25
1995 1.00 0.05 -- (0.05) -- 1.00 4.69 51,081 0.45 4.88
1994(2) 1.00 -- -- -- -- 1.00 0.42++ 12 1.16* 2.26*
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
Class A
1998 $ 1.00 0.03 -- (0.03) -- $ 1.00 3.16% $ 25,144 0.61% 3.11%
1997 1.00 0.03 -- (0.03) -- 1.00 3.01 16,495 0.55 2.97
1996 1.00 0.03 -- (0.03) -- 1.00 3.53 16,179 0.34 3.33
1995 1.00 0.03 -- (0.03) -- 1.00 2.74 2,491 0.75 2.68
1994(3) 1.00 -- -- -- -- 1.00 0.20++ 50 1.25* 1.20*
- ----------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- ----------------------------------
Class A
1998(4) $ 1.00 0.04 -- (0.04) -- $ 1.00 5.19% $ 78,265 0.67%* 4.98%*

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- ----------- -----------------------------------
<S> <C> <C> <C>
- -----------
U.S. TREASU
- -----------
Class A
1998 0.85% -- --
1997 0.83 -- --
1996(1) 0.86* -- --
- -----------
MONEY MARKE
- -----------
Class A
1998 0.85% -- --
1997 0.83 -- --
1996 0.77 -- --
1995 0.97 -- --
1994(2) 592.55* -- --
- -----------
TAX-FREE MO
- -----------
Class A
1998 0.86% -- --
1997 0.84 -- --
1996 0.90 -- --
1995 2.94 -- --
1994(3) 32.17* -- --
- -----------
U.S. GOVERN
- -----------
Class A
1998(4) 0.87%* -- --
</TABLE>

11
<PAGE> 13
<TABLE>
<CAPTION>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return+ (000) Assets Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------
SHORT-TERM TREASURY PORTFOLIO
=============================
Class A
1998 $ 9.96 0.52 0.09 (0.51) (0.01) $10.05 6.23% $14,410 0.78% 5.02%
1997(5) 9.95 0.27 0.03 (0.28) (0.01) 9.96 3.39++ 22,937 0.67* 5.07*
- ------------------------------
U.S. GOVERNMENT BOND PORTFOLIO
==============================
Class A
1998(6) $ 9.88 0.81 (0.03) (0.81) -- $ 9.85 7.86%++ $ 30 1.05% 6.02%*
- ----------------
INCOME PORTFOLIO
================
Class A
1998 $ 9.94 0.58 0.44 (0.59) -- $10.37 10.47% $ 6,889 0.95% 5.82%
1997 9.91 0.59 0.01 (0.57) -- 9.94 6.32 4,102 0.89 5.96
1996 9.72 0.60 0.19 (0.60) -- 9.91 8.14 4,184 1.02 5.54
1995 9.62 0.55 0.05 (0.47) (0.03) 9.72 6.45 296 1.23 5.66
1994(7) 9.69 0.02 (0.06) (0.03) -- 9.62 (0.41)++ 30 1.72* 3.95*
- ---------------------------
MARYLAND TAX-FREE PORTFOLIO
===========================
Class A
1998 $ 9.87 0.44 0.34 (0.45) (0.06) $10.14 7.91% $25,283 0.90% 4.39%
1997(8) 9.96 0.13 (0.07) (0.15) -- 9.87 0.63++ 7,997 0.91* 4.70*
- -------------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
===============================
Class A
1998(9) $10.26 $ 0.04 (0.13) (0.04) -- $10.13 (0.94)%++ $2,577 1.01%* 3.72%*
- ------------------
BALANCED PORTFOLIO
- ------------------
Class A
1998 $11.40 0.27 3.04 (0.28) (1.23) $13.20 30.67% $15,074 1.02% 2.20%
1997 11.35 0.28 0.56 (0.28) (0.51) 11.40 7.66 6,164 0.96 2.56
1996 10.04 0.31 1.68 (0.31) (0.37) 11.35 20.23 3,323 1.09 2.51
1995 10.15 0.27 0.05 (0.24) (0.19) 10.04 3.33 549 1.26 2.83
1994(10) 10.62 0.01 (0.43) (0.05) -- 10.15 (3.95)++ 166 1.86* 1.36*
- -----------------------
EQUITY INCOME PORTFOLIO
- -----------------------
Class A
1998 $11.01 0.28 2.73 (0.29) (1.21) $12.52 28.73%++ $ 3,428 1.07%* 2.39%*
1997(11)
- ----------------------
EQUITY INDEX PORTFOLIO
- ----------------------
Class A
1998(12) $ 9.78 0.06 1.80 (0.07) -- $11.57 19.08%++ $ 1,417 0.45%* 1.02%*
- --------------------------
BLUE CHIP EQUITY PORTFOLIO
- --------------------------
Class A
1998 $12.38 0.10 4.69 (0.10) (0.09) $16.98 38.93% $43,300 1.04% 0.71%
1997(13) 10.33 0.16 2.06 (0.16) (0.01) 12.38 21.74++ 13,211 0.86* 1.29*
- ----------------------
VALUE EQUITY PORTFOLIO
- ----------------------
Class A
1998(6) $14.55 -- 0.05 -- -- $14.60 0.34%++ $ 227 1.26%* 0.62%*
- ------------------------
CAPITAL GROWTH PORTFOLIO
- ------------------------
Class A
1998 $11.87 -- 4.93 (0.02) (1.96) $14.82 44.90% $14.401 1.06% (0.10)%
1997 11.56 0.09 1.41 (0.13) (1.06) 11.87 13.39 5,595 0.56 0.74
1996 10.18 0.12 2.15 (0.12) (0.77) 11.56 23.24 2,111 0.50 1.05
1995 10.18 0.08 0.18 (0.08) (0.18) 10.18 2.74 404 1.23 0.86
1994(10) 10.89 -- (0.71) -- -- 10.18 (6.52)++ 87 1.92* (0.27)*

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- ------------------------------------------------
<S> <C> <C> <C>
- -----------------------------
SHORT-TERM TREASURY PORTFOLIO
=============================
Class A
1998 1.07% 124.24% --
1997(5) 0.91* 147.86 --
- ------------------------------
U.S. GOVERNMENT BOND PORTFOLIO
==============================
Class A
1998(6) 1.33%* 13.77% --
- ----------------
INCOME PORTFOLIO
================
Class A
1998 1.16% 154.87% --
1997 1.09 271.60 --
1996 1.37 107.33 --
1995 27.63 73.00 --
1994(7) 55.35* 20.00 --
- ---------------------------
MARYLAND TAX-FREE PORTFOLIO
===========================
Class A
1998 1.15% 22.40% --
1997(8) 1.10* 11.13 --
- -------------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
===============================
Class A
1998(9) 1.24% 3.50% --
- ------------------
BALANCED PORTFOLIO
- ------------------
Class A
1998 1.33% 71.58% .0685
1997 1.19 124.22 .0673
1996 1.55 107.56 --
1995 5.80 81.00 --
1994(10) 15.08* 37.00 --
- -----------------------
EQUITY INCOME PORTFOLIO
- -----------------------
Class A
1998 1.45%* 39.88%* .0692
1997(11)
- ----------------------
EQUITY INDEX PORTFOLIO
- ----------------------
Class A
1998(12) 1.08%* 49.56% .0335
- --------------------------
BLUE CHIP EQUITY PORTFOLIO
- --------------------------
Class A
1998 1.50% 26.32% .0697
1997(13) 1.25* 46.91 .0727
- ----------------------
VALUE EQUITY PORTFOLIO
- ----------------------
Class A
1998(6) 1.67%* 4.34% .0700
- ------------------------
CAPITAL GROWTH PORTFOLIO
- ------------------------
Class A
1998 1.37% 174.55% .0685
1997 1.30 246.14 .0692
1996 1.65 578.57 --
1995 9.73 182.00 --
1994(10) 30.78* 41.00 --
</TABLE>

12
<PAGE> 14
<TABLE>
<CAPTION>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return+ (000) Assets Assets
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------
SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- --------------------------------------------------------------
Class A
1998 $ 8.53 (0.06) 3.98 -- (0.62) $11.83 47.57% $ 1,853 1.21% (0.46)%
1997(13) 15.47 (0.01) (3.72) -- (3.21) 8.53 (27.14)++ 1,075 1.11* (0.13)*
- ----------------------------------------
INTERNATIONAL EQUITY SELECTION PORTFOLIO
- ----------------------------------------
Class A
1998(6) $11.40 -- 0.11 -- -- $11.51 0.96%++ $ 13 0.96%* (0.63)%*

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- --------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------
SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- --------------------------------------------------------------
Class A
1998 1.36% 410.72% .0678
1997(13) 1.21* 704.41 .0678
- ----------------------------------------
INTERNATIONAL EQUITY SELECTION PORTFOLIO
- ----------------------------------------
Class A
1998(6) 1.19%* 0.98% --
</TABLE>

<TABLE>
<C> <S>
* 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 Class A does not include the one time
sales charge
++ Returns are for the period indicated and have not been
annualized.
(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 July 7, 1997.
(5) Commenced operations on September 9, 1996.
(6) Commenced operations on April 1, 1998.
(7) Commenced operations on April 12, 1994.
(8) Commenced operations on January 2, 1997.
(9) Commenced operations on March 23, 1998.
(10) Commenced operations on March 9, 1994.
(11) Commenced operations on May 9, 1997.
(12) Commenced operations on November 3, 1997.
(13) Commenced operations on May 16, 1996.
</TABLE>

13
<PAGE> 15

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 the portfolios
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 are 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.

14
<PAGE> 16

NRSROs or, if only one such rating organization has assigned a rating, such
single organization. The portfolio may also acquire unrated securities
determined by AIA 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.

AIA 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.

15
<PAGE> 17

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.

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, AIA will consider factors in addition to current yield, including
preservation of capital, the potential for realizing capital appreciation,
maturity and yield to maturity. AIA 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.

U.S. GOVERNMENT BOND PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the U.S. GOVERNMENT BOND PORTFOLIO is to
provide current income.

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; taxable municipal 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".

Under normal market conditions, the portfolio will invest at least 65% of
the value of its total assets in U.S. Government Securities. For purposes of
this policy, the portfolio will consider collateralized mortgage obligations
issued by U.S. government agencies or instrumentalities to be U.S. Government
Securities. In addition, under normal market conditions, the portfolio will
invest at least 65% of its total assets in bonds. The portfolio's remaining
assets may be invested in any of the securities listed above. The portfolio will
attempt to maintain a dollar-weighted average portfolio maturity of three to ten
years.

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

The investment objective of the INTERMEDIATE FIXED INCOME PORTFOLIO is to
provide current income consistent with the preservation of capital.

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 AIA 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 AIA as to the best price available.

16
<PAGE> 18

making investment decisions for the portfolio, AIA will consider factors in
addition to current yield, including preservation of capital, the potential for
realizing capital appreciation, maturity and yield to maturity. AIA 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.

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 AIA to be of comparable quality. The portfolio may also invest up
to 15% of its total assets in lower-quality debt securities, sometimes referred
to as "junk bonds". See "Risks to Consider", the Appendix to this Prospectus and
the Statement of Additional Information for more information. 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
adviser's judgment 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, AIA will
consider factors in addition to current yield, including preservation of
capital, the potential for realizing capital appreciation, maturity and yield to
maturity. AIA 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 Maryland state and
county income taxes.

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.

AIA 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.

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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.

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

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, AIA may dispose of securities without regard to the length
of time they are held if it believes such action will benefit the portfolio.
Although AIA 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.

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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 (the "S&P 500"). 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".

AIA considers many factors when evaluating a security for investment by the
portfolio, including the company's current financial strength and relative
value. Although AIA 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. AIA may adjust
the portfolio's investments based on its interpretation of underlying economic,
financial, and security trends; however, AIA'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 S&P 500.

The portfolio invests at least 65% of total assets in common stocks
included in the S&P 500. AIA 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.

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 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 may also
invest up to 5% of its total assets in Standard & Poor's Depositary Receipts
("SPDRs"). 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.

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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. "S&P 500
Index" is a registered service mark of Standard & Poor's Corporation, which does
not sponsor and is in no way affiliated with the Equity Index Portfolio.

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

The investment objective of the BLUE CHIP EQUITY PORTFOLIO is to achieve
long-term appreciation. 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
portfolio may also seek capital 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.
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 AIA
believes offer above-average growth potential based on their fundamental
strength. AIA 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.

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, 1998, the market capitalizations of the companies included
in the S&P MidCap 400 Index ranged from $200 million to $14 billion. The
companies in which the portfolio invests are typically well established but have
not reached full maturity and may offer significant growth potential. AIA 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.

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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 economic
growth will be reflected in the growth of the revenues and earnings of
publicly-held corporations. 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.

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 high
return on the company's invested capital.

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 portfolio may also seek capital appreciation 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 AIA believes offer above-average growth
potential based on their fundamental strength. AIA 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 EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the SMALL-CAP EQUITY PORTFOLIO (formerly the
Special Equity Portfolio) is to provide capital appreciation.

Under normal circumstances, at least 65% of the value of the portfolio's
total assets will be invested in equity securities of companies with a market
capitalization of $1.2 billion or less at the time of investment. AIA will seek
to identify companies with above-average growth potential or companies
experiencing an unusual or possibly non-repetitive development taking place in
the company, i.e., a "special situation". See the Statement of Additional
Information for more information. The portfolio will invest in securities that
AIA believes offer above-average growth potential based on their fundamental
strength.

In seeking capital appreciation, the portfolio may also invest in
securities of companies which have valuable fixed assets and whose securities
are believed by AIA to be undervalued in relation to their assets, earnings or
growth potential.

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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. AIA may use various investment techniques to hedge the
portfolio's risks, but there is no guarantee that these strategies will work as
intended. AIA 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 AIA'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
("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. AIA will attempt to identify and select a varied portfolio of
international equity funds which presents the greatest long-term capital growth
potential based on AIA'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.
The selection of underlying funds 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 AIA's view, meet these
criteria will then be subject to further evaluation of investment policies,
historical total return, size, volatility, manager tenure 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 AIA
will consider these similarities and differences when making investment
decisions.

The Investment Company Act of 1940 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
AIA 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 an investment were made directly in the
underlying funds.

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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
underlying funds may also lend their portfolio securities, and borrow for
investment purposes.

Underlying funds may 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 more than 25% of its total assets) in any
industry or in underlying funds which concentrate their assets in any industry.
However, under certain unusual circumstances, the portfolio could be indirectly
concentrated in one or more industries. If this were to occur, AIA would
consider whether to maintain or change its investments in underlying funds. 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 portfolio may invest in
Money Market Instruments.

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

An investment in any of the portfolios involves certain risks. These risks
include, but are not limited to, the risks discussed below. Certain investments
and investment techniques permitted for the portfolios pose special risks in
addition to those discussed below. See the Appendix to this Prospectus and the
Statement of Additional Information for more information. 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.

By itself no portfolio constitutes a balanced investment program. There is
no assurance that a portfolio will achieve its investment objective. The yield
and total return of the portfolios will fluctuate. 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 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
other portfolios will fluctuate and investors may have a gain or loss when
redeeming shares.

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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 Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Group ("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.

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.

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
support for other types of municipal instruments. AIA 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, AIA 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 equity securities held by a portfolio will not necessarily affect income
derived from those securities but will affect the net asset value of the
portfolio's shares. Equity securities may not perform well during certain market
cycles and may not respond to general market movements to the same extent as
other securities.

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SMALLER-CAPITALIZATION COMPANIES. The Small-Cap Equity Portfolio (formerly
the 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 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 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.

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<PAGE> 27

INDUSTRY CONCENTRATION. The International Equity Selection Portfolio will
not concentrate its assets in any industry or in underlying funds which
concentrate their assets in any industry. However, in certain unusual
circumstances, the portfolio may be indirectly concentrated in one or more
industries. In such circumstances, because the scope of investment alternatives
within an industry is limited, the value of the portfolio's shares may be
subject to greater market fluctuation than an investment in a fund which invests
directly in a broader range of securities.

YEAR 2000 RISKS. The Fund depends on the smooth functioning of computer
systems in almost every aspect of its business. Like other mutual funds,
businesses and individuals around the world, the Fund and its portfolios could
be adversely affected if the computer systems used by its service providers do
not properly process dates on and after January 1, 2000 and distinguish between
the year 2000 and the year 1900. The Fund has made inquiry of its service
providers to determine whether they expect to have their computer systems
adjusted for the year 2000 transition, and is seeking assurances from each
service provider that it expects its system to accommodate the year 2000
transition without material adverse consequences to the Fund and its portfolios.
While it is likely that such assurances will be obtained, the Fund and its
shareholders may experience losses if these assurances prove to be incorrect or
as a result of year 2000 computer difficulties experienced by issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others with which the Fund does business.

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 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 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 particular class of a portfolio and assumes
that all distributions are reinvested. A CUMULATIVE TOTAL RETURN reflects
performance of a class 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 performance of a class had been
constant over the entire period. Because average annual total returns tend to
smooth out variations in 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 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

26
<PAGE> 28

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.

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

PURCHASES
- --------------------------------------------------------------------------------

Class A and Class B shares are sold on a continuous basis by the Fund's
distributor, SEI Investments Distribution Co. Class A or Class B shares may be
purchased by establishing a brokerage account with a qualified securities dealer
or other financial institution (an "Investment Professional"), such as First
Maryland Brokerage Corporation, or by contacting the Fund's distributor at
1-888-4ARK-FUND.

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
investment. Shares will be redeemed at the last calculated net asset value, less
any applicable sales charge, on the day the account is closed.

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.

Certificates representing shares will not be issued. The net asset values
of the fixed-income and equity portfolios are determined as of the close of
regular trading on 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
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 THROUGH INVESTMENT PROFESSIONALS. You may set up an account
through an Investment Professional. Please contact your Investment Professional
or call 1-800-ARK-FUND for information on opening a brokerage account to invest
in a portfolio. The 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 certain
limitations may apply.

PURCHASES BY MAIL. Shares may be purchased 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

27
<PAGE> 29

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 by wiring money to:

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

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

An order for the purchase of shares of a money market portfolio 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 Class A or Class B 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.

If you have established an account through an Investment Professional, 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.

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

ALTERNATIVE SALES CHARGE OPTIONS
- --------------------------------------------------------------------------------

You may purchase shares of the portfolios at a price equal to their net
asset value per share plus a sales charge which, at your election, may be
imposed either (i) at the time of purchase (Class A initial sales charge
alternative), or (ii) with respect to the portfolios having Class B shares
available for purchase (the Income Portfolio, Balanced Portfolio, Blue Chip
Equity Portfolio, Value Equity Portfolio and Capital Growth Portfolio) on a
contingent deferred basis (Class B deferred sales charge or "CDSC" alternative).
The classes have the same rights and are identical in all respects except that

28
<PAGE> 30

(i) Class B shares bear the expenses of the deferred sales charge arrangement
and distribution and service fees resulting from such sales arrangement, (ii)
each class has exclusive voting rights with respect to approvals of any Rule
12b-1 distribution plan related to that specific class (although Class B
shareholders may be entitled to vote on any distribution fees imposed on Class A
shares so long as Class B shares convert into Class A shares), (iii) only Class
B shares carry a conversion feature and (iv) each class has different exchange
privileges. See "Exchanges". Sales personnel of securities dealers or other
financial institutions distributing shares of the portfolios, and other persons
entitled to receive compensation for selling such shares, may receive differing
compensation for selling Class A or Class B shares.

The alternative purchase arrangement permits you to choose the method of
purchasing shares that is more beneficial to you. The amount of your purchase,
the length of time you expect to hold the shares, and whether you wish to
receive dividends in cash or in additional shares will all be factors in
determining which sales charge option is best for you. You should consider
whether, over the time you expect to maintain your investment, the additional
distribution and service fees and CDSC on Class B shares prior to conversion
would be less than the initial sales charge on Class A shares, and to what
extent such differential would be offset by the expected higher yield of Class A
shares. Class A shares will normally be more beneficial to you if you qualify
for reduced sales charges as described below.

CLASS A SALES CHARGES

The offering price (price to buy one share) is the net asset value of a
Class A share of the applicable portfolio, divided by the sum of one minus the
applicable sales charge percentage. There are no sales charges imposed on
purchases of Class A shares of the money market portfolios and the Short-Term
Treasury Portfolio. The following table shows the total sales charges applicable
to purchases of Class A shares of other portfolio:
<TABLE>
<CAPTION>
U.S. GOVERNMENT BOND, BALANCED, EQUITY INCOME,
INCOME, MARYLAND TAX-FREE EQUITY INDEX, BLUE CHIP EQUITY,
AND PENNSYLVANIA TAX-FREE VALUE EQUITY, CAPITAL GROWTH AND
PORTFOLIOS SMALL-CAP EQUITY* PORTFOLIOS
-------------------------------------- --------------------------------------
SALES CHARGE SALES CHARGE
AS A % OF PROFESSIONAL AS A % OF PROFESSIONAL
--------------------- CONCESSION --------------------- CONCESSION
OFFERING NET AMOUNT AS A % OF OFFERING NET AMOUNT AS A % OF
PRICE INVESTED OFFERING PRICE PRICE INVESTED OFFERING PRICE
-------- ---------- -------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000.... 4.50 4.71 4.05 4.75 4.99 4.28
$50,000 to less than
$100,000........... 4.00 4.17 3.60 4.50 4.71 4.05
$100,000 to less than
$250,000........... 3.00 3.09 2.70 3.50 3.63 3.15
$250,000 to less than
$500,000........... 2.50 2.56 2.25 2.50 2.56 2.25
$500,000 to less than
$1,000,000......... 2.00 2.04 1.80 2.00 2.04 1.80
$1,000,000 to less
than $3,000,000.... 1.00 1.01 0.90 1.00 1.01 0.90
$3,000,000 to less
than $5,000,000.... 0.50 0.50 0.45 0.50 0.50 0.45
$5,000,000 and
above.............. 0.00 0.00 0.00 0.00 0.00 0.00

INTERNATIONAL EQUITY
SELECTION PORTFOLIO
--------------------------------------
SALES CHARGE
AS A % OF PROFESSIONAL
--------------------- CONCESSION
OFFERING NET AMOUNT AS A % OF
PRICE INVESTED OFFERING PRICE
-------- ---------- --------------
<S> <C> <C> <C>
Less than $50,000.... 1.50 1.52 1.40
$50,000 to less than
$100,000........... 1.50 1.52 1.40
$100,000 to less than
$250,000........... 1.00 1.01 0.90
$250,000 to less than
$500,000........... 0.75 0.76 0.65
$500,000 to less than
$1,000,000......... 0.50 0.50 0.40
$1,000,000 to less
than $3,000,000.... 0.00 0.00 0.00
$3,000,000 to less
than $5,000,000.... 0.00 0.00 0.00
$5,000,000 and
above.............. 0.00 0.00 0.00
</TABLE>

- --------------------------------------------------------------------------------
* formerly Special Equity

29
<PAGE> 31

A portion of the sales charge is currently being waived so that the total
sales charge applicable to purchases of Class A shares of a portfolio (other
than the International Equity Selection Portfolio) is 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 Fund's distributor. The sales charge waivers
reflected in the above table may be discontinued at any time.

REDUCTIONS AND WAIVERS: CLASS A. The sales charge will be reduced for
purchases of Class A 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 Class A shares of a single
portfolio or to combined purchases of Class A shares of any portfolio subject to
a sales charge, and to purchases through an exchange from any such portfolio. An
investment in Class A shares for several accounts held 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 Class A 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 Class A 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 charitable
organization (as defined in Section 501(c)(3) of the Code) investing $100,000 or
more; (3) 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); (4) for a First National Bank of Maryland account with the proceeds of a
distribution from an employee benefit plan that qualified for waiver 9; (5) for
any state, county or city, or any governmental instrumentality, department,
authority or agency; (6) with redemption proceeds from other mutual fund
complexes on which you have previously paid an initial or contingent deferred
sales charge; (7) 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); (8) as part of an employee benefit plan having more than 25
eligible employees or a minimum of

30
<PAGE> 32

$250,000 of plan assets invested in the Fund; (9) 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 (10) 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
Class A 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 services fee, Institutional Class shares are expected to
have a higher total return than Class A shares. Contact your Investment
Professional to discuss if you qualify.

EMPLOYEE INVESTMENT PROGRAM. Class A shares of the portfolios may be
purchased without a sales charge and may be redeemed for an employee account.
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 account directly with the Fund by making an
initial investment of $100 ($50 if purchasing through the Automatic Investment
Plan) or more in Class A shares of any portfolio. Automatic investment and
Systematic Withdrawal Plans are available for employee accounts. To open an
employee account call 1-888-4ARK-FUND to request an Account Application.

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. 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.

CLASS B SALES CHARGES

Class B shares are sold without an initial sales charge, but are subject to
a contingent deferred sales charge ("CDSC") if redeemed within a specified
period after purchase. Class B shares also bear a higher 12b-1 fee than Class A
shares. Class B shares automatically convert into Class A shares, based on
relative net asset value, at the end of eight years after purchase. For more
information about the conversion of Class B shares, see the Statement of
Additional Information. Class B shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made. Until
conversion, Class B shares will have a higher expense ratio and pay lower
dividends than Class A shares because of the higher 12b-1 fee.

As shown in the table below, a CDSC will be imposed if an investor redeems
shares prior to the time when the shares would be converted into Class A shares.

<TABLE>
<CAPTION>
1 YR 2 YRS 3 YRS 4 YRS 5 YRS 6 YRS 7+ YRS
---- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Charge.................... 5% 4% 3% 3% 2% 1% 0%
</TABLE>

No CDSC is imposed to the extent that Class B shares redeemed (i) are no
longer subject to the holding period therefor, (ii) resulted from reinvestment
of distributions on Class B shares, or (iii) were exchanged for shares of
another portfolio, provided that the shares acquired in such exchange or
subsequent exchanges (including shares of the Money Market Portfolio) will
continue to remain subject to the CDSC, if applicable, until the applicable
holding period expires. In determining whether the CDSC applies to each
redemption of Class B shares, Class B shares not subject to a CDSC are redeemed
first.

31
<PAGE> 33

REDUCTIONS AND WAIVERS. The CDSC on Class B shares may be waived (i)
within one year following the death or post-purchase disability (as defined in
the Internal Revenue Code) of the owner or joint owner, provided that Class B
shares are redeemed within one year following the death or initial determination
of disability; or (ii) to the extent that the redemption represents a minimum
required distribution from an individual retirement account or other retirement
plan to a shareholder who has attained the age of 70 1/2. Investors
participating in the systematic withdrawal plan may make aggregate withdrawals
each year of up to 10% of the value of their account at the time the plan was
established without being subject to the CDSC. See "Systematic Withdrawal Plan".

EXCHANGES
- --------------------------------------------------------------------------------

An exchange is a convenient way to purchase shares of another portfolio
registered in your state. Shares of a portfolio may be exchanged for shares of
the same class of another portfolio. The exchange will be made on the basis of
relative net asset value plus the applicable sales charge next determined after
the exchange request is received by the Fund's transfer agent. Exchanges may be
made by telephone. See "Redemptions--Redemptions By Telephone Exchange."

If Class A shares are exchanged for 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. If Class B
shares subject to a CDSC are exchanged, the transaction will not be subject to
the CDSC. However, when the shares acquired through the exchange are redeemed,
the redemption may be subject to the CDSC, depending upon when the shares were
originally purchased. The CDSC will be computed using the schedule of any
portfolio into or from which an investor has exchanged shares that would result
in the payment of the highest CDSC applicable to the shares owned by the
investor. For purposes of computing the CDSC, the length of time the investor
owned the shares will be measured from the date of original purchase and will
not be affected by any exchange. 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 AIA'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 classes of a particular portfolio is generally not
permitted, unless a shareholder becomes eligible to purchase shares of another
class. The Fund reserves the right to require shareholders to complete an
Account 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 an exchange of shares of one class of a portfolio for shares
of another class of the same portfolio will not constitute a taxable event.

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.

REDEMPTIONS
- --------------------------------------------------------------------------------

You may redeem all or a portion of your Class A or Class B shares on any
Business Day by mail, telephone or check writing, as described below. Shares
will be redeemed at the net asset value next

32
<PAGE> 34

calculated, less any applicable sales charge, after the Fund's transfer agent
has received the redemption request in good order.

The following Class B shares may be redeemed without any charge at any
time: (i) shares acquired by reinvestment of dividends and capital gains, and
(ii) shares otherwise exempt from the CDSC, as described in "Class B Sales
Charges--Reductions and Waivers". For other Class B shares, the amount of the
charge is determined as a percentage of the lesser of the current market value
or the cost of the shares being redeemed. In determining what CDSC is payable on
any redemption, shares held longest during the CDSC period would be redeemed
first. For this purpose, the amount of any increase in the value of a Class B
share above its initial purchase price is not regarded as a share exempt from
the CDSC. Thus, when a Class B share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial purchase price.

Redemption 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 redemption request
means that shares in the portfolio from which the shareholder is making the
redemption 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. Redemption 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.

REDEMPTION THROUGH INVESTMENT PROFESSIONALS. Shares may be redeemed
through your Investment Professional. It is the responsibility of your
Investment Professional to transmit promptly your order to redeem shares to the
Fund's transfer agent.

REDEMPTION BY MAIL. Written requests for redemptions from an 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.

REDEMPTION BY TELEPHONE. Investors wishing to redeem shares 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. Investors may have the
proceeds sent either by mail or wire.

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 shareholder 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.

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<PAGE> 35

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

Investors 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 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 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 accounts
investing in Class A shares of 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. Investors may make telephone exchanges
of shares held in their accounts for shares in any other portfolio offering the
same class of 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.

The Fund will not be responsible for the authenticity of exchange
instructions received by telephone and the investor will bear the risk of loss.

For more information on exchanging shares, "Exchanges".

OTHER INFORMATION. Shares redeemed on any Business Day 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

34
<PAGE> 36

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.

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

NET ASSET VALUE. The net asset value of a class of shares of a portfolio is
calculated by adding the pro rata share of the value of all securities and other
assets attributable to the class, deducting the pro rata share of
portfolio-level liabilities of the class, deducting class-specific liabilities,
and dividing the result by the number of shares of the class outstanding in each
class. 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. 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.

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 and Pennsylvania Tax-Free Portfolio are declared daily and paid
monthly; for the Equity Income Portfolio dividends are declared and paid
monthly; for the Balanced Portfolio, Equity Index Portfolio, Blue Chip Equity
Portfolio, Mid-Cap Equity Portfolio and Value Equity Portfolio dividends are
declared and paid quarterly; and for the Capital Growth Portfolio, Small-Cap
Equity Portfolio (formerly the Special Equity Portfolio) and International
Equity Selection Portfolio dividends are declared and paid annually. Net
realized capital gains, if any, for any portfolio, are declared and paid at
least annually.

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

1. SHARE OPTION. 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. 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. 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 is available to investors who invest
through First Maryland Brokerage Corporation and 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

35
<PAGE> 37

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.

AUTOMATIC INVESTMENT PLAN. Employees and direct investors 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
$10,000 or more. Investors may elect to receive automatic payments of $200 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.

Investors 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 Plan,
investors must have their dividends automatically reinvested. Investors may
change or cancel a withdrawal plan at any time, upon written notice to ARK
Funds, P.O. Box 8525, Boston, MA 02266-8525.

The aggregate withdrawals of Class B shares in any year pursuant to the
Systematic Withdrawal Plan will not be subject to the CDSC in an amount up to
10% of the value of the account at the time of the establishment of the plan.
Because automatic withdrawals of Class B shares in amounts greater than 10% of
the initial value of the account will be subject to the CDSC, it may not be in
the best interests of Class B shareholders to participate in a withdrawal plan
for such amounts.

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.

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
an account in any of the portfolios (other than 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. The
telephone, wire and checkwriting privileges are not available to IRA accounts.
For more information or to obtain an Account Application, call 1-888-4ARK-FUND.

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

The business and affairs of the Fund are managed under the supervision of
its Board of Trustees. The Fund's Board of Trustees approves all significant
agreements between the Fund and persons or companies furnishing services to the
Fund, including the agreements with the Fund's investment adviser, distributor,
administrator, transfer agent and custodian. The management of the Fund's day-
to-day operations is delegated to its officers, investment adviser and
administrator, subject always to the general supervision of the Board of
Trustees. A majority of the Fund's trustees are not affiliated with either the
investment adviser or the distributor.

36
<PAGE> 38

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

Allied Investment Advisors, Inc. ("AIA"), 100 E. Pratt Street, Baltimore,
MD 21202, provides investment advisory services to the Fund. Investment advisory
services are provided subject to the general supervision of the Board of
Trustees. AIA 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>
U.S. Treasury Money Market Portfolio........................ 0.25%
U.S. Government Money Market Portfolio...................... 0.25%
Money Market Portfolio...................................... 0.25%
Tax-Free Money Market Portfolio............................. 0.25%
Short-Term Treasury Portfolio............................... 0.35%
U.S. Government Bond Portfolio.............................. 0.75%
Intermediate Fixed Income Portfolio......................... 0.60%
Income Portfolio............................................ 0.60%
Maryland Tax-Free Portfolio................................. 0.65%
Pennsylvania Tax-Free Portfolio............................. 0.65%
Balanced Portfolio.......................................... 0.65%
Equity Income Portfolio..................................... 0.70%
Equity Index Portfolio...................................... 0.20%
Blue Chip Equity Portfolio.................................. 0.70%
Mid-Cap Equity Portfolio.................................... 0.80%
Value Equity Portfolio...................................... 1.00%
Capital Growth Portfolio.................................... 0.70%
Small-Cap Portfolio......................................... 0.80%
International Equity Selection Portfolio.................... 0.65%
</TABLE>

AIA, 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 investment advisory fees payable by certain of the portfolios may be
higher than the fees payable by other mutual funds (although not necessarily
higher than the fees payable by funds with similar investment objectives), due
to the greater complexity, expense and commitment of resources involved in
managing those portfolios.

AIA is a wholly-owned subsidiary of First National Bank of Maryland ("First
National"). First National, established in 1806, is a wholly-owned subsidiary of
First Maryland Bancorp, a bank holding company registered under the 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." AIA was
organized in 1995 to manage assets and provide research services for the Trust
Division of First National, 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 AIA previously served in comparable capacities for the
Trust Division of First National. As of June 30, 1998, AIA had assets under
management of approximately $11.1 billion.

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

37
<PAGE> 39

Subject to the general supervision of the Board of Trustees, AIA 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 AIA's policy to obtain the best net
results in terms of price and execution. Subject to this policy, securities
transactions may be directed at higher commission rates to broker-dealers who
provide research, statistical and other information to AIA. If more than one
account managed by AIA is purchasing or selling the same security, orders may be
aggregated in the interest of achieving the most favorable execution.

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

James M. Hannan is a Principal of AIA 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 National since 1987. Prior to
1987 he served as the Treasurer for the City of Hyattsville, Maryland.

Susan S. Schnaars is a Principal of AIA 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, and Director of Fixed Income
Investments for, AIA 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 National 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 AIA and Senior Fixed Income Credit Analyst
responsible for leading the corporate research efforts 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 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 AIA and 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 AIA he was an investment executive with the Treasury Banking Group of
First National.

Charles E. Knudsen is a Managing Director of AIA and manager 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 ten years of investment management experience with First
National. Mr. Knudsen is a Chartered Financial Analyst.

Clyde L. Randall is a Principal of AIA and co-manager, with Mr. Aschroft,
of the Blue Chip Equity Portfolio and manager of the Equity Income 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.

38
<PAGE> 40

Allen J. Ashcroft, Jr. is a Principal of AIA and co-manager, with Mr.
Randall, of the Blue Chip Equity Portfolio and manager of the Equity Income
Portfolio. Prior to joining First National, Mr. Ashcroft was an equity analyst
and portfolio manager for McGlinn Capital Management, Wyomissing, Pennsylvania,
for 12 years. Mr. Ashcroft has more than 18 years of experience in investment
research and equity analysis.

H. Giles Knight is a Principal of AIA and manager of the Small-Cap Equity
Portfolio (formerly the Special Equity Portfolio). Prior to joining First
National, 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. Mr. Knight has almost 30
years of investment experience.

Christopher E. Baggini is a Principal of AIA and manager of the Mid-Cap
Equity Portfolio and the Capital Growth Portfolio. Prior to joining First
National, Mr. Baggini served as portfolio manager and research analyst for First
Metropolitan Development Corporation. He has more than 12 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.

J. Eric Leo is a Managing Director of, and Director of Equity Research for,
AIA. Mr. Leo is manager of the Value Equity Portfolio and the Equity Index
Portfolio. Prior to 1997, he was Executive Vice President and Chief Investment
Officer of Legg Mason Capital Management, Inc. Mr. Leo has more than 25 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 AIA 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.

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

SEI Investments Mutual Fund Services (the "Administrator"), Oaks, PA 19456,
serves as the portfolios' administrator under an administration agreement with
the Fund. SEI Investments 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 the administration and operation of the Fund
and its portfolios, 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 the
portfolios, 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 0.13% of the
aggregate average net assets of the portfolios, 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.

39
<PAGE> 41

rate of up to 0.0275% of the aggregate average net assets of the portfolios. See
the Statement of Additional Information for more information.

DISTRIBUTION AND SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

SEI Investments Distribution Co. (the "Distributor"), 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 principal office of the
Distributor is Oaks, Pennsylvania 19456. The Distributor is the principal
underwriter of the Fund. First National neither participates in nor is
responsible for the underwriting of the shares of the Fund.

The Board of Trustees has adopted a distribution plan for Class A of each
portfolio pursuant to Rule 12b-1 under the 1940 Act. The plan provides for
payment of a fee to the Distributor of up to 0.75% of average net assets of
Class A of each portfolio. The Board has approved the following fee rates: 0.25%
of the average net assets of Class A of each money market portfolio; 0.30% of
the average net assets of Class A of the U.S. Government Bond Portfolio,
Intermediate Fixed Income Portfolio, Income Portfolio, Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio; 0.40% of the average net assets
of Class A of the Short-Term Treasury Portfolio, Balanced Portfolio, Equity
Income Portfolio, Equity Index Portfolio, Mid-Cap Equity Portfolio, Value Equity
Portfolio, Capital Growth Portfolio, Small-Cap Equity Portfolio (formerly the
Special Equity Portfolio), and International Equity Selection Portfolio; and
0.55% of the average net assets of Class A of the Blue Chip Equity Portfolio.

The Board of Trustees has also adopted a distribution plan for Class B of
the Money Market Portfolio, Income Portfolio, Balanced Portfolio, Blue Chip
Equity Portfolio, Value Equity Portfolio and Capital Growth Portfolio. The plan
provides for payments by the portfolios to the Distributor of up to 0.75% of
average net assets attributable to Class B shares. The Board has approved a fee
rate of 0.75% of the average net assets of Class B of the portfolios. Although
Class B shares are sold without an initial sales charge, the Distributor pays a
sales commission equal to 4% of the amount invested to dealers who sell Class B
shares. These commissions are not paid on exchanges from other portfolios or on
sales to investors exempt from the CDSC. The payments are based on the average
net asset value of Class B shares attributable to shareholders for whom the
dealers are designated as the dealer of record.

Payments under the Class A and Class B distribution plans are intended to
compensate the Distributor for services provided and expenses incurred by it as
principal underwriter of the portfolios, including the payments to dealers
mentioned above. The Distributor may suspend or modify such payments to dealers.
The payments are also subject to the continuation of the relevant distribution
plan, the terms of service agreements between dealers and the Distributor, and
any applicable limits imposed by the National Association of Securities Dealers,
Inc.

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, as well as
for the cost of related direct mail, advertising and promotional expenses.

The Class A and Class B distribution plans do not obligate a portfolio to
reimburse the Distributor for the actual expenses the Distributor may incur in
fulfilling its obligations under a plan. Thus, under a 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.

Under a shareholder services plan in effect with respect to Class A and
Class B of each portfolio, a portfolio may pay shareholder servicing fees to
Investment Professionals at an annual rate of up to 0.25% of the average net
assets of such class attributable to their customers for providing ongoing

40
<PAGE> 42

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 annual shareholder
services fee rates of 0.15% and 0.25% of the average net assets of Class A and
Class B of each portfolio, respectively.

All or any portion of the distribution or shareholder services fees 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 Investments Management Corporation, Oaks, PA 19456, provides transfer
agent and related services for the portfolios. SEI Investments Management
Corporation has subcontracted the transfer agency services to State Street Bank
and Trust Company which maintains shareholder accounts and records for the
portfolios.

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

FMB Trust Company, National Association (the "Custodian"), 25 South Charles
Street, Baltimore, MD 21201, is custodian for the securities and cash of the
Fund. Under a 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 0.015% 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.

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 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, AIA believes that it may
perform the advisory services described in this Prospectus for the Fund and its
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 shares of any portfolio
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.

41
<PAGE> 43

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 income 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 obligations of the State of Maryland
or its political subdivisions. 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.

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.

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<PAGE> 44

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 Fund is composed of
the following twenty 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, Capital
Growth Portfolio, Small-Cap Equity Portfolio (formerly Special Equity Portfolio)
and International Equity Selection Portfolio. The Maryland Tax-Free Portfolio
and Pennsylvania Tax-Free Portfolio are non-diversified; the other portfolios
are diversified. 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 Board of Trustees of the Fund has established four classes of shares:
Class A and Class B shares, which are offered pursuant to this Prospectus, and
two institutional classes, which are offered pursuant to other prospectuses. 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).

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<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.

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<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.

INVESTMENT GRADE SECURITIES. Investment grade securities are securities
which have been rated Baa or higher by Moody's or BBB or higher by 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.

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 U.S. Government Securities) 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 only in an amount
not exceeding 33 1/3% of its total assets; and (b) may not purchase securities
when borrowings (including reverse repurchase agreements) exceed 5% of its total
assets.

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<PAGE> 47

4. A portfolio may not make a loan if more than 33 1/3% of its assets would
be lent to other parties.

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.

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 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.

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. A 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 adviser. Only

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<PAGE> 48

the Short-Term Treasury Portfolio, Short-Term Bond Portfolio, U.S. Government
Bond Portfolio, Intermediate Fixed Income Portfolio and Income Portfolio
currently intend to lend portfolio securities.

STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRs"). SPDRs are interests in a
unit investment trust holding a portfolio of securities linked to the S&P 500.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500. For further information
regarding SPDRs, see the Statement of Additional Information.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities include U.S.
Treasury bills, notes and bonds, and obligations issued by federal agencies.
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.

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

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<PAGE> 49

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.

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ARK FUNDS
INSTITUTIONAL CLASS
- ---------------------------------------------------------
TABLE OF CONTENTS
- ---------------------------------------------------------

<TABLE>
<S> <C>
Summary........................... 2
Fees and Expenses................. 4
Financial Highlights.............. 9
Investment Objectives and
Policies....................... 12
Risks to Consider................. 24
Performance....................... 27
Purchases, Exchanges and
Redemptions.................... 28
Management of the Fund............ 33
Tax Matters....................... 39
General Information............... 40
Appendix.......................... 42
- ---------------------------------------
</TABLE>
<PAGE> 51

ARK FUNDS -- INSTITUTIONAL CLASS

- --------------------------------------------------------------------------------
PROSPECTUS
JULY 27, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
* U.S. Treasury Money Market Portfolio * Pennsylvania Tax-Free Portfolio
* U.S. Government Money Market Portfolio * Balanced Portfolio
* Money Market Portfolio * Equity Income Portfolio
* Tax-Free Money Market Portfolio * Equity Index Portfolio
* Short-Term Treasury Portfolio * Blue Chip Equity Portfolio
* Short-Term Bond Portfolio * Mid-Cap Equity Portfolio
* U.S. Government Bond Portfolio * Value Equity Portfolio
* Intermediate Fixed Income Portfolio * Capital Growth Portfolio
* Income Portfolio * Small-Cap Equity Portfolio
* Maryland Tax-Free Portfolio * International Equity Selection
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 First National Bank of Maryland, its affiliated banks
(including Allied Irish Banks, p.l.c. and its affiliates), or its correspondent
banks or their affiliated banks.

THE SHARES OF THE PORTFOLIOS 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 investors with information that they
should know before investing. Please read and retain it for future reference. A
Statement of Additional Information dated July 27, 1998 and Annual Report
(including financial statements for the fiscal year ended April 30, 1998) have
been filed with the Securities and Exchange Commission ("SEC") and are
incorporated herein by reference. The Statement of Additional Information and
Annual Report are available upon request without charge by calling
1-800-624-4116 (inside Maryland 1-800-638-7751). The SEC maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.

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

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.

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 bonds which are issued or guaranteed as to payment of
principal and interest by the U.S. government or its agencies or
instrumentalities.

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.

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.

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<PAGE> 53

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.

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

SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO) -- seeks to
provide capital appreciation by investing primarily in equity securities of
smaller companies.

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 in good order. See
"Purchases, Exchanges and Redemptions".

INVESTMENT ADVISER, DISTRIBUTOR AND ADMINISTRATOR. Allied Investment
Advisors, Inc. ("AIA") serves as investment adviser to each portfolio. SEI
Investments Distribution Co. serves as the distributor of the portfolios' shares
and SEI Investments Mutual Fund Services serves as the Fund's administrator. See
"Management of the Fund".

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

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<PAGE> 54

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
MONEY U.S. GOVERNMENT MONEY TAX-FREE
MARKET MONEY MARKET MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- --------- ------------
<S> <C> <C> <C> <C>
Advisory Fees (after waivers)(1).............. 0.19% 0.14% 0.11% 0.09%
Shareholder Services Fees (after
waivers)(2)................................. 0.06% 0.06% 0.06% 0.06%
Other Expenses(3)............................. 0.19% 0.17% 0.17% 0.19%
----- ----- ----- -----
Total Operating Expenses (after waivers)(4)... 0.44% 0.37% 0.34% 0.34%
===== ===== ===== =====
</TABLE>

(1) AIA 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.
AIA 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 0.25%.

(2) A portion of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.

(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 0.59%, 0.57%, 0.57% and 0.59%, 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....................... 5 14 25 55
U.S. Government Money Market Portfolio..................... 4 12 21 47
Money Market Portfolio..................................... 3 11 19 43
Tax-Free Money Market Portfolio............................ 3 11 19 43
</TABLE>

4
<PAGE> 55

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

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
--------------------------------------------------------------------
SHORT-TERM SHORT-TERM U.S. GOVERNMENT INTERMEDIATE
TREASURY BOND BOND FIXED INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Advisory Fees (after waivers)(1)................ 0.35% 0.70% 0.66% 0.49% 0.51%
Shareholder Services Fees (after waivers)(2).... 0.06% 0.06% 0.06% 0.06% 0.06%
Other Expenses(3)............................... 0.22% 0.22% 0.19% 0.20% 0.19%
---- ----- --- ---- ----
Total Operating Expenses (after waivers)(4)..... 0.63% 0.98% 0.91% 0.75% 0.76%
==== ===== === ==== ====
</TABLE>

(1) AIA has agreed to waive, on a voluntary basis, a portion of its fees for the
Short-Term Bond Portfolio, U.S. Government Bond Portfolio, Intermediate
Fixed Income Portfolio and Income Portfolio and the advisory fees shown
reflect those voluntary waivers. AIA 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 Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income Portfolio and Income Portfolio would be
0.75%, 0.75%, 0.60% and 0.60%, respectively.

(2) A portion of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.

(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 and Income Portfolio would be 0.72%,
1.12%, 1.09%, 0.95% and 0.94%, 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 35 79
Short-Term Bond Portfolio................................... 10 31 54 120
U.S. Government Bond Portfolio.............................. 9 29 50 112
Intermediate Fixed Income Portfolio......................... 8 24 42 93
Income Portfolio............................................ 8 24 42 94
</TABLE>

5
<PAGE> 56
ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MARYLAND
TAX- PENNSYLVANIA
FREE TAX-FREE
PORTFOLIO PORTFOLIO
--------- ------------
<S> <C> <C>
Advisory Fees (after waivers)(1)............................ 0.49% 0.65%
Shareholder Services Fees (after waiver)(2)................. 0.06% 0.06%
Other Expenses(3)........................................... 0.19% 0.20%
---- ----
Total Operating Expenses (after waivers)(4)................. 0.74% 0.91%
==== ====
</TABLE>

(1) AIA has agreed to waive, on a voluntary basis, a portion of its fees for the
Maryland Tax-Free Portfolio and the advisory fees shown reflect this
voluntary waiver. AIA reserves the right to terminate its fee waivers at any
time in its sole discretion. Absent such waiver, the advisory fees for the
Maryland Tax-Free Portfolio would be 0.65%.

(2) A portion of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.

(4) Absent the voluntary fee waivers described above, the total operating
expenses for Institutional Class shares of the Maryland Tax-Free Portfolio
and Pennsylvania Tax-Free Portfolio would be 0.99% and 1.00%, 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>
Maryland Tax-Free Portfolio.......................... 8 24 41 92
Pennsylvania Tax-Free Portfolio...................... 9 29 50 112
</TABLE>

6
<PAGE> 57

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)............................ 0.56% 0.64% 0.03% 0.60%
Shareholder Services Fees (after waivers)(2)................ 0.06% 0.06% 0.00% 0.06%
Other Expenses (after waivers)(3)........................... 0.20% 0.17% 0.17% 0.22%
----- ----- ----- -----
Total Operating Expenses (after waivers)(4)................. 0.82% 0.87% 0.20% 0.88%
===== ===== ===== =====
</TABLE>

(1) AIA 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. AIA 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 0.65%, 0.70%, 0.20% and 0.70%, respectively.

(2) A portion or all of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.

(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. The Fund's administrator has agreed to waive, on a voluntary
basis, 0.13% of its fee for the Equity Index Portfolio. Absent such waiver,
other expenses for the Equity Index Portfolio would be 0.30%.

(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
1.00%, 1.02%, 0.65% and 1.07%, 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 46 101
Equity Income Portfolio.................................... 9 28 48 107
Equity Index Portfolio..................................... 2 6 11 26
Blue Chip Equity Portfolio................................. 9 28 49 108
</TABLE>

7
<PAGE> 58

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

<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
--------------------------------------------------------------
INTERNATIONAL
MID-CAP VALUE CAPITAL SMALL-CAP EQUITY
EQUITY EQUITY GROWTH EQUITY SELECTION
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO* PORTFOLIO
--------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Advisory Fees (after waivers)(1)....................... 0.74% 0.87% 0.65% 0.79% 0.55%
Shareholder Services Fees (after waivers)(2)........... 0.06% 0.06% 0.06% 0.06% 0.06%
Other Expenses(3)...................................... 0.23% 0.19% 0.21% 0.30% 0.24%
----- ----- ----- ----- -----
Total Operating Expenses (after waivers)(4)............ 1.03% 1.12% 0.92% 1.15% 0.85%
===== ===== ===== ===== =====
</TABLE>

* Formerly Special Equity Portfolio.

(1) AIA has agreed to waive, on a voluntary basis, a portion of its fees for the
Mid-Cap Equity Portfolio, Value Equity Portfolio, Capital Growth Portfolio,
Small-Cap Equity Portfolio and International Equity Selection Portfolio and
the advisory fees shown reflect those voluntary waivers. AIA reserves 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 Equity Portfolio
and International Equity Selection Portfolio would be 0.80%, 1.00%, 0.70%,
0.80% and 0.65%, respectively.

(2) A portion of the shareholder services fees is being waived for each
portfolio. Absent such waivers, the shareholder services fees would be
0.15%.

(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, Capital Growth Portfolio, Small-Cap Equity Portfolio
and International Equity Selection Portfolio would be 1.18%, 1.34%, 1.06%,
1.25%, and 1.04%, 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 33 57 126
Value Equity Portfolio...................................... 11 36 62 136
Capital Growth Portfolio.................................... 9 29 51 113
Small-Cap Equity Portfolio.................................. 12 37 63 140
International Equity Selection Portfolio.................... 9 27 47 105
</TABLE>

8
<PAGE> 59

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

The following table provides information about the financial history of the
Institutional Class of each portfolio. The table expresses the information in
terms of a single share outstanding throughout the year or period. The
information for each of the years or periods in the five-year period ended April
30, 1998 (as applicable) 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, 1998 is included in the Annual Report.
The Annual Report is 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>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return+ (000) Assets Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- ------------------------------------
Class A
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 4.77% $ 35,302 0.70% 4.66%
1997 1.00 0.05 -- (0.05) -- 1.00 4.71 13,673 0.64 4.62
1996(1) 1.00 0.02 -- (0.02) -- 1.00 1.82++ 8,758 0.55* 4.71*
- ----------------------
MONEY MARKET PORTFOLIO
- ----------------------
Class A
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.25% $188,048 0.62% 5.13%
1997 1.00 0.05 -- (0.05) -- 1.00 5.03 128,693 0.59 4.92
1996 1.00 0.05 -- (0.05) -- 1.00 5.44 104,703 0.58 5.25
1995 1.00 0.05 -- (0.05) -- 1.00 4.69 51,081 0.45 4.88
1994(2) 1.00 -- -- -- -- 1.00 0.42++ 12 1.16* 2.26*
- -------------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- -------------------------------
Class A
1998 $ 1.00 0.03 -- (0.03) -- $ 1.00 3.16% $ 25,144 0.61% 3.11%
1997 1.00 0.03 -- (0.03) -- 1.00 3.01 16,495 0.55 2.97
1996 1.00 0.03 -- (0.03) -- 1.00 3.53 16,179 0.34 3.33
1995 1.00 0.03 -- (0.03) -- 1.00 2.74 2,491 0.75 2.68
1994(3) 1.00 -- -- -- -- 1.00 0.20++ 50 1.25* 1.20*
- --------------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------
Class A
1998(4) $ 1.00 0.04 -- (0.04) -- $ 1.00 5.19% $ 78,265 0.67%* 4.98%*

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- ------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- ------------------------------------
Class A
1998 0.85% -- --
1997 0.83 -- --
1996(1) 0.86* -- --
- ----------------------
MONEY MARKET PORTFOLIO
- ----------------------
Class A
1998 0.85% -- --
1997 0.83 -- --
1996 0.77 -- --
1995 0.97 -- --
1994(2) 592.55* -- --
- -------------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- -------------------------------
Class A
1998 0.86% -- --
1997 0.84 -- --
1996 0.90 -- --
1995 2.94 -- --
1994(3) 32.17* -- --
- --------------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------
Class A
1998(4) 0.87%* -- --
</TABLE>

9
<PAGE> 60
<TABLE>
<CAPTION>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return (000) Assets Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- -------------------------------
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.08% $ 262,687 0.40% 4.96%
1997 1.00 0.05 -- (0.05) -- 1.00 5.00 225,924 0.37 4.88
1996 1.00 0.05 -- (0.05) -- 1.00 5.32 275,259 0.36 5.18
1995 1.00 0.05 -- (0.05) -- 1.00 4.60 221,069 0.38 4.59
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.48++ 137,826 0.43* 2.80*
- ----------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- ----------------------------------
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.42% $1,285,840 0.35% 5.29%
1997 1.00 0.05 -- (0.05) -- 1.00 5.22 1,250,778 0.32 5.10
1996 1.00 0.05 -- (0.05) -- 1.00 5.64 1,043,758 0.31 5.45
1995 1.00 0.05 -- (0.05) -- 1.00 5.00 651,113 0.25 5.09
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.70++ 271,437 0.35* 3.03*
- -------------------
MONEY MARKET PORTFOLIO
- -------------------
1998 $ 1.00 0.05 -- (0.05) -- $ 1.00 5.55% $ 226,439 0.33% 5.41%
1997 1.00 0.05 -- (0.05) -- 1.00 5.36 318,919 0.28 5.23
1996 1.00 0.06 -- (0.06) -- 1.00 5.78 348,343 0.25 5.62
1995 1.00 0.05 -- (0.05) -- 1.00 5.13 277,859 0.20 5.13
1994(1) 1.00 0.03 -- (0.03) -- 1.00 2.80++ 197,162 0.26* 3.16*
- ---------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- ---------------------------
1998 $ 1.00 0.03 -- (0.03) -- $ 1.00 3.45% $ 90,446 0.32% 3.39%
1997 1.00 0.03 -- (0.03) -- 1.00 3.29 69,091 0.28 3.23
1996 1.00 0.04 -- (0.04) -- 1.00 3.61 74,739 0.22 3.54
1995 1.00 0.03 -- (0.03) -- 1.00 3.24 64,112 0.22 3.21
1994(1) 1.00 0.02 -- (0.02) -- 1.00 1.87++ 66,692 0.35* 2.10*
- ------------------------
SHORT-TERM TREASURY PORTFOLIO
- ------------------------
1998 $ 9.96 0.53 0.10 (0.53) (0.01) $10.05 6.48% $ 24,929 0.55% 5.26%
1997 9.96 0.50 -- (0.49) (0.01) 9.96 5.13 21,563 0.55 5.11
1996(2) 10.00 0.06 (0.04) (0.06) -- 9.96 0.16++ 18,823 0.55* (0.55)*
- ---------------------
SHORT-TERM BOND PORTFOLIO
- ---------------------
1998 $ 9.96 0.09 (0.01) (0.09) -- $ 9.95 0.82%++ $ 131,669 0.97% 5.14%*
1998 9.95 0.57 0.01 (0.57) -- 9.96 5.98 133,544 0.82 5.78
1997(3) 10.00 0.49 (0.05) (0.49) -- 9.95 4.49++ 146,178 0.90* 5.47*
- --------------------------
U.S. GOVERNMENT BOND PORTFOLIO
- --------------------------
1998 $ 9.85 0.10 -- (0.10) -- $ 9.85 1.02%++ $ 265,616 0.88%* 6.04%*
1998 9.82 0.67 0.03 (0.67) -- 9.85 7.40 264,565 0.79 6.88
1997(3) 10.00 0.59 (0.18) (0.59) -- 9.82 4.18++ 259,042 0.85* 6.54*
- -----------------------------
INTERMEDIATE FIXED INCOME PORTFOLIO
- -----------------------------
1998 $ 9.80 0.60 0.23 (0.60) (0.03) $10.00 8.65% $ 84,328 0.69% 6.02%
1997(4) 10.00 0.28 (0.20) (0.28) -- 9.80 0.78++ 76,326 0.68* 5.55*
- -------------
INCOME PORTFOLIO
- -------------
1998 $ 9.82 0.61 0.43 (0.61) -- $10.25 10.84% $ 322,304 0.73% 6.05%
1997 9.80 0.59 0.02 (0.59) -- 9.82 6.51 242,966 0.68 6.19
1996 9.60 0.61 0.20 (0.61) -- 9.80 8.46 180,962 0.73 6.00
1995 9.61 0.58 0.02 (0.58) (0.03) 9.60 6.53 66,441 0.74 6.15
1994(5) 10.00 0.38 (0.38) (0.38) (0.01) 9.61 (0.08)++ 54,289 0.77* 4.90*
- -----------------------
MARYLAND TAX-FREE PORTFOLIO
- -----------------------
1998 $ 9.87 0.47 0.33 (0.47) (0.06) $10.14 8.15% $ 83,215 0.68% 4.62%
1997(4) 10.00 0.22 (0.13) (0.22) -- 9.87 0.89++ 79,608 0.67* 4.95*

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- -------- -----------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
- ------------------------------------
1998 0.48% --
1997 0.43 --
1996 0.45 --
1995 0.47 --
1994(1) 0.51* --
- --------------------------------------
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
- --------------------------------------
1998 0.49% --
1997 0.43 --
1996 0.44 --
1995 0.47 --
1994(1) 0.62* --
- ----------------------
MONEY MARKET PORTFOLIO
- ----------------------
1998 0.50% --
1997 0.43 --
1996 0.44 --
1995 0.46 --
1994(1) 0.52* --
- -------------------------------
TAX-FREE MONEY MARKET PORTFOLIO
- -------------------------------
1998 0.51% --
1997 0.44 --
1996 0.45 --
1995 0.47 --
1994(1) 0.53* --
- -----------------------------
SHORT-TERM TREASURY PORTFOLIO
- -----------------------------
1998 0.60% 124.24%
1997 0.60 147.86
1996(2) 0.60* --
- -------------------------
SHORT-TERM BOND PORTFOLIO
- -------------------------
1998 1.16%* 108.18%
1998 1.01 135.00
1997(3) 1.08 112.00
- ------------------------------
U.S. GOVERNMENT BOND PORTFOLIO
- ------------------------------
1998 1.06%* 13.77% --
1998 0.98 431.00 .0600
1997(3) 1.03* 255.00 --
- -----------------------------------
INTERMEDIATE FIXED INCOME PORTFOLIO
- -----------------------------------
1998 0.87% 41.63%
1997(4) 0.83* 17.18
- ----------------
INCOME PORTFOLIO
- ----------------
1998 0.77% 154.87% --
1997 0.68 271.60
1996 0.73 107.33
1995 0.74 73.00
1994(5) 0.77* 20.00
- ---------------------------
MARYLAND TAX-FREE PORTFOLIO
- ---------------------------
1998 0.77% 22.40%
1997(4) 0.72* 11.13
</TABLE>

10
<PAGE> 61
<TABLE>
<CAPTION>
Ratio of
Realized Distri- Net
and butions Ratio of Investment
Net Unrealized from Distri- Net Net Expenses Income
Asset Gains or Net butions Asset Assets to to
Value, Net (Losses) Invest- from Value, End of Average Average
Beginning Investment on ment Capital End of Total Period Net Net
of Period Income Investments Income Gains Period Return (000) Assets Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------
PENNSYLVANIA TAX-FREE PORTFOLIO
- --------------------------
1998 $10.28 0.07 (0.14) (0.07) -- $10.14 (0.66)%++ $215,182 0.84%* 3.84%*
1998 10.09 0.40 0.19 (0.40) -- 10.28 6.68 195,322 0.80 4.43
1997(3) 10.00 0.40 0.09 (0.40) -- 10.09 5.03++ 221,393 0.83* 4.41*
- ---------------
BALANCED PORTFOLIO
- ---------------
1998 $11.43 0.30 3.04 (0.30) (1.23) $13.24 30.95% $ 96,858 0.79% 2.44%
1997 11.38 0.33 0.53 (0.30) (0.51) 11.43 7.85 76,987 0.74 2.79
1996 10.04 0.34 1.71 (0.34) (0.37) 11.38 20.90 102,233 0.75 3.19
1995 10.16 0.33 0.03 (0.29) (0.19) 10.04 3.75 91,039 0.77 3.32
1994(5) 10.00 0.19 0.17 (0.19) (0.01) 10.16 3.56++ 88,208 0.81* 2.41*
- -------------------
EQUITY INCOME PORTFOLIO
- -------------------
1998 $10.67 0.31 3.06 (0.31) (1.21) $12.52 33.04% $106,643 0.84% 2.58%
1997(4) 10.00 0.12 0.67 (0.12) -- 10.67 7.88++ 83,947 0.83* 2.47*
- -----------------
EQUITY INDEX PORTFOLIO
- -----------------
1998(6) $10.00 0.08 1.58 (0.07) -- $11.59 16.71%++ $ 45,531 0.20% 1.43%
- ---------------------
BLUE CHIP EQUITY PORTFOLIO
- ---------------------
1998 $12.39 0.14 4.70 (0.13) (0.09) $17.01 39.34% $ 67,060 0.81% 0.96%
1997 10.12 0.17 2.28 (0.17) (0.01) 12.39 24.41 35,690 0.70 1.55
1996(3) 10.00 -- 0.12 -- -- 10.12 1.20++ 11,456 0.65* 1.52*
- --------------------
MID-CAP EQUITY PORTFOLIO
- --------------------
1998 $10.17 0.04 4.61 (0.04) (0.67) $14.11 46.92% $ 55,280 0.97% 0.31%
1997(4) 10.00 0.03 0.17 (0.03) -- 10.17 1.98++ 27,059 0.90* 0.65*
- -------------------
CAPITAL GROWTH PORTFOLIO
- -------------------
1998 $11.92 0.02 4.96 (0.04) (1.96) $14.90 45.19% $ 50,615 0.84% 0.13%
1997 11.60 0.11 1.41 (0.14) (1.06) 11.92 13.46 34,170 0.39 0.92
1996 10.20 0.16 2.17 (0.16) (0.77) 11.60 23.62 39,560 0.24 1.26
1995 10.19 0.14 0.16 (0.11) (0.18) 10.20 3.15 41,170 0.74 1.35
1994(5) 10.00 0.06 0.21 (0.03) (0.05) 10.19 2.66++ 52,233 0.87* 0.78*
- ------------------
VALUE EQUITY PORTFOLIO
- ------------------
1998 $14.00 0.01 0.62 (0.01) (0.03) $14.59 4.51%++ $645,202 1.08%* 0.65%*
1998 11.91 0.15 3.45 (0.15) (1.36) 14.00 31.64 577,154 1.00 1.17
1997(3) 10.00 0.14 2.10 (0.14) (0.19) 11.91 22.77++ 540,889 1.05* 1.48*
- ---------------------------------------------------
SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
- ---------------------------------------------------
1998 $ 8.53 (0.02) 3.97 -- (0.62) $11.86 47.93% $ 27,372 0.98% (0.24)%
1997 14.72 (0.01) (2.97) -- (3.21) 8.53 (23.43) 17,746 0.95 (0.12)
1996(7) 10.00 0.09 4.72 (0.09) -- 14.72 48.34++ 33,621 0.91* 0.60*
- --------------------------------
INTERNATIONAL EQUITY SELECTION PORTFOLIO
- --------------------------------
1998 $10.85 -- 0.66 -- -- $11.51 6.08%++ $ 41,510 0.78%* (0.52)%*
1998(8) 10.00 0.15 1.12 (0.23) (0.19) 10.85 12.95++ 35,858 0.75 1.73

Ratio of
Expenses
to Average
Net
Assets Portfolio Average
(Excluding Turnover Commission
Waivers) Rate Rate**
- -------- -----------------------------------
<S> <C> <C> <C> <C>
- --------
PENNSYLV
- --------
1998 0.91%* 3.50%
1998 1.00 57.00
1997(3) 1.02* 86.00
- --------
BALANCED
- --------
1998 0.83% 71.58% .0685
1997 0.74 124.22 .0673
1996 0.75 107.56 --
1995 0.77 81.00 --
1994(5) 0.81* 37.00 --
- --------
EQUITY I
- --------
1998 0.97% 39.88% .0692
1997(4) 0.93* 34.38 .0689
- --------
EQUITY I
- --------
1998(6) 0.62% 49.56% .0335
- --------
BLUE CHI
- --------
1998 0.89% 26.32% .0697
1997 0.90 46.91 .0727
1996(3) 1.38* 0.97 --
- --------
MID-CAP
- --------
1998 1.06% 38.30% .0687
1997(4) 0.95* 14.74 .0715
- --------
CAPITAL
- --------
1998 0.88% 174.55% .0685
1997 0.85 246.14 .0692
1996 0.84 578.57 --
1995 0.85 182.00 --
1994(5) 0.87* 41.00 --
- --------
VALUE EQ
- --------
1998 1.20%* 4.34% .0700
1998 1.20 30.00 .0632
1997(3) 1.26* 37.00 .0616
- --------
SMALL-CA
- --------
1998 1.02% 410.72% .0678
1997 0.95 704.41 .0678
1996(7) 0.91* 286.80 --
- --------
INTERNAT
- --------
1998 1.22%* 0.98%
1998(8) 1.20 43.00
</TABLE>

* 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.
++ Returns are for the period indicated and have not been annualized.
(1) Commenced operations on June 14, 1993.
(2) Commenced operations on March 20, 1996.
(3) Commenced operations on April 1, 1996.
(4) Commenced operations on November 18, 1996.
(5) Commenced operations on July 16, 1993.
(6) Commenced operations October 1, 1997.
(7) Commenced operations on July 13, 1995.
(8) Commenced operations on April 1, 1997.

11
<PAGE> 62

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.

12
<PAGE> 63

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
AIA 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.

13
<PAGE> 64

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.

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, AIA will consider factors in addition to current yield, including
preservation of capital, the potential for realizing capital appreciation,
maturity and yield to maturity. AIA 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 invests 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. 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 invest
up to 5% of its total assets in lower-quality debt securities, sometimes
referred to as "junk bonds".

Under normal market conditions, the portfolio will invest at least 65% of
its total assets in bonds. The Portfolio will attempt to maintain a
dollar-weighted average portfolio maturity of one to three years.

14
<PAGE> 65

U.S. GOVERNMENT BOND PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the U.S. GOVERNMENT BOND PORTFOLIO is to
provide current income.

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

The investment objective of the INTERMEDIATE FIXED INCOME PORTFOLIO is to
provide current income consistent with the preservation of capital.

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, AIA will
consider factors in addition to current yield, including preservation of
capital, the potential for realizing capital appreciation, maturity and yield to
maturity. AIA 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.

15
<PAGE> 66

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.

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 AIA to be of comparable quality. The portfolio may also invest up
to 15% of its total assets in lower-quality debt securities, sometimes referred
to as "junk bonds". See "Risks to Consider", the Appendix to this Prospectus and
the Statement of Additional Information for more information. 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 Maryland state and
county income taxes.

16
<PAGE> 67

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 investment objective of the BALANCED PORTFOLIO is to seek long-term
total returns from both capital appreciation and current income.

17
<PAGE> 68

interpretation of underlying economic, financial, and security trends. AIA's
ability to make such adjustments successfully will depend on its ability to
predict market trends.

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.

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

The investment objective of the EQUITY INDEX PORTFOLIO is to provide
investment results that correspond to the performance of the S&P 500.

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.

18
<PAGE> 69

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 may also
invest up to 5% of its total assets in Standard & Poor's Depositary Receipts
("SPDRs"). 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. The portfolio is expected to produce current investment
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
portfolio may also seek capital appreciation by

19
<PAGE> 70

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. 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
AIA believes offer above-average growth potential based on their fundamental
strength. AIA 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.

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, 1998, the market capitalizations of the companies included
in the S&P MidCap 400 Index 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. AIA 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.

VALUE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

20
<PAGE> 71

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.

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 a portfolio's
primary objective.

SMALL-CAP EQUITY PORTFOLIO
- --------------------------------------------------------------------------------

The investment objective of the SMALL-CAP EQUITY PORTFOLIO (formerly the
Special Equity Portfolio) is to provide capital appreciation.

21
<PAGE> 72

AIA 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 AIA 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 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. AIA may use various investment techniques to hedge the
portfolio's risks, but there is no guarantee that these strategies will work as
AIA intended. AIA 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 AIA's judgment, a more conservative
approach to investment is desirable.

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

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. AIA will attempt to identify and select a varied portfolio of
international equity funds which presents the greatest long-term capital growth
potential based on AIA'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.
The selection of underlying funds 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 AIA's view, meet these
criteria will then be subject to further evaluation of investment policies,
historical total return, size, volatility, manager tenure 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,

22
<PAGE> 73

the same or different investment restrictions than the portfolio, and AIA will
consider these similarities and differences when making investment decisions.

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 underlying funds may also lend their portfolio
securities, and borrow for investment purposes.

23
<PAGE> 74

underlying funds which concentrate their assets in any industry. However, under
certain unusual circumstances, this could result in the portfolio could be
indirectly concentrated in one or more industries. If this were to occur, AIA
would consider whether to maintain or change its investments in such underlying
funds. See "Risks to Consider", the Appendix to this Prospectus and the
Statement of Additional Information for more information.

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

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

An investment in any of the portfolios involves certain risks. These risks
include, but are not limited to the risks discussed below. Certain investments
and investment techniques permitted for the portfolios pose special risks in
addition to those discussed below. See the Appendix to this Prospectus and the
Statement of Additional Information for more information. 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.

24
<PAGE> 75

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.

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
support for other types of municipal instruments. AIA 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 AIA 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.

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 equity securities held by a portfolio 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.

25
<PAGE> 76

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
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.

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.

YEAR 2000 RISKS. The Fund depends on the smooth functioning of computer
systems in almost every aspect of its business. Like other mutual funds,
businesses and individuals around the world, the Fund and its portfolios could
be adversely affected if the computer systems used by its service providers do
not properly process dates on and after January 1, 2000 and distinguish between
the year 2000 and the year 1900. The Fund has made inquiry of its service
providers to determine whether they expect to have their computer systems
adjusted for the year 2000 transition, and is seeking assurances from each
service provider that it expects its system to accommodate the year 2000
transition without material adverse consequences to the Fund and its portfolios.
While it is likely that such assurances will be obtained, the Fund and its
shareholders may experience losses if these assurances prove to be incorrect or
as a result of year 2000 computer difficulties experienced by issuers of
portfolio securities or third parties, such as custodians, banks, broker-
dealers or others with which the Fund does business.

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.

27
<PAGE> 78

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.

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 call 1-800-624-4116 (inside
Maryland 1-800-638-7751) to request a Statement of Additional Information and
Annual Report.

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

PURCHASES
- --------------------------------------------------------------------------------

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 National"), 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

28
<PAGE> 79

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.

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 fixed-income and equity portfolios are determined as of the close
of regular trading on 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 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.").

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 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.

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.
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<PAGE> 80

EXCHANGES
- --------------------------------------------------------------------------------

An exchange is a convenient way to purchase shares of another portfolio
registered in your state. Institutional Class shares of a portfolio may
generally be exchanged for Institutional Class shares of another portfolio.
Institutional Class shares received by a shareholder as a result of the
reorganization of the Marketvest Funds into the ARK Funds may only be exchanged
for Institutional Class shares of another portfolio if the shareholder is
eligible to purchase Institutional Class shares. The exchange will be made on
the basis of relative net asset value next determined after the exchange request
is received by the Fund's transfer agent. Exchanges may be made by telephone.
See "Redemptions -- By Telephone."

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
fluctuation 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 AIA'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 classes of a particular portfolio is generally not
permitted, except that an exchange to Class A shares 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 Class A
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 Class A shares. 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. Investors who are
currently Personal Trust Customers who will be receiving a distribution from
their trust account may exchange their Institutional Class shares for Class A
shares of any portfolio or portfolios of the Fund. 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 an exchange of shares of one
class of a portfolio for shares of another class of the same portfolio will not
constitute a taxable event.

REDEMPTIONS
- --------------------------------------------------------------------------------

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 a redemption request in good order. 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

30
<PAGE> 81

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 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 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.

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.

Although at present First National 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.

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 its
transfer agent will each employ reasonable procedures to confirm that

31
<PAGE> 82

instructions communicated by telephone are genuine. Such procedures may include
taping of telephone conversations.

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

It is anticipated that First National will be the holder of record for all
Institutional Class shares held through qualified accounts. First National, 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 National to purchase Institutional Class
shares automatically at intervals established by the shareholder. Additional
fees may be charged by First National 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 National in the management of its accounts
are not duplicative of any of the services for which AIA is compensated for
managing and advising the portfolios. The charges paid by clients of First
National or its affiliates should be considered in calculating the net yield or
total return on investments in the Institutional Class shares. Clients of First
National 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 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 and Pennsylvania
Tax-Free Portfolio are declared daily and paid monthly; for the Equity Income
Portfolio dividends are declared and paid monthly; for the Balanced Portfolio,
Equity Index Portfolio, Blue Chip Equity Portfolio, Mid-Cap Equity Portfolio and
Value Equity Portfolio dividends are declared and paid quarterly; and for the
Capital Growth Portfolio, Small-Cap Equity Portfolio (formerly Special Equity
Portfolio) and International Equity Selection Portfolio dividends are declared
and paid annually. 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. 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. INCOME-EARNED OPTION reinvests capital gain distributions and pays
income dividends in cash.

32
<PAGE> 83

C. 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.

NET ASSET VALUE. The net asset value of a class of shares of a portfolio is
calculated by adding the pro rata share of the value of all securities and other
assets attributable to the class, deducting the pro rata share of
portfolio-level liabilities of the class, deducting class-specific liabilities,
and dividing the result by the number of shares of the class 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. 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.

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

The business and affairs of the Fund are managed under the supervision of
its Board of Trustees. The trustees are responsible for managing the business
affairs of the Fund and for exercising the Fund's powers except those reserved
for the shareholders. The Fund's Board of Trustees approves all significant
agreements between the Fund and persons or companies furnishing services to the
Fund, including the agreements with the Fund's investment adviser, distributor,
administrator, transfer agent and custodian. The management of the Fund's
day-to-day operations is delegated to its officers, the adviser and
administrator, subject always to the general supervision of the Board of
Trustees. A majority of the Fund's trustees are not affiliated with either the
investment adviser or the distributor.

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<PAGE> 84

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

Allied Investment Advisors, Inc.("AIA") 100 E. Pratt Street, Baltimore, MD
21202, provides investment advisory services to the Fund. Investment advisory
services are provided subject to the general supervision of the Board of
Trustees. AIA 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>
U.S. Treasury Money Market Portfolio...................... 0.25%
U.S. Government Money Market Portfolio.................... 0.25%
Money Market Portfolio.................................... 0.25%
Tax-Free Money Market Portfolio........................... 0.25%
Short Term Treasury Portfolio............................. 0.35%
Short-Term Bond Portfolio................................. 0.75%
U.S. Government Bond Portfolio............................ 0.75%
Intermediate Fixed Income Portfolio....................... 0.60%
Income Portfolio.......................................... 0.60%
Maryland Tax-Free Portfolio............................... 0.65%
Pennsylvania Tax-Free Portfolio........................... 0.65%
Balanced Portfolio........................................ 0.65%
Equity Income Portfolio................................... 0.70%
Equity Index Portfolio.................................... 0.20%
Blue Chip Equity Portfolio................................ 0.70%
Mid-Cap Equity Portfolio.................................. 0.80%
Value Equity Portfolio.................................... 1.00%
Capital Growth Portfolio.................................. 0.70%
Small-Cap Equity Portfolio................................ 0.80%
International Equity Selection Portfolio.................. 0.65%
</TABLE>

AIA, in its sole discretion, may waive all or any 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.

The investment advisory fees payable by certain of the portfolios may be
higher than the fees payable by other mutual funds (although not necessarily
higher than the fees payable by a funds with similar investment objectives), due
to the greater complexity, expense and commitment of resources involved in
managing those portfolios.

34
<PAGE> 85

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 AIA
previously served in comparable capacities for the Trust Division of First
National. As of June 30, 1998, AIA had assets under management of approximately
$11.1 billion.

Subject to the general supervision of the Board of Trustees, AIA 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 AIA to obtain the best net results in terms of
price and execution. Subject to this policy, securities transactions may be
directed at higher commission rates to broker-dealers who provide research,
statistical and other information to AIA. If more than one account managed by
AIA is purchasing or selling the same security, such orders may be aggregated in
the interest of achieving the most favorable execution.

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

Susan S. Schnaars is a Principal of AIA 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, and Director of Fixed Income
Investments for, AIA 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).

35
<PAGE> 86

Clyde L. Randall is a Principal of AIA 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.

Christopher E. Baggini is a Principal of AIA and manager of the Mid-Cap
Equity Portfolio and the Capital Growth Portfolio. Prior to joining First
National, Mr. Baggini served as portfolio manager and research analyst for First
Metropolitan Development Corporation. He has over 12 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.

J. Eric Leo is a Managing Director of, and Director of Equity Research for
AIA. Mr. Leo is manager of the Value Equity Portfolio and the Equity Index
Portfolio. Prior to 1997, he was Executive Vice President and Chief Investment
Officer of Legg Mason Capital Management, Inc. Mr. Leo has more than 25 years of
experience in investment management, including managing mutual fund portfolios
and accounts for both individuals and institutions.

36
<PAGE> 87

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

Pursuant to a separate agreement with the Administrator, FMB Trust Company,
National Association, the Fund's custodian and an affiliate of First National,
performs sub-administration services on behalf of the portfolios, for which it
receives a fee paid by the Administrator at the annual rate of up to 0.0275% of
the aggregate average net assets of the portfolios. See the Statement of
Additional Information for more information.

DISTRIBUTION AND SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

SEI Investments Distribution Co. (the "Distributor"), 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 National and its affiliates neither
participate in nor are responsible for the underwriting of the shares of the
Fund.

37
<PAGE> 88

Under a shareholder services plan in effect with respect to the
Institutional Class of each portfolio, a portfolio may pay shareholder services
fee at an annual rate of up to 0.15% of the average net assets of the
Institutional Class shares. The Board of Trustees has approved an annual
shareholder servicing fee rate of 0.06% of the average net assets of the
Institutional Class of each portfolio.

All or any portion of the shareholder services fees 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 Investments Management Corporation, Oaks, PA 19456, provides transfer
agent and related services for the Portfolios. SEI Investments Management
Corporation has subcontracted the transfer agency services to State Street Bank
and Trust Company which maintains shareholder accounts and records for the
portfolios.

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

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

38
<PAGE> 89

the Fund might occur. It is not anticipated, however, that any such change would
affect the net asset value of the shares of any portfolio 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 income 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.

39
<PAGE> 90

subdivisions. 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.

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

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 Fund is composed of
the following twenty 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, Capital
Growth Portfolio, Small-Cap Equity Portfolio (formerly Special Equity
Portfolio), and International Equity Selection Portfolio. The Maryland Tax-Free
Portfolio and Pennsylvania Tax-Free Portfolio are non-diversified; the other
portfolios are diversified. 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.

40
<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 Board of Trustees of the Fund has established four classes of shares:
two retail classes, and two institutional classes; Institutional Class (which is
offered pursuant to this prospectus) and Institutional II Class. 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).

41
<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.

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, 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,

42
<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.

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.

43
<PAGE> 94

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.

4. A portfolio may not make a loan if more than 33 1/3% of its assets would
be lent to other parties.

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.

SECURITIES LENDING. A 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 adviser. Only the Short-Term Treasury Portfolio,
Short-Term Bond Portfolio, U.S. Government Bond Portfolio, Intermediate Fixed
Income Portfolio and Income Portfolio currently intend to lend portfolio
securities.

STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRS"). SPDRs are interests in a
unit investment trust holding a portfolio of securities linked to the S&P 500.
SPDRs closely track the underlying portfolio of securities, trade like a share
of common stock and pay periodic dividends proportionate to those paid by the
portfolio of stocks that constitutes the S&P 500. For further information
regarding SPDRs, see the Statement of Additional Information.

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> 97

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> 98

ARK FUNDS

INSTITUTIONAL II CLASS
- ---------------------------------------------------------
TABLE OF CONTENTS
- ---------------------------------------------------------

<TABLE>
<S> <C>
Summary........................... 2
Fees and Expenses................. 3
Financial Highlights.............. 4
Investment Objectives and
Policies....................... 5
Performance....................... 8
Purchases, Exchanges and
Redemptions.................... 9
Management of the Fund............ 13
Tax Matters....................... 16
General Information............... 17
Appendix.......................... 18
- ---------------------------------------
</TABLE>
<PAGE> 99

ARK FUNDS -- INSTITUTIONAL II CLASS

- --------------------------------------------------------------------------------
PROSPECTUS
JULY 27, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
* U.S. Treasury Money Market Portfolio * Money Market Portfolio
* U.S. Government Money Market Portfolio * Tax-Free Money Market Portfolio
</TABLE>

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,
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 OF THE PORTFOLIOS 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 investors with information that they
should know before investing. Please read and retain it for future reference. A
Statement of Additional Information dated July 27, 1998 and Annual Report
(including financial statements for the fiscal year ended April 30, 1998) have
been filed with the Securities and Exchange Commission ("SEC") and are
incorporated herein by reference. The Statement of Additional Information and
Annual Report, and additional information about the classes of shares not
offered through this Prospectus, are available upon request without charge by
calling 1-800-624-4116 (inside Maryland 1-800-638-7751). The SEC maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.

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.

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 in good
order. See "Purchases, Exchanges and Redemptions".

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

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> 101

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)............. 0.19% 0.14% 0.11% 0.09%
12b-1 Fees................................... 0.10% 0.10% 0.10% 0.10%
Other Expenses(2)............................ 0.19% 0.17% 0.17% 0.19%
---- ---- ---- ----
Total Operating Expenses (after
waivers)(3)................................ 0.48% 0.41% 0.38% 0.38%
==== ==== ==== ====
</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 0.54%, 0.52%, 0.52% and 0.54%,
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 27 60
U.S. Government Money Market Portfolio........... 4 13 23 52
Money Market Portfolio........................... 4 12 21 48
Tax-Free Money Market Portfolio.................. 4 12 21 48
</TABLE>

3
<PAGE> 102

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 each of the years or periods in the three-year period ended
April 30, 1998 (as applicable) 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 Annual Report is
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
- -------------------------------
1998 $1.00 0.05 (0.05) $1.00 4.99% $94,844 0.48% 4.88% 0.54%
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
- ----------------------------------
1998 $1.00 0.05 (0.05) $1.00 5.33% $91,629 0.44% 5.21% 0.55%
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
- -------------------
1998 $1.00 0.05 (0.05) $1.00 5.47% $82,293 0.41% 5.33% 0.55%
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
- ---------------------------
1998 $1.00 0.03 (0.03) $1.00 3.37% $29,474 0.40% 3.31% 0.56%
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>

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

4
<PAGE> 103

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> 104

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,

6
<PAGE> 105

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.

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.

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.

7
<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.

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.

8
<PAGE> 107

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.

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

PURCHASES
- --------------------------------------------------------------------------------

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
National, 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.

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 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.").

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

9
<PAGE> 108

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.

EXCHANGES
- --------------------------------------------------------------------------------

An exchange is a convenient way to purchase 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 exchange
will be made on the basis of relative net asset value next determined after the
exchange request is received by the Fund's transfer agent. Exchanges may be made
by telephone. See "Redemptions -- By Telephone."

An exchange between the Institutional II Class and another class of any
portfolio is generally not permitted, except that an exchange to Class A shares
of a portfolio will occur should an investor become ineligible to purchase
Institutional II 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 shares of the class
exchanged into. If a shareholder declines to accept the exchange, and if the
shareholder does not meet the requirements for investing in Institutional II
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 an exchange of shares of one class of a portfolio for shares
of another class of the same portfolio will not constitute a taxable event.

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<PAGE> 109

REDEMPTIONS
- --------------------------------------------------------------------------------

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 a redemption request in good order. 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 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 National pays the wire costs involved, the Fund
reserves the right at any time to require the investor to pay such costs.

11
<PAGE> 110

instructions communicated by telephone are genuine. Such procedures may include
taping of telephone conversations.

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

It is anticipated that First National Bank of Maryland ("First National")
will be the holder of record for all Institutional II Class shares held through
qualified accounts. First National, 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 National to purchase Institutional II Class
shares automatically at intervals established by the client. Additional fees may
be charged by First National 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).

DISTRIBUTION OPTIONS. Each portfolio declares dividends daily and pays them
monthly. 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
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.

PORTFOLIO TRANSACTIONS. Subject to the general supervision of the Board of
Trustees, AIA 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
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 AIA's policy to obtain the
most favorable execution. If more than one account managed by AIA is purchasing
or selling the same security, such orders may be aggregated in the interest of
achieving the most favorable execution.

NET ASSET VALUE. The net asset value of a class shares of a portfolio is
calculated by adding the pro rata share of the value of all securities and other
assets attributable to a portfolio, deducting the pro rata share of
portfolio-level liabilities of the class, deducting class-specific liabilities
and dividing the result by the number of shares of the class outstanding. Assets
of the portfolios are valued based upon the amortized cost method. This method
involves valuing an

12
<PAGE> 111

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.

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

The business and affairs of the Fund are managed under the supervision of
its Board of Trustees. The trustees are responsible for managing the business
affairs of the Fund and for exercising the Fund's powers except those reserved
for the shareholders. The Fund's Board of Trustees approves all significant
agreements between the Fund and persons or companies furnishing services to the
Fund, including the agreements with the Fund's investment adviser, distributor,
administrator, transfer agent and custodian. The management of the Fund's
day-to-day operations is delegated to its officers, the investment adviser and
administrator, subject always to the general supervision of the Board of
Trustees. A majority of the Fund's trustees are not affiliated with either the
adviser or the distributor.

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

Allied Investment Advisors, Inc. ("AIA"), 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 0.25% of each
portfolio's average net assets. AIA, 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.

AIA is a wholly-owned subsidiary of First National Bank of Maryland ("First
National"). First National, established in 1806, is a wholly-owned subsidiary of
First Maryland Bancorp, a bank holding company registered under the 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". AIA was
organized in 1995 to manage assets and provide research services for the Trust
Division of First National, 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 National. As of June 30,
1998, AIA had assets under management of approximately $11.1 billion.

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

13
<PAGE> 112

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

James M. Hannan is a Principal of AIA 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 National 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
- --------------------------------------------------------------------------------

SEI Investments Mutual Fund Services (the "Administrator"), 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 the administration and operation of the Fund
and its portfolios, 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 the
portfolios, 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 0.13% of
aggregate average net assets of the portfolios, 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"), 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 National neither participates in nor is
responsible for the underwriting of the shares of the Fund.

14
<PAGE> 113

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
0.75% of average net assets of the Institutional II Class of each Portfolio. The
Board has approved the fee rate of 0.10% 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 Investments Management Corporation, Oaks, PA 19456, provides transfer
agent and related services for the Portfolios. SEI Investments Management
Corporation, has subcontracted the transfer agency services to State Street Bank
and Trust Company which State Street Bank maintains shareholder accounts and
records for the Portfolios.

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

FMB Trust Company, National Association, (the "Custodian") 25 South Charles
Street, Baltimore, MD 21201, is custodian for the securities and cash of the
Fund. Under a 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 0.015% 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
- --------------------------------------------------------------------------------

15
<PAGE> 114

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 Fund and its 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 shares of any of the
portfolios or result in any financial loss to any shareholder.

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

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.

16
<PAGE> 115

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

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 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 is composed of the following twenty 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, Capital Growth Portfolio, Small-Cap Equity Portfolio (formerly
Special Equity Portfolio) and International Equity Selection Portfolio. The
Maryland Tax-Free Portfolio and Pennsylvania Tax-Free Portfolio are
non-diversified; the remaining Portfolios are diversified.

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 Board of Trustees of the Fund has established four classes of shares;
two retail classes, and two institutional classes; Institutional Class and
Institutional II Class (which is offered pursuant to this prospectus). 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).

17
<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.

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 only in an amount
not exceeding 33 1/3% of its total assets, and (b) may 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.

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 money market portfolios may invest all or a
portion of their assets in Money Market Instruments.

19
<PAGE> 118

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 portfolio 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.

U.S. GOVERNMENT SECURITIES. U.S. Government Securities include U.S.
Treasury bills, notes and bonds, and obligations issued by federal agencies.
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, are backed by the full faith and
credit of the U.S. government and are the highest quality government securities.

20
<PAGE> 119

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.

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

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
<PAGE> 120
ARK FUNDS

STATEMENT OF ADDITIONAL INFORMATION

JULY 27, 1998

This Statement of Additional Information is not a prospectus but should
be read in conjunction with the current Prospectuses dated July 27, 1998, for
Class A and Class B, Institutional Class and Institutional II Class shares
of ARK Funds (the "Fund"). Please retain this document for future reference.
Capitalized terms used by 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, 1998) is incorporated herein by reference. To obtain
additional copies of the Class A and Class B, Institutional Class and
Institutional II Class prospectuses, the 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 8
Special Considerations 30
Portfolio Transactions 45
Valuation of Portfolio Securities 47
Portfolio Performance 48
Additional Purchase and Redemption Information 51
Taxes 53
Trustees and Officers 59
Investment Adviser 61
Administrator and Distributor 64
Transfer Agent 68
Description of the Fund 69
Independent Auditors Financial Statements 71
Appendix A - Description of Indices and Ratings A-1
Appendix B - 1998 Tax Rates B-1
</TABLE>
<PAGE> 121
INVESTMENT POLICIES AND LIMITATIONS

The following policies and limitations supplement those set forth in
Class A and Class B 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 Growth
<PAGE> 122
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 and
Small-Cap Equity Portfolio (formerly Special Equity Portfolio) as a matter of
fundamental policy, may not:

All portfolios (other than the Money Market Portfolio and Tax-Free
Money Market 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.

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

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 Selection Portfolio 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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THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL:

All portfolios, 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) in order 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:

(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.

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

(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, Capital Growth
Portfolio and Small-Cap Equity Portfolio (formerly Special 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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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 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 Equity Portfolio (formerly Special Equity Portfolio), as
a matter of non-fundamental policy:

(xii) does not currently intend to purchase warrants, valued at the
lower of cost or market, in excess of 10% of the portfolio's
net assets. Included in that amount, but not to exceed 2% of
the portfolio's net assets, are warrants whose underlying
securities are not traded on principal domestic or foreign
exchanges. Warrants acquired by the portfolio 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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political subdivision are separated from those of other political entities; and
whether a governmental body is guaranteeing the security.

INVESTMENT PRACTICES

A portfolio may engage in the following investment practices consistent
with its investment objectives, policies and restrictions. Please refer to the
current prospectus for the ARK Funds and the section "Investment Policies and
Limitations" contained in this Statement of Additional Information for a further
description of each portfolio's investment objectives, policies and
restrictions.

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.

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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 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 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
portfolio 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 portfolio
at one rate, while offering a lesser rate of exchange should the portfolio
desire to resell

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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.

The International Equity Selection Portfolio may use currency forward
contracts for any purpose consistent with its investment objectives. The
following discussion summarizes some, but not all, of the possible currency
management strategies involving forward contracts that could be used by the
portfolio. The portfolio 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 portfolio will be able to protect itself
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 portfolio 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 portfolio 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 portfolio 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 portfolio if the currency used to hedge
does not perform similarly to the currency in which the hedged securities are
denominated.

The portfolio may enter into forward contracts to shift their
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 portfolio to assume the risk of fluctuations in the
value of the currency it purchases.

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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 portfolio will segregate
assets to cover forward contracts, if any, whose purpose is essentially
speculative. The portfolio 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 portfolio's investment exposure to changes in currency exchange
rates, and could result in losses to the portfolio 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

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.

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

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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 portfolios 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

A 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 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

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

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portfolio might obtain a less favorable price than prevailed when it decided to
seek registration of the security.

INDEXED SECURITIES

The 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

A portfolio may invest in loans and other direct debt instruments.
Direct debt instruments are interests in amounts owed by a corporate,
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

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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.

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

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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.

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 objective, 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 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.

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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.

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.

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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

A portfolio may 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.

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.

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REPURCHASE AGREEMENTS

A 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 Board of Trustees has authorized securities lending for the
following portfolios: Short-Term Treasury Portfolio, Short-Term Bond Portfolio,
U.S. Government Bond Portfolio, Intermediate Fixed Income Portfolio and Income
Portfolio. These portfolios 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
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

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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 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.

SPECIAL SITUATIONS

The Small-Cap Equity Portfolio (formerly Special Equity Portfolio) may
invest in companies experiencing an unusual or possibly non-repetitive
development or "special situation". An unusual or possibly non-repetitive
development or special situation may involve one or more of the following
characteristics:

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

o 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

o new or changed management, or material changes in management
policies or corporate structure

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

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

STANDARD & POOR'S DEPOSITARY RECEIPTS ("SPDRS")

SPDRs are interests in a unit investment trust ("UIT") that may be
obtained from the UIT or purchased in the secondary market as SPDRs are listed
on the American Stock Exchange. The UIT will issue SPDRs in aggregations of
50,000 known as "Creation Units" in exchange for a "Portfolio Deposit"
consisting of (a) a portfolio of securities substantially similar to the
component securities ("Index Securities") of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500"), (b) a cash payment equal to a pro rata
portion of the dividends accrued to the UIT's portfolio securities since the
last dividend payment by the UIT, net of expenses and liabilities, and (c) a
cash payment or credit ("Balancing Amount") designed to equalize the net asset
value of the S&P 500 and the net asset value of a Portfolio Deposit.

SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the portfolio must accumulate enough SPDRs to reconstitute a
Creation Unit. The liquidity of small holdings of SPDRs, therefore, will depend
upon the existence of a secondary market. Upon redemption of a Creation Unit,
the portfolio will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.

The price of SPDRs is derived and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of a traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying SPDRs
purchased or sold by a portfolio could result in losses on SPDRs. Trading in
SPDRs involves risks similar to those risks, described below under "Hedging
Strategies" relating to options, involved in the writing of options on
securities.

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 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

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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

A 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.

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

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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.

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.

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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 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

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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 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

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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.

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.

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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 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

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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 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,

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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 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 4,797,600, reflecting an increase of 13.8% from the 1980 Census. Maryland's
population in 1997 was 5,094,300. 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 Primary Metropolitan Statistical
Area was 2,382,172 and for the Maryland portion of the Washington Primary
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 8.2% and 9.6%
in each of the years 1986 through 1988, but fell from a rate of 8.5% in 1989 to
3.1% in 1991. Commencing in 1992, however, personal income growth rebounded,
increasing at annual rates of between 4.0% and 5.3% 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 4.5% in each of the years 1992 through 1996.
Unemployment in Maryland peaked in 1982 at 8.5%, 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 March 1998, the Maryland unemployment
rate was 4.6%.

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 5.0%
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 (18.8% versus 7.7% in 1997).
Between 1977 and 1997, manufacturing wages decreased by 26.2%, while
non-manufacturing wages increased by 58.4%

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On June 30, 1994, the State of Maryland's General Fund, representing
approximately 50% of each year's total revenues, had a surplus on a budgetary
basis of $60 million, together with $161.8 million on deposit in the Revenue
Stabilization Account of the State Reserve Fund. On June 30, 1995, the General
Fund contained a surplus on a budgetary basis of $26.5 million (after
reservation of $106 million for fiscal year 1996 expenses), and the Revenue
Stabilization Account of the State Reserve Fund contained $286.1 million. In
April 1995, the State's General Assembly approved a $14.4 billion budget for
fiscal year 1996, which budget did not include any expenditures based upon
additional revenue from new or broad-based taxes, but included a $170 million
appropriation to the State Reserve Fund, including $200 million to the Revenue
Stabilization Account. When the fiscal year 1996 budget was enacted, the State
projected that it would end the fiscal year with a General Fund surplus of $3.1
million. In December 1995 and March 1996, the State lowered its estimates of
General Fund revenues by a total of $148 million. To address this reduction in
revenues, the State, among other things, reduced General Fund appropriations and
transferred $57 million from the Revenue Stabilization Account. The State ended
fiscal year 1996 with a General fund surplus on a budgetary basis of $13.1
million and $461.2 million on deposit on the Revenue Stabilization Account (net
of the transfer to the General Fund).

In April 1996, the General Assembly approved a $14.6 billion fiscal
year budget 1997. The budget as enacted included funds sufficient to meet all
fiscal year 1996 deficiencies and to meet all specific statutory funding
requirements and incorporated $29 million in savings from revisions to the State
personnel system and reform to the welfare and Medicare programs. On June 30,
1997, the General Fund contained a surplus on a budgetary basis of $207.2
million, $144.5 of which was designated for fiscal year 1998 obligations, in
addition to which the Revenue Stabilization Account of the State Reserve Fund
contained $490.1 million.

In April 1997, the General Assembly approved a $15.4 billion fiscal
year budget 1998. This budget (i) includes funds sufficient to meet all specific
statutory funding requirements; (ii) incorporates the first partial 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 $27.9
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 currently projects a General Fund balance on a budgetary basis of $283
million.

In April 1998, the General Assembly approved a $16.6 billion fiscal
year 1999 budget. This budget includes, among other things, (i) amounts required
under the State's school funding agreement with the City of Baltimore; (ii) a
full year of the five-year phase-in of the 10% reduction of the personal income
tax accelerating the calendar 1998 reduction to 5% from 2% (estimated to reduce
revenues in fiscal year 1999 by approximately $295.7 million); (iii) General

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Fund deficiency appropriations of $75.5 million for fiscal year 1998 which
include $25 million for computer programming modifications to address the "year
2000" problem; (iv) $106.8 million for the Revenue Stabilization Account of the
State Reserve Fund; (v) $76 million to provide medical coverage to low income
children and pregnant women currently without coverage; and (vi) $61.5 million
to provide funding for a Statewide public education proposal targeted primarily
to at-risk students. When this budget was enacted, the State estimated that the
General Fund surplus on a budgetary basis at June 30, 1999 would be
approximately $20 million, in addition to which the State projected that there
would be $632 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.

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 1998, 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 System of Maryland, 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

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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, the Maryland Industrial Development Financing Authority, the
Northeast Maryland Waste Disposal Authority, the Maryland Economic Development
Corporation and the Maryland Energy Financing Administration issue conduit
revenue bonds, the proceeds of which are lent to borrowers eligible under
relevant state and federal law. Conduit revenue 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.

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 "Aa2" 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 Allegany County and Garrett County, the bonds of which are rated
"Baa2" and "Baa3", respectively, by Moody's and Kent County and Somerset County
which are not rated. 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 "A1" 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

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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 declines over the past thirty years 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.

In 1997, the population of Pennsylvania was 12.02 million people.
According to the U.S. Department of Commerce, Bureau of the Census,
Pennsylvania's population experienced a slight increase from the 1988 estimate
of 11.5 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 7.1% in
1993. In 1994 and 1995, Pennsylvania's annual average unemployment rate was
below the overall rate in the Mid-Atlantic region, but slightly higher than in
the United States as a whole. Seasonally adjusted data for April 1998, the most
recent month for which data is available, shows an unemployment rate of 4.3%,
which is the same rate 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.

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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 and 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 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 (34.9% of General Fund revenues in fiscal 1997), the
2.8% personal income tax (33.2% of General Fund revenues in fiscal 1997) and the
9.99% corporate net income tax (9.8% of General Fund revenues in fiscal 1997).
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 sources 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 ($7.31
billion of fiscal 1997 expenditures, the projected $7.53 billion of the fiscal
1998 budget and the proposed almost $7.71 billion of the fiscal 1999 budget) and
public health and human services ($13.4 billion of fiscal 1997 expenditures, the
projected $13.8 billion of the fiscal 1998 budget and the proposed increase of
the fiscal 1999 $14.5 billion budget).

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GOVERNMENTAL FUND TYPES: FINANCIAL CONDITION/RESULTS OF OPERATIONS
(GAAP BASIS)

From fiscal 1993 through fiscal 1997, steady, modest economic growth,
lower inflation and the impact from tax reductions following the tax rate
increases and tax base expansions of fiscal 1991, contributed to tax revenue
gains averaging 4.1% per year during the period. Total revenues during the same
five-year period increased at an average rate of 4.7% per year.
Intergovernmental revenue accounted for an 8.1% gain during this period, largely
due to an accounting change in fiscal 1996 which permitted food stamp coupon
revenue received from the Federal government to be recorded as income to the
Commonwealth. Expenditures during the period from fiscal 1993 through fiscal
1997 rose at a 3.8% annual rate, led by a 13.8% annual increase for protection
of persons and property costs associated with prison construction, staffing and
maintenance. Public health and welfare program costs expanded 5.4% per year
during this period, while expenditures for the conservation of natural resources
program declined in fiscal 1996 as a result of departmental restructuring and
the attendant recategorization of expenditures. The fund balance for
Governmental Fund Types has increased during the 1995, 1996 and 1997 fiscal
years. At June 30, 1997, the fund balance totaled $2,900.9 million, an increase
of $914.6 million from the previous fiscal year.

GENERAL FUND: FINANCIAL CONDITIONS/RESULTS OF OPERATIONS

FIVE-YEAR OVERVIEW (GAAP BASIS)

For the five-year period from fiscal 1993 through fiscal 1997, total
revenues and other sources rose at a 4.7% average annual rate while total
expenditures and other uses grew by 4.9% annually. Tax revenues from this same
period increased by an average of 4.1% per year. The largest rate of growth for
any single revenue source during this period came from intergovernmental
revenues, which increased by 8.5% per year. As indicated above, this growth was
largely due to an accounting change that made food stamp coupon revenue from the
Federal government an item of intergovernmental revenue to the Commonwealth.

Expenditures and other uses rose at a slightly higher percentage than
revenues during the period from fiscal 1993 through fiscal 1997, at a rate of
4.9% per year. Program costs for protection of persons and property increased at
an average rate of 13.8% per year, due to the high amounts expended to acquire,
staff and operate expanded prison facilities for Pennsylvania's increased inmate
population. Public health and welfare costs increased at an average annual rate
of 5.7% during this period, the second-highest rate of percentage increase among
Commonwealth programs. The amount and growth of these costs has been restrained
by efforts to control costs for various social programs and by generally
favorable economic conditions throughout the Commonwealth.

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The fund balance at June 30, 1997 totaled $1,364.9 million, an increase
of $729.7 million over the $635.2 million balance at June 30, 1996. The fund
balance has a $832.4 million unreserved-designated component, of which almost
one-half is represented by the Tax Stabilization Reserve Fund. The increase in
the fund balance at June 30, 1997 also includes a return of an
unreserved-undesignated balance, which was last recorded at the end of fiscal
1994. The fiscal 1997 year-end unreserved-undesignated balance of $187.3 million
is the largest balance recorded since fiscal 1987.

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.

FISCAL 1996 BUDGET (GAAP BASIS)

Revenues and other sources totaled $25,850.3 million, an 8.0% increase
from the previous fiscal year. The fund balance for fiscal 1996 was drawn down
$53.1 million from the balance at the end of fiscal 1995 to $635.2 million.
Expenditures and other uses exceeded revenues and other sources by $28.0
million. Consequently, the unreserved fund balance declined by $61.1 million,
reducing the balance to $381.8 million at the end of fiscal 1996. Total

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revenues and other sources increased by 8.7%, led by a 24.2% increase in
intergovernmental revenues due to the aforementioned accounting change to count
Federal food-stamp coupon revenue as income to the Commonwealth. Expenditures
and other uses increased by 8.6% for the fiscal year, including a 24.8% increase
for protection of persons and property program costs due to higher correctional
program costs and re-categorization of expenditures. Costs for the conservation
of natural resources programs declined as a result of the abolishment of one
department, the creation of new departments in its place and the
re-classification of expenditures for natural resources programs 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.

FISCAL 1997 BUDGET (GAAP BASIS)

Assets for fiscal 1997 increased $563.4 million and liabilities
declined $166.3 million to produce a $729.7 million increase in the fund balance
at June 30, 1997. The fund balance increase during fiscal 1997 has brought a
restoration of an undesignated-unreserved balance, which totaled $187.3 million
in fiscal 1997. Total revenues and other sources rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue from an improving state economy was partially
offset by a $175.2 million decline in intergovernmental revenues. Expenditures
and other uses increased by 1.0% for the fiscal year led, again, by costs
associated with the program for the protection of persons and property. These
prison construction- and staffing-related costs increased by 4.7% in fiscal
1997, well below the average 17.1% annual increase that occurred over the four
previous fiscal years. General government program costs for fiscal 1997 declined
by 14.3% from fiscal 1996, largely due to a reduction in estimated expenditures
for maintaining Pennsylvania's self-insured worker's compensation program.

ADOPTED FISCAL 1998 BUDGET (BUDGETARY BASIS)

The approved fiscal 1998 budget provides for $17,269.1 million in
appropriations from Commonwealth funds, an increase of 3.7% over appropriates,
including supplemental appropriations, for fiscal 1997. Major funding increases
provided by the fiscal 1998 budget include $166 million in appropriations for
elementary and secondary education plus an estimated $51 million in reduced
employer retirement contributions payable by local school districts due to a
reduction in the contribution rate; $56 million for higher education
institutions and scholarships; and $70 million for higher caseload, utilization
and cost of nursing home care.

The fiscal 1998 budget is based on anticipated Commonwealth revenues of
$17,435.4 million before reserves for tax refunds, an increase of 1.0% over
estimated fiscal 1997 Commonwealth revenues. Although actual revenues exceeded
estimated revenues in fiscal 1997, the fiscal 1998 budget revenue estimate was
not changed and represents a 0.7% increase over actual fiscal 1997 revenues. The
estimates for the fiscal 1998 budget were based on a forecast for overall
national economic growth to slow to just above 1.0% over the last two quarters
of fiscal year 1997 and

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result in a 1.2% growth rate in real gross domestic product for the second
calendar quarter of 1998 over the second quarter of 1997. The anticipated growth
rate is a result of anticipated slowing of gains in consumer spending, business
investment and residential housing, with inflation projected to remain modest
and the unemployment rate projected to reach 6.0% by the second calendar quarter
of 1998.

The rate of anticipated growth of Commonwealth revenues was also
affected by the enactment of tax reductions and tax revenue dedications
effective for the 1998 fiscal year. Excluding these newly enacted changes,
revenues were projected to increase by 2.4% during fiscal 1998. Tax reductions
enacted for fiscal 1998 totaled an estimated $170.6 million, including $16.2
million reflected in higher projected tax refunds. In addition, $75 million of
existing sales tax revenue has been earmarked for mass transit funding and one
cent of the cigarette tax (estimated $10.8 million) has been earmarked for a
children's health program and are no longer included in the General Fund. Major
changes to taxes enacted for fiscal 1998 include the repeal of the sales and use
tax on computer services ($79.1 million); an increase in the exemption from
personal income taxes for low-income families ($25.4 million); enactment of a
research-and-development tax credit program for business ($15.0 million); and
conforming Pennsylvania tax laws to Federal tax laws for S corporations and
limited liability companies ($16.3 million). Most of these changes are effective
beginning in July 1997 although some are effective retroactively to January
1997.

Commonwealth revenues through January 1997 are $211.4 million, or 2.4%
above estimate. In the Governor's proposed fiscal 1999 General Fund budget, the
estimate of Commonwealth revenues anticipated for fiscal 1998 has been increased
by $231.1 million, raising the year-over-year increase to 2.1%. Of that
increase, $213.5 million is attributed to personal income tax receipts, raising
the personal income tax year-over-year increase to 5.0% from 1.3% in the earlier
estimate. Inheritance tax receipts have also been above estimate for the 1998
fiscal year and have been increased in the revision by $60 million, or an 11.0%
increase compared to a 1.2% estimate.

From a review of the expenditure provisions for fiscal 1998, $100.6
million in supplemental appropriation needs have been identified. Of this total,
$96.2 million are for the Department of Public Welfare, mostly for the medical
assistance program in connection with additional costs incurred in a transition
to a managed health care program. The cost of the supplemental appropriations
will be appropriated from an estimated $190 million of expenditure lapses
projected to occur during fiscal year 1998. The amount of expenditure lapses
over supplemental appropriations and additional revenue to be received are
projected to permit the fund to close fiscal 1998 with a surplus balance of
$280.6 million, net of transfer of 15% of the unappropriated surplus balance to
the Tax Stabilization Reserve Fund.

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PROPOSED FISCAL 1999 BUDGET

In February 1998, the Governor presented his proposed fiscal 1999
budget to the General Assembly. Total Commonwealth revenues before reductions
for tax refunds and proposed tax changes are estimated to be $18,190.0 million,
2.9% above revised estimates for fiscal 1997. Proposed appropriations from those
revenues total $17,787.4 million, a 3.0% increase over currently estimated
appropriations for fiscal 1998. The fiscal 1999 budget assumes the draw down of
the currently estimated $280.6 million unappropriated surplus at June 30, 1998,
although no appropriation lapses are included in the projection. The proposed
fiscal 1999 budget includes five proposed tax reductions representing an
estimated $128.1 million, of 0.7%, of fiscal 1999 revenues. The proposal with
the largest effect on revenues is an expansion in the amount of household income
eligible for tax forgiveness from the personal income tax and is estimated at
$54.1 million. Over $60 million in revenue reductions would also result from a
millage reduction to the tax rate for capital stock and franchise taxes and from
an increase in the time period for a business to recover operating losses for
corporate net income tax purposes. Two tax credit programs will have an
additional negative revenue impact of $5 million each. The General Assembly is
reviewing the proposed budget in hearings before its committees. The General
Assembly may change, eliminate or add amounts and items to the Governor's
proposed budget 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 $4,795.1 million at June 30, 1997, a
decrease of $261 million from June 30, 1996. Over the 10-year period ended June
30, 1997, total outstanding general obligation debt increased at an annual rate
of 0.5% and for the most recent five years, at an annual rate of 0.3%. All
outstanding general obligation bonds of the Commonwealth are rated AA- by S &
P's, Aa3 by Moody's and AA by Fitch. The ratings reflect only the views of the
rating agencies.

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 fielded within the succeeding fiscal year's
budget.

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Pennsylvania issued a total of $225.0 million of tax anticipation notes
for the account of the General Fund in fiscal 1998, all of which will mature on
June 30, 1998, and will be paid from fiscal 1998 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, $60 million of bond anticipation notes are authorized to be
issued in the form of commercial paper notes. As of December 31, 1997, $46.4
million was issued and 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, 1997:
Delaware River Joint Toll Bridge Commission ($52.7 million), Delaware River Port
Authority ($512.3 million), Pennsylvania Economic Development Financing
Authority ($1,080.5 million), Pennsylvania Energy Development Authority ($72.8
million), Pennsylvania Higher Education Assistance Agency ($1,538.8 million),
Pennsylvania Higher Educational Facilities Authority ($2,776.8 million),
Pennsylvania Industrial Development Authority ($402.1 million), Pennsylvania
Infrastructure Investment Authority ($196.4 million), Pennsylvania Turnpike
Commission ($1,177.6 million), Philadelphia Regional Port Authority ($59.5
million), and the State Public School Building Authority ($310.5 million). In
addition, the Governor is statutorily required to place in the budget of the
Commonwealth an amount sufficient make up any deficiency in the capital reserve
fund created for, or to avoid default on, bonds issued by the Pennsylvania
Housing Finance Agency ($2,631.1 million of revenue bonds outstanding as of
December 31, 1997), 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 ($1.19
million of the loan principal was outstanding as of December 31, 1997). 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 which
permits recovery of damages for any loss up to $250,000 per person and
$1,000,000 per accident ($27.0 million has been appropriated from the Motor
License Fund in fiscal 1998); (b)

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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
(In January 1992, the U.S. District Court, per Judge Kelly, denied the ACLU's
motion for class certification, following which the Commonwealth filed a motion
for summary judgment on most of the counts in the ACLU's complaints. After the
filing of the motion for summary judgment, the ACLU filed a renewed motion to
certify sub-classes of plaintiffs. In December of 1994, the U.S. Court of
Appeals for 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 (In response to an action in
mandamus seeking to compel the Commonwealth to comply with the 1987 decision, on
July 26, 1996, the Supreme Court appointed retired Justice Montemuro as special
master to devise a plan and submit it for implementation by January 1, 1998. On
January 28, 1997, the Supreme Court announced the establishment of a tripartite
committee, including representatives of the Commonwealth Executive and
Legislative Departments and Justice Montemuro, to develop an implementation
plan. On July 26, 1997, Justice Montemuro filed an interim report wherein he
recommended a transition to state funding of a unified judicial system in four
phases, during each of which specified court employees would transfer into the
Commonwealth payroll system. Justice Montemuro recommended implementation of the
system effective July 1, 1998, with completion of the first phase early in the
next century. Objections to the report were due by September 1, 1997. Although
the General Assembly is yet to enact legislation implementing the Supreme
Court's decision, the Governor has proposed an appropriation of $15.6 million to
implement Phase I of Justice Montemuro's report as part of his proposed fiscal
1999 budget.); (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. Certain
other banks have filed petitions in the same matter that are currently pending
with the Commonwealth Court, and one of these banks proceeded forward on behalf
of the other banks to litigate the same issues involved in the Settlement
Agreements. A panel of the Commonwealth Court, by a decision dated January 8,
1998, found no constitutional violations by the Commonwealth. The bank has filed
exceptions and argument before the Commonwealth Court en banc is currently
awaited.); (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, and seeking

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injunctive relief to modify the conditions and change certain behaviors and
practices (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 were
paid upon dismissal of the preliminary injunction relating to certain health
issues in January 1997. The parties are currently complying with monitoring
provisions outlined in the Agreement. The monitoring phase expired on January 6,
1998.); (f) 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. The state case is assigned to Judge Pellegrini.
Judge Pellegrini heard oral argument on September 8, 1997 and has taken the case
under advisement.); (g) 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 $11 million may be required to be paid in 1998, depending
upon the results of property liquidations by Envirotest. On November 26, 1996,
the interest of Envirotest under the Agreement was ultimately assigned, by a
series of assignments, to Market Street Funding Corporation, and payments by the
Commonwealth are being remitted to PNC Bank, N.A. as administrator for the
assignee; (h) on November 3, 1995, the Commonwealth and the Governor, along with
the Mayor and City of Philadelphia, were joined as additional respondents in an
enforcement action commenced in Commonwealth Court in 1973 against the School
District of Philadelphia, to remedy unintentional conditions of segregation in
the Philadelphia public schools. The Governor and Commonwealth were joined in
the remedial phase of the proceeding to determine their liability, if any, to
pay additional costs necessary to remedy the unlawful conditions of segregation
found to exist in Philadelphia public schools. On February 28, 1996, the School
District of Philadelphia and certain public interest intervenors each filed
third-party actions against the Commonwealth to require the Commonwealth to
supply the funding necessary to fully comply with the remedial orders of the
Commonwealth Court. Following denial of the Commonwealth's preliminary
objections seeking dismissal of the claims against it, the Commonwealth asserted
numerous defenses and filed a cross-claim against the City of Philadelphia
claiming that sole liability rests with the City or, in the alternative, that
the Commonwealth has a right of indemnity or contribution against the City if
liability exists (Trial

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commenced on May 30, 1996 in the Commonwealth Court, but the Supreme Court of
Pennsylvania assumed extraordinary plenary jurisdiction on July 3, 1996 for a
resolution of the case before Judge Smith. On August 20, 1996, Judge Smith
issued an opinion and order and entered judgment in favor of the School District
and the intervenors against the Commonwealth and Governor; entered judgment in
favor of the City and Mayor on the intervenors' claim and on the Commonwealth's
and Governor's cross-claim; and required the Commonwealth and Governor to submit
a plan to the Court within 30 days to effect a transfer of funds to enable the
School District to comply with the remedial order. The Governor and Commonwealth
moved to vacate Judge Smith's order, and on September 10, 1996, the Supreme
Court granted the motion to vacate, retaining further jurisdiction in the case.
On January 28, 1997, the Supreme Court issued an order directing the parties to
brief, among other issues, whether the lower court erred in its opinion joining
the Commonwealth and Governor and City and Mayor as additional respondents. Oral
argument was heard in the case on February 3, 1998, and the Supreme Court took
the matter under advisement.); (i) on December 29, 1993 a former judge of the
Allegheny Court of Common Pleas filed a complaint for declaratory judgment in
the Commonwealth Court against the State Employes' Retirement Board, alleging
that its use of gender distinct actuarial factors for benefits based on service
prior to August 1, 1983 violated the equal protection and equal rights
provisions of the Pennsylvania Constitution. Due to the constitutional nature of
the claims, it is possible that a decision adverse to the State Employe's
Retirement Board would also be applicable to other Commonwealth retirement
systems which paid lower benefits to some participants on the basis of their
gender or the gender of their survivor annuitants (The Commonwealth Court
granted the State Employe's Retirement Board's preliminary objections to the
plaintiff's claims for all damages except for a recalculation of his pension
benefits should he prevail. On February 13, 1997, the Commonwealth Court en banc
denied the plaintiff's motion for judgment and the pleadings.); and (j) five
residents of the City of Philadelphia, on their own behalf and that of their
school-aged children, together with a number of public interest organizations,
filed an action for declaratory judgment in the Commonwealth Court on February
24, 1997, against the Commonwealth, the General Assembly, the Governor and
numerous other Legislative and Executive Branch officials. The plaintiffs claim
that Pennsylvania's statutory education financing system violates the
Pennsylvania Constitution as applied in Philadelphia, and that they were denied
their constitutional right to a "thorough and efficient" system of public
education in the financial and administrative circumstances faced by the School
District of Philadelphia. The plaintiffs sought a declaration that the present
funding system is unconstitutional and that the legislature must amend the
present or enact new education legislation so as to assure that future funding
for the School District of Philadelphia makes adequate provision for the special
needs of its students (The respondents filed preliminary objections seeking
dismissal of the action and the Commonwealth Court heard oral argument on the
matter on September 10, 1997. The Commonwealth Court subsequently dismissed the
case on the grounds that it presented non-justiciable issues. An appeal is
presently expected.).

PHILADELPHIA

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 May
20, 1997.

To date, PICA has issued $1,761.1 million 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, 1997 showed a
surplus of approximately $128.8 million.

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.

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PORTFOLIO TRANSACTIONS

The portfolios' adviser, Allied Investment Advisors, Inc. ("AIA") seeks
the most favorable execution result with respect to transactions. In seeking the
most favorable execution, AIA, 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. For additional information about the
portfolio's adviser, see "Investment Adviser" below.

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, AIA 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, AIA 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
AIA 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 AIA is not
reduced because AIA and its affiliates receive such services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
as amended, AIA as the adviser of a portfolio may cause the portfolio to pay a
broker-dealer that provides brokerage and research services to AIA 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, AIA 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 AIA's overall responsibilities to the portfolio or its other
clients. In reaching this determination, AIA 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.

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Certain investments may be appropriate for a portfolio and for other
clients advised by AIA. 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 AIA on the same day. In each of
these situations, the transactions will be allocated among the clients in a
manner considered by AIA 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 AIA in the interest of achieving the most
favorable execution for the portfolio.

For the fiscal year ended April 30, 1996, the Balanced Portfolio, Blue
Chip Equity Portfolio, Capital Growth Portfolio and Small-Cap Equity 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 Equity
Portfolio (formerly Special Equity Portfolio), Blue Chip Equity Portfolio,
Equity Income Portfolio and Mid-Cap Equity Portfolio paid brokerage commissions
of $251,132, $204,310, $274,131, $61,450, $65,133, and $14,645, respectively.
For the fiscal year ended April 30, 1998, the Balanced Portfolio, Capital Growth
Portfolio, Small-Cap Equity Portfolio (formerly Special Equity Portfolio), Blue
Chip Equity Portfolio, Equity Income Portfolio, Mid-Cap Equity Portfolio, Equity
Index Portfolio and Value Equity Portfolio paid brokerage commissions of
$121,443, $178,598, $210,728, $83,365, $127,244, $52,089, $33,683 and $87,444,
respectively. For fiscal year ended April 30, 1996, the portfolios paid no
brokerage commissions to affiliated brokers. For the fiscal year ended April 30,
1997, the Small-Cap Equity Portfolio (formerly Special Equity Portfolio), Blue
Chip Equity Portfolio and Stock Portfolio paid brokerage commissions of $28,
$112 and $350 to affiliated brokers. For the fiscal year ended April 30, 1998,
the portfolios paid no brokerage commissions 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, 1998, the
portfolios held securities of the Fund's "regular brokers or dealers" as
follows: the U.S. Government Money Market Portfolio held repurchase agreements
issued by Dean Witter Reynolds valued at $150,000,000, repurchase agreements
issued by Goldman Sachs valued at $326,714,000, and repurchase agreements issued
by Salomon Smith Barney valued at $200,000,000; the Money Market Portfolio held
corporate obligations issued by Goldman Sachs valued at $25,516,000, corporate
obligations issued by Lehman Brothers valued at $9,999,000, corporate
obligations issued by Merrill Lynch valued at $20,010,000, corporate obligations
issued by Salomon Smith Barney valued at $19,776,000, and repurchase agreements
issued by First Boston valued at $55,859,000; the Short-Term Bond Portfolio held
corporate obligations issued by Goldman Sachs valued at $5,001,000, corporate
obligations issued by Lehman Brothers valued at $4,033,000, corporate
obligations issued by Smith Barney valued at $2,020,000, and corporate
obligations issued by First Boston valued at $18,322,000; the Income Portfolio
held corporate obligations issued by Lehman Brothers valued at $2,922,000,
corporate obligations issued by Merrill Lynch valued at $5,000,000, repurchase
agreements issued by First Boston valued at $21,309,000, and corporate
obligations issued by Morgan Stanley valued at $7,380,000; the Intermediate
Fixed Income Portfolio held corporate obligations issued by Dean Witter Discover
valued at $1,503,000, corporate obligations issued by Lehman Brothers valued at
$1,294,000, corporate obligations issued by Merrill Lynch valued at $1,549,000,
and repurchase agreements issued by First Boston valued at $2,071,000; the U.S.
Government Bond Portfolio held corporate obligations issued by Dean Witter
Discover valued at $8,003,000, corporate obligations issued by Merrill Lynch
valued at $10,002,000, and corporate obligations issued by First Boston valued
at $11,701,000; the Balanced Portfolio held equity securities issued by Morgan
Stanley, Dean Witter valued at $1,420,000, and repurchase agreements issued by
First Boston valued at $7,128,000; the Equity Income Portfolio held repurchase
agreements issued by First Boston valued at $6,626,000; the Value Equity
Portfolio held equity securities issued by J.P. Morgan valued at $6,825,000,
equity securities issued by Morgan Stanley, Dean Witter valued at $1,104,000,
and repurchase agreements issued by First Boston valued at $48,285,000; the
Equity Index Portfolio held equity securities issued by J.P. Morgan valued at
$123,000, equity securities issued by Lehman Brothers valued at $32,000, equity
securities issued by Merrill Lynch valued at $149,000, equity securities issued
by Morgan Stanley, Dean Witter valued at $248,000, and repurchase agreements
issued by First Boston valued at $394,000; the Blue Chip Equity Portfolio held
repurchase agreements issued by First Boston valued at $3,349,000; the Capital
Growth Portfolio held equity securities issued by Morgan Stanley, Dean Witter
valued at $1,183,000 and repurchase agreements issued by First Boston valued at
$2,151,000; the Mid-Cap Equity Portfolio held equity securities issued by Paine
Webber Group and Bear Stearns valued at 432,000 and 370,000, respectively; the
Small-Cap Equity Portfolio held repurchase agreements issued by First Boston
valued at $5,220,000; and the International Equity Selection Portfolio held
repurchase agreements issued by First Boston valued at 2,693,000.

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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 AIA'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.

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.

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BALANCED PORTFOLIO, EQUITY INCOME PORTFOLIO, EQUITY INDEX PORTFOLIO, BLUE CHIP
EQUITY PORTFOLIO, MID-CAP EQUITY PORTFOLIO, VALUE EQUITY PORTFOLIO, CAPITAL
GROWTH PORTFOLIO, SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)
AND INTERNATIONAL EQUITY SELECTION 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.

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

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(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 1998.

For the seven-day period ended April 30, 1998, the yields and effective
yields for the U.S. Treasury Money Market Portfolio were 4.60% and 4.71% (Class
A), 4.85% and 4.97% (Institutional Class), and 4.81% and 4.93% (Institutional II
Class); for the U.S. Government Money Market Portfolio were 4.88% and 4.99%
(Class A), 5.13% and 5.26% (Institutional Class), and 5.09% and 5.22%
(Institutional II Class); for the Money Market Portfolio were 5.05% and 5.18%
(Class A), 5.30% and 5.44% (Institutional Class), and 5.26% and 5.40%
(Institutional II Class); and for the Tax-Free Money Market Portfolio were 3.47%
and 3.53% (Class A), 3.72% and 3.79% (Institutional Class), and 3.68% and 3.75%
(Institutional II Class).

For the 30-day period ended April 30, 1998, the yields for the Class A
and Institutional Class shares of the non-money-market portfolios were as
follows: Income Portfolio - 5.38% and 5.74%; Balanced Portfolio - 1.80% and
2.05%; Blue Chip Equity Portfolio - 0.43% and 0.63%; Maryland Tax-Free
Portfolio - 3.75% and 4.06%; Pennsylvania Tax-Free Portfolio - 3.62% and 3.93%;
Equity Income Portfolio - 1.83% and 2.07%; Equity Index Portfolio - 1.00% and
1.28%; and Short-Term Treasury Portfolio - 4.85% and 5.04%. For the same 30-day
period the yields for the Institutional Class shares were as follows:
Intermediate Fixed Income Portfolio - 5.43%; U.S. Government Bond Portfolio -
5.32%; Short-Term Bond Portfolio - 5.20%, and Mid-Cap Equity Portfolio - 0.01%.

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TOTAL RETURN

The average annual total returns for the one-year period ended April
30, 1998 for the Class A and Institutional Class shares of the Income Portfolio
were 7.13% and 10.84%, respectively, and since inception (April 12, 1994 and
June 14, 1993) were 6.82% and 6.68%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 for the Class A and Institutional Class shares of the Balanced
Portfolio and Capital Growth Portfolio were 26.78% and 30.95%, respectively, and
40.52% and 45.19%, respectively, and since inception (March 9, 1994 and July 16,
1993) were 12.49% and 13.51%, respectively, and 16.55% and 17.43%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 and since inception (July 13, 1995) for the Institutional Class shares
of the Small-Cap Equity Portfolio (formerly Special Equity Portfolio) were
47.93% and 20.36%. The average annual total returns for the one-year period
ended April 30, 1998 and since inception (May 16, 1996) of the Class A shares of
the Small-Cap Equity Portfolio (formerly Special Equity Portfolio) were 43.21%
and 2.17%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 and since inception (April 30, 1996) for the Institutional Class shares
of the Blue Chip Equity Portfolio were 39.34% and 31.04%. The average annual
total returns for the one-year period ended April 30, 1998 and since inception
(May 16, 1996) of the Class A shares of the Blue Chip Equity Portfolio were
34.79% and 28.80%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 and since inception (September 9, 1996) for the Class A shares of the
Short-Term Treasury Portfolio were 6.23% and 5.89%, respectively. The average
annual total return for the one-year period ended April 30, 1998 and since
inception (March 20, 1996) for the Institutional Class shares of the Short-Term
Treasury Portfolio were 6.48% and 5.57%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 and from inception (January 2, 1997) for the Class A shares of the
Maryland Tax-Free Portfolio were 4.63% and 3.99%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 (March 23, 1998) for the Class A shares of the Pennsylvania Tax-Free
Portfolio was 3.37%. The average annual total returns for the one-year period
ended April 30, 1998 and from inception (March 23, 1998) for the Institutional
Class shares of the Pennsylvania Tax-Free Portfolio were 6.77% and 5.28%.
(Performance shown prior to the inception date of Class A (March 23, 1998) is
synthetic (not actual) and represents that of the Institutional Class adjusted
for the sales charge. Performance presented from inception reflects the
performance of the Marketvest Pennsylvania Intermediate Municipal Bond Fund
shares, which were offered beginning April 1, 1996.)

The average annual total returns for one-year period ended April 30,
1998 and since inception (November 18, 1996) for the Institutional Class shares
of the Intermediate Fixed Income Portfolio, Maryland Tax-Free Portfolio, Equity
Income Portfolio and Mid-Cap Equity Portfolio were: 8.65% and 6.43%, 8.15% and
6.18%, 33.04% and 28.19% and 46.92% and 32.03%, respectively.

The average annual total returns for the one-year period ended April
30, 1998 and since inception (April 1, 1996) for the Class A and Institutional
Class shares of the Value Equity Portfolio were 31.43% and 26.75% and 35.36% and
28.58%, respectively. (Performance shown prior to the inception date of Class A
(April 1, 1998) is synthetic (not actual) and represents that of the
Institutional Class adjusted for the sales charge. Performance presented from
inception reflects the performance of the Marketvest Equity Fund shares, which
were offered beginning April 1, 1996.)

The average annual total returns for the one-year period ended April
30, 1998, the five-year period ended April 30, 1998, and since inception (May
31, 1991) for the Class A and Institutional Class shares of the International
Equity Selection Portfolio were 17.59%, 13.80%, and 11.34% and 19.35%, 14.31%,
and 11.76%, respectively. (Performance shown prior to the inception date of
Class A (April 1, 1998) is synthetic (not actual) and represents that of the
Institutional Class adjusted for the sales charge. Performance presented from
inception reflects the performance of the Marketvest International Equity Fund
shares, which is the successor to a collective trust fund. The quoted
performance data includes performance of the collective trust fund for the
period from May 31, 1991 to April 1, 1997 when the Marketvest International
Equity Fund's registration statement became effective, as adjusted to reflect
the Marketvest International Equity Fund's anticipated expenses.

The average annual total returns for the one-year period ended April
30, 1998 and since inception (April 1, 1996) for the Institutional Class shares
of the Short-Term Bond Portfolio were 6.26% and 5.44%, respectively.
(Performance presented from inception reflects the performance of the Marketvest
Short-Term Bond Fund shares, which were offered beginning April 1, 1996).

The average annual total returns for the one-year period ended April
30, 1998 and since inception (April 1, 1996) for Class A and Institutional Class
shares of the U.S. Government Bond Portfolio were 5.19% and 4.41% and 8.71% and
6.06%, respectively. (Performance shown prior to the inception date for Class A
(April 1, 1998) is synthetic (not actual) and represents that of the
Institutional Class adjusted for the sales charge. Performance presented from
inception reflects the performance of the Marketvest Intermediate U.S.
Government Bond Fund shares, which were offered beginning April 1, 1996.)

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The cumulative total returns for the period from March 20, 1998
(inception) to April 30, 1998 for the Class A shares and Institutional Class
shares of the Equity Index Portfolio were 34.47% and 30.65%, respectively.

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 calculation of the NAV, dividends and distributions of a
portfolio's Class A, Class B, Institutional Class and Institutional II Class
shares recognizes two types of expenses. General expenses that do not pertain
specifically to any class are allocated pro rata to the shares of each class,
based on the percentage of the net assets of such class to the portfolio's
total assets, and then equally to each outstanding share within a given class.
Such general expenses include (i) management fees, (ii) legal, bookkeeping and
audit fees, (iii) printing and mailing costs of shareholder reports,
prospectuses, Statements of Additional Information and other materials for
current shareholders, (iv) fees to Independent Directors, (v) custodian
expenses, (vi) share issuance costs, (vii) organization and start-up costs,
(viii) interest, taxes and brokerage commissions, and (ix) non-recurring
expenses, such as litigation costs. Other expenses that are directly
attributable to a class are allocated equally to each outstanding share within
that class. Such expenses include (i) distribution and/or other fees, (ii)
transfer and shareholder servicing agent fees and expenses, (iii) registration
fees and (iv) shareholder meeting expenses, to the extent that such expenses
pertain to a specific class rather than to a portfolio as a whole.

The NAV per share of Class A, Class B, Institutional Class and
Institutional II Class shares of a portfolio are determined as of the close
of business of the NYSE on each day that the NYSE is open, by dividing the
value of the portfolio's net assets attributable to that class by the number
of shares of that class outstanding.

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, Mid-Cap Equity Portfolio, Value Equity Portfolio, Capital Growth
Portfolio, Small-Cap Equity Portfolio (formerly Special Equity Portfolio) and
International Equity Selection Portfolio is determined as of the close of
regular trading on 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.

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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
as of the close of regular trading on 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 1998 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.
The NYSE or FRB may also close on other days. 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 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.

Class B shares will automatically convert into Class A shares at the
end of the month eight years after the purchase date. Class B shares acquired by
exchanging Class B shares of another portfolio will convert into Class A shares
based on the time of the initial purchase. Class B shares acquired through
reinvestment of distributions will convert into Class A shares based on the date
of the initial purchase to which such shares relate. For this purpose, Class B
shares acquired through reinvestment of distributions will be attributed to
particular purchases of Class B shares in accordance with such procedures as the
Trustees may determine from time to time. The conversion of Class B shares to
Class A shares is subject to the condition that such conversions will not
constitute taxable events for Federal tax purposes.

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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.

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
and at least 90% of the excess of its tax-exempt interest income over related
expenses (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

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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 net
capital gain, 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. Net capital
gain of a noncorporate taxpayer is generally taxed at a rate of 28%, if derived
from sales of assets held for 18 months or less, and at a rate of 20%, if
derived from sales of assets held for more than 18 months. A portfolio will
designate the portion of each net capital gain dividend that is gain subject to
the 28% rate and the portion that is subject to the 20% rate in accordance with
rules promulgated by the Internal Revenue Service generally requiring that the
portfolio (i) determine the aggregate amount of net capital gain for the taxable
that would have been in each rate category if the portfolio had been an
individual and (ii) allocate the aggregate amount of gain in each category
proportionately among the shareholders receiving net capital gain dividends.
Distributions that are not net capital gain dividends or exempt-interest
dividends will generally be taxed at a maximum marginal rate of 39.6% in the
case of non-corporate taxpayers. 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 to the extent derived from dividend income received by the
portfolio. 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

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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 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. 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.

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. Any resultant net capital gain will be subject to the
28%/20% rate structure described above depending upon whether the shares have
been held for more than 18 months at the time of the redemption.

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"), he 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 that 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 in effect, be netted against their share of the portfolio's
gross income.

The portfolio may invest in 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

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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 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.

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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 received by the portfolios
(a) on obligations of Maryland or its political subdivisions and authorities,
(b) on obligations of the United States, or (c) on certain obligations of
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, 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 (other than obligations of the State of
Maryland or a political subdivision or authority thereof) 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.

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OTHER TAX INFORMATION

In addition to federal taxes, shareholders may be subject to state or
local taxes on their investment, depending on state law.

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.

Richard B. Seidel, 770 Hedges Lane, Wayne, Pennsylvania 19087. Date of
Birth: 4/20/41. Trustee since 1998. Mr. Seidel is a Director and President
(since 1994) of Girard Partners, Ltd. (a registered broker-dealer). Prior to
1994, Mr. Seidel was a Director and President of Fairfield Group, Inc.

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 SEI Investments Mutual Fund Services
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.

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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. Ms. Stanton has been Vice President and
Assistant Secretary of SEI Investments since 1994. Prior to 1994, Ms. Stanton
was an Associate with Morgan, Lewis & Bockius (law firm) since 1989.

Lynda J. Striegel. Date of Birth: 10/30/48. Vice President and
Secretary since June 1998. Ms. Striegel is Vice President and Assistance
Secretary of SEI Investments, since 1998. Prior to 1998, Ms. Striegel was Senior
Assets Management Counsel, Barnet Banks from 1997 to 1998; Partners, Groom and
Nordberg, Chartered from 1996 to 1997; Associate General Counsel, Riggs Bank,
N.A. from 1991 to 1995.

Lydia A. Gavalis. Date of Birth: 6/5/64. Vice President and Assistant
Secretary since 1998. Vice President and Assistant Secretary of SEI Investments
Company since 1998. Assistant General Counsel and Director of Arbitration,
Philadelphia Stock Exchange from 1989 to 1998.

Kathy Heilig. Date of Birth: 12/21/58. Vice President and Assistant
Secretary since 1998. Treasurer of SEI Investments Company since 1997. Assistant
Controller of SEI Investments Company since 1995; Vice President of SEI
Investments Company since 1991; Director of Taxes of SEI Investments Company
from 1987 to 1991; Tax Manager - Arthur Anderson LLP prior to 1987.

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 Ballantine (law firm). Prior to 1994, Mr. Cipperman
was an Associate with Winston & Strawn (law firm) since 1991.

Joseph M. O'Donnell. Date of Birth: 11/13/54. Vice President &
Assistant Secretary since March 1998. Mr. O'Donnell is Vice President of SEI
Investments Company since January 1998. Prior to January 1998, Mr. O'Donnell was
Vice President and General Counsel of FPS Services, Inc. (from 1993 to 1997).
Prior to joining FPS Services, Inc., Mr. O'Donnell was Staff Counsel and
Secretary of Provident Mutual Family of Funds from 1990 to 1993.

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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, 1998

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. $8,000.00 -- -- $8,000.00

David D. Downes 8,000.00 -- -- 8,000.00

Charlotte R. Kerr 8,000.00 -- -- 8,000.00

George K. Reynolds, III 7,500.00 -- -- 7,500.00

Thomas Schweizer 8,000.00 -- -- 8,000.00

Richard B. Seidel N/A N/A N/A N/A
</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 ADVISER

Pursuant to an advisory agreement with the Fund dated as of February
12, 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.

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 AIA, 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 AIA 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 AIA of its duties or by reason of reckless disregard of its
obligations and duties under the advisory contract. The advisory contract
provides that AIA may render services to others.

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For the fiscal year ended April 30, 1998, the advisory fee payable to
AIA with respect to the U.S. Treasury Money Market Portfolio was $950,471 of
which $228,108 was waived; with respect to the U.S. Government Money Market
Portfolio was $3,419,050 of which $1,504,386 was waived; with respect to the
Money Market Portfolio was $1,340,587 of which $750,727 was waived; with respect
to the Tax-Free Money Market Portfolio was $363,632 of which $232,727 was
waived; with respect to the Short-Term Treasury Portfolio was $142,899 of which
$7,217 was waived; with respect to the Short-Term Bond Portfolio was $173,712 of
which $26,223 was waived; with respect to the U.S. Government Bond Portfolio was
$333,031 of which $49,534 was waived; with respect to the Intermediate Fixed
Income Portfolio was $470,633 of which $114,918 was waived; with respect to the
Income Portfolio was $1,430,536 of which $24,176 was waived; with respect to the
Maryland Tax-Free Portfolio was $523,716 of which $60,920 was waived; with
respect to the Pennsylvania Tax-Free Portfolio was $232,022 of which $22,998 was
waived; with respect to the Balanced Portfolio was $537,057 of which $8,299 was
waived; with respect to the Equity Income Portfolio was $691,714 of which
$95,123 was waived; with respect to the Equity Index Portfolio was $39,637 of
which $37,626 was waived; with respect to the Blue Chip Equity Portfolio was
$473,707 of which $27,150 was waived; with respect to the Mid-Cap Equity
Portfolio was $286,418 of which $20,587 was waived; with respect to the Value
Equity Portfolio was $997,541 of which $162,273 was waived; with respect to the
Capital Growth Portfolio was $304,120 of which $2,637 was waived; with respect
to the Small-Cap Equity Portfolio (formerly Special Equity Portfolio) was
$150,514 of which $238 was waived; and with respect to the International Equity
Selection Portfolio was $42,205 of which $23,706 was waived. Prior to February
12, 1998, the fees set forth above were payable pursuant to an advisory
agreement with AIA 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 $668,387 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 Equity
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; and with respect to the
Equity Income Portfolio was $262,270 of which $37,287 was waived; and with
respect to the Mid-Cap Equity Portfolio was $83,933 of which $5,948 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

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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 Equity 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.

In addition to receiving its advisory fee AIA 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 AIA 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 AIA,
or its affiliate, from a portfolio with respect to the client's assets invested
in the portfolio.

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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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.

ADMINISTRATOR AND DISTRIBUTOR

ADMINISTRATOR AND SUB-ADMINISTRATOR

SEI Investments Mutual Fund Services serves as administrator (the
"Administrator") to the Fund. The Administrator assists in supervising all
operations of the portfolios, except those performed by AIA 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 1 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 or sub-administrator to the following
mutual funds: SEI Daily Income Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI Institutional
International Trust, SEI Asset Allocation Trust, SEI Institutional Investments
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., PBHG Insurance Series Fund,
Inc., PBHG Advisor Funds, Inc., The Achievement Funds Trust, Bishop Street
Funds, Monitor Funds, STI Classic Variable Trust, TIP Funds, CrestFunds, Inc.,
First American Strategy Funds, Inc., HighMark Funds, Expedition Funds, Oak
Associates Funds, Armada Funds and The Nevis Fund, Inc.

For the fiscal year ended April 30, 1998, the administration fee
payable to the Administrator with respect to the U.S. Treasury Money Market
Portfolio was $494,240; with respect to the U.S. Government Money Market
Portfolio was $1,777,888; with respect to the Money Market Portfolio was
$697,098; with respect to the Tax-Free Money Market Portfolio was $189,087; with
respect to the Income Portfolio was

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$364,951; with respect to the Balanced Portfolio was $124,759; with respect to
the Capital Growth Portfolio was $64,748; with respect to the Small-Cap Equity
Portfolio (formerly Special Equity Portfolio) was $31,575; with respect to Blue
Chip Equity Portfolio was $100,718; with respect to the Short-Term Treasury
Portfolio was $53,076; with respect to the Intermediate Fixed Income Portfolio
was $101,969; with respect to the Maryland Tax-Free Portfolio was $132,656; with
respect to the Pennsylvania Tax-Free Portfolio was $30,476 (an additional
$16,803 was paid to Federated Investors, the administrator of the Market vest
Funds prior to the reorganizations ("Federated")); with respect to the Equity
Income Portfolio was $128,459; with respect to the Mid-Cap Equity Portfolio was
$52,356; with respect to the Short-Term Bond Portfolio was $18,456 (an
additional $12,347 was paid to Federated; with respect to the U.S. Government
Bond Portfolio was $36,989 (an additional $22,521 was paid to Federated); with
respect to the Value Equity Portfolio was $69,147 (an additional $86,672 was
paid to Federated); and with respect to the International Equity Selection
Portfolio was $4,627 (an additional $10,640 was paid to Federated).

Pursuant to a separate agreement with the Administrator, FMB Trust
Company, National Association, the Fund's custodian, performs sub-administration
services on behalf of the portfolios, for which it receives a fee paid by the
Administrator at the annual rate of up to 0.0275% of the aggregate average net
assets of the portfolios. For the fiscal year ended April 30, 1998, the
Administrator paid sub-administration fee to FMB Trust Company, National
Association of $429,472.47.

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 Equity 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; and with respect to the Mid-Cap Equity
Portfolio was $15,587.

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 Equity Portfolio (formerly Special Equity
Portfolio) was $11,805; and with respect to the Short-Term Treasury Portfolio
was $2,611.

The administration agreement permits the Administrator to subcontract
its services thereunder, provided that the Administrator will not be relieved of
its obligations under the agreement by the appointment of a subcontractor and
the Administrator shall be responsible to the Fund for all acts of the
subcontractor as if such acts were its own, except for losses suffered by any
portfolio resulting from willful misfeasance, bad faith or gross negligence by
the subcontractor in the performance of its duties or for reckless disregard by
it of its obligations and duties. Pursuant to a sub-administration agreement
between the Administrator and FMB Trust Company, National Association, FMB Trust
Company, National Association will perform services which may include clerical,
bookkeeping, accounting, stenographic, and administrative

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services, for which it will receive a fee, paid by the Administrator, at the
annual rate of up to 0.0275% of aggregate average net assets.

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 PLANS

The Board of Trustees has adopted distribution plans (the "Plans")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule") on behalf of the Class A
and Class B of each portfolio and Institutional II Class of each money market
portfolio. The Plans allow the portfolios 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 shares of the portfolios,
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 portfolios;
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 shareholders and the portfolios, including obtaining
information from the portfolios regarding the portfolios and providing
performance and other information about the portfolios; and providing additional
distribution-related services.

The Plans have been approved by the Board of Trustees, including the
majority of disinterested trustees, and where required by the sole shareholder
of the classes. As required by the Rule, the Board considered all pertinent
factors relating to the implementation of each of the Plans prior to its
approval, and the trustees have determined that there is a reasonable likelihood
that the Plans will benefit the classes and their respective shareholders. To
the extent that the Plans provide greater flexibility in connection with the
distribution of shares of the portfolios, additional sales 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, 1998,
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 $88,359.27, $72,621.55, $83,482.64
and $20,816.33, respectively.

The Board has approved distribution fees based on the following
percentages of the average daily net assets of the Class A: .25% for each money
market portfolio; .30% for the Short-Term Bond Portfolio, U.S. Government Bond
Portfolio, Intermediate Fixed Income

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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, Value Equity Portfolio, Capital Growth Portfolio, Small-Cap Equity
Portfolio (formerly Special Equity Portfolio), and International Equity
Selection Portfolio; and 55% for the Blue Chip Equity Portfolio. For the fiscal
year ended April 30, 1998, the Class A of the portfolios paid distribution fees
in the following amounts: $68,720.53 for the U.S. Treasury Money Market
Portfolio, $90,143.44 for the U.S. Government Money Market Portfolio,
$454,232.40 for the Money Market Portfolio, $65,014.86 for the Tax-Free Money
Market Portfolio, $13,994.95 for the Income Portfolio, $25,726.30 for the
Balanced Portfolio, $24,926.58 for the Capital Growth Portfolio, $3,863.54 for
the Small-Cap Equity Portfolio (formerly Special Equity Portfolio), $70,491.08
for the Blue Chip Equity Portfolio, $44,487.20 for the Short-Term Treasury
Portfolio, $46,599.82 for the Maryland Tax-Free Portfolio, $667.51 for the
Pennsylvania Tax-Free Portfolio, $3.03 for the U.S. Government Bond Portfolio,
$4,126.57 for the Equity Income Portfolio; $627.58 for the Equity Index
Portfolio, $27.77 for the Value Equity Portfolio and $1.27 for the International
Equity Selection Portfolio.

As of the date of this Statement of Additional Information, all
distribution fees received by the Distributor under the Plans are paid to
qualified securities brokers or financial institutions or other investment
professionals in respect of their share accounts. The Plans are a compensation
plan because the Distributor is paid a fixed fee and is given discretion
concerning what expenses are payable under the Plans. 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.

SHAREHOLDER SERVICES PLANS

The Board of Trustees has adopted shareholder services plans on behalf
of the Class A, Class B 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 Class A and Class B of each portfolio or such lesser
amount as may

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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, 1998, Class A of the U.S. Treasury
Money Market Portfolio, U.S. Government Money Market Portfolio, Money Market
Portfolio and Tax-Free Money Market Portfolio paid shareholder servicing fees of
$16,492, $19,162, 109,013 and $15,603, respectively.

For the fiscal year ended April 30, 1998, the Institutional Class of
the U.S. Treasury Money Market Portfolio, U.S. Government Money Market
Portfolio, Money Market Portfolio, Tax-Free Money Market Portfolio, Income
Portfolio, Balanced Portfolio, Capital Growth Portfolio, Small-Cap Equity
Portfolio, Blue Chip Equity Portfolio, Short-Term Treasury Portfolio,
Intermediate Fixed Income Portfolio, Maryland Tax-Free Portfolio, Pennsylvania
Tax-Free Portfolio, Equity Income Portfolio, Mid-Cap Equity Portfolio,
International Equity Selection Portfolio, U.S. Government Bond Portfolio, Value
Equity Portfolio and Short-Term Bond Portfolio paid shareholder servicing fees
of $59,751, $210,161, $52,733, $19,720, $61,137, $18,509, $9,213, $4,891,
$11,688, $4,700, $16,149, $16,836, $13,905, $20,520, $9,987, $2,135, $17,071,
$31,907 and $8,518, respectively.

For the fiscal year ended April 30, 1997, Class A 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, Class A 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.

As of the date of this Statement of Additional Information, Class B had
not commenced operations and no shareholder servicing fees were paid.

TRANSFER AGENT

The Fund has a Transfer Agency and Services Agreement dated November 1,
1995, with SEI Investments Management Corporation. SEI Investments Management
Corporation 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.

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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, Capital Growth Portfolio, Small-Cap Equity
Portfolio (formerly Special Equity Portfolio) and International Equity Selection
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.

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

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liability is limited to circumstances in which the portfolio itself would be
unable to meet its obligations. AIA believes 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 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 June 30, 1998, 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:

Unless otherwise indicated the address for the below-listed 5%
shareholders should be c/o First National Bank of Maryland, 110 South Paca
Street, Baltimore, Maryland 21201.

U.S. TREASURY MONEY MARKET PORTFOLIO

Institutional Class - First National Bank of Maryland FILM Account (65.09%)

U.S. GOVERNMENT MONEY MARKET PORTFOLIO

Institutional Class - York Bank FILM Account (9.28%); First National Bank of
Maryland FILM Account (51.13%)
Institutional II Class - Metro Washington Airports Authority 1997 Construction
(13.89%); Metro Washington Airports Authority 1998 Construction (21.70%)

MONEY MARKET PORTFOLIO

Institutional II Class - Roman Catholic Clergy (18.11%)

TAX-FREE MONEY MARKET PORTFOLIO

Institutional Class - IDA BAC 1997 Wastewater Bans (5.38%); IDA BAC 1997 Water
Bans (8.59%)
Institutional II Class - Merchants Terminal Corp. (13.06%); Charles-Fulton
Trustee (13.32%)

SHORT-TERM BOND PORTFOLIO

Institutional Class - HHS, Inc. Escrow Account (7.32%)

U.S. GOVERNMENT BOND PORTFOLIO

Institutional Class - Capital Blue Cross Retirement Pension Plan (5.07%)

INCOME PORTFOLIO

Institutional Class - First Maryland Bancorp Pension Plan (10.30%); IBEW
International Officers Representatives and Assistants Pension Plan (10.30%);
IBEW Office Employee Pension Plan (10.30%)

PENNSYLVANIA TAX-FREE PORTFOLIO

Class A - Hershey Trust Co./FBO Roger K. Furse, P.O. Box 445, Hershey,
Pennsylvania 17033-0445 (7.02%); Hershey Trust Co., P.O. Box 445, Hershey,
Pennsylvania 17033-0445 (6.68%)
Institutional Class - S. Wilson & Grace M. Pollack Trust (10.21%)

BALANCED PORTFOLIO

Institutional Class - First Maryland Bancorp Pension Plan (19.16%); University
of Maryland Medical Pension (23.88%); First Maryland Bancorp Capital Balanced
Fund (27.20%)

EQUITY INDEX PORTFOLIO

Institutional Class - Lane Enterprises, Inc. 401K Equity (10.81%); First
Maryland Bancorp Capital Equity Index (60.12%); IBEW International Officer
Representatives and Assistants Pension Plan (6.23%)

BLUE CHIP EQUITY PORTFOLIO

Institutional Class - Montgomery County Board of Education Employee Benefit
Trust Fund (Retired Health and Life Account) (5.67%); IBEW International
Officers Representatives and Assistants Pension Plan (7.71%)

MID-CAP EQUITY PORTFOLIO

Institutional Class - First Maryland Bancorp Pension Plan (12.07%)

VALUE EQUITY PORTFOLIO

Class A - U.S. Trust Company of Florida/FBO Lois K. O'Daniel Revocable Trust,
765 Seagate Drive, Naples, Florida 34103-2421 (43.17%); Hershey Trust Co.,
P.O. Box 445, Hershey, Pennsylvania 17033-0445 (7.94%); Seth M. Lydon, 1712
Elizabeth Avenue, Laureldale, Pennsylvania 19605-2263 (7.69%); SunTrust Bank
Southwest Florida, Custodian for Christine E. Gulla TTEE, Christine E. Gulla
Trust UTD, P.O. Box 105870, Atlanta, Georgia 30348-5870 (5.08%); James R.
Evans Jr., 110 North Duke Street, Lancaster, Pennsylvania 17608 (5.08%)
Institutional Class - Pennsylvania Heavy & Highway Contractors Pension Plan
(6.71%)

CAPITAL GROWTH PORTFOLIO

Institutional Class - Montgomery County Board of Education Employee Benefit
Trust Fund (Retired Health and Life Account) (8.02%); First Maryland Bancorp
Capital Growth Equity (37.56%); First Maryland Bancorp Pension Plan (5.28%)

SMALL-CAP EQUITY PORTFOLIO (FORMERLY SPECIAL EQUITY PORTFOLIO)

Institutional Class - First Maryland Bancorp Pension Plan (18.23%); SHD-York
Health System Endowment (5.18%); IBEW Office Employee Pension Plan (5.23%);
SHD-York Health System Pension (6.48%); IBEW International Officers
Representatives and Assistants Pension Plan (18.17%)

INTERNATIONAL EQUITY SELECTION PORTFOLIO

Class A - The Good Samaritan Hospital, s/o Robert W. Riley, 4th & Walnut
Street, Lebanon, Pennsylvania 17042 (90.03%)
Institutional Class - First Maryland Bancorp Pension Plan (16.41%);
Pennsylvania Heavy & Highway Contractors Pension Plan (21.34%)

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 National Bank of 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 National Bank of 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.

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INDEPENDENT AUDITORS

KPMG Peat Marwick LLP, located at 99 High Street, Boston, Massachusetts
02110, are the Fund's independent auditors, providing audit services and
consultation in connection with the review of various Securities and Exchange
Commission filings.

FINANCIAL STATEMENTS

The portfolios' financial statements and financial highlights for the
fiscal year ended April 30, 1998 are included in the Annual Report which report
is supplied with this Statement of Additional Information. The portfolios'
financial statements and financial highlights are incorporated herein by
reference.

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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.

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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 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.

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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.

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

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the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.

A - Bonds 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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<PAGE> 196
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

1998 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 1998. 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 1998.

<TABLE>
<CAPTION>
COMBINED COMBINED COMBINED
MARYLAND AND PENNSYLVANIA PENNSYLVANIA
FEDERAL MARYLAND FEDERAL PENNSYLVANIA AND FEDERAL AND FEDERAL
SINGLE RETURN JOINT RETURN INCOME MARGINAL EFFECTIVE TAX MARGINAL EFFECTIVE TAX EFFECTIVE TAX
TAXABLE INCOME TAXABLE INCOME TAX BRACKET RATE BRACKET** RATE BRACKET** BRACKET**

* 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 7.92%
(applicable to residents of Caroline, Montgomery, Prince George's,
Somerset and Wicomico Counties). For Caroline, Montgomery, Prince
George's, Somerset and Wicomico, the county income tax rate is equal to
60% of Maryland state taxes. For Allegany and St. Mary's Counties, the
county income tax rate is 58% of the state tax. For Baltimore, Carroll
and Queen Anne's Counties, 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 20% 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 Pennsylvania state income tax rate of 2.8% and Philadelphia
school district investment income tax rate of 4.79%. 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.
<PAGE> 198
If your combined effective federal, Maryland state and county personal income
tax rate in 1997 is:

33.70% 36.46% 41.10% 44.38%

To match these tax free rates: Your taxable investment would have to earn the
following yield:

3.00% 4.53% 4.72% 5.09% 5.39%
4.00% 6.03% 6.30% 6.79% 7.19%
5.00% 7.54% 7.87% 8.48% 8.99%
6.00% 9.05% 9.44% 10.18% 10.79%
7.00% 10.56% 11.02% 11.88% 12.59%

If your combined effective federal, Pennsylvania state and Philadelphia school
district investment income tax rate in 1997 is:

33.46% 36.24% 40.86% 44.18%

Your taxable investment would have to earn the following yield:

3.00% 4.51% 4.70% 5.07% 5.37%
4.00% 6.01% 6.27% 6.76% 7.17%
5.00% 7.51% 7.84% 8.45% 8.96%
6.00% 9.02% 9.41% 10.15% 10.75%
7.00% 10.52% 10.98% 11.84% 12.54%

If your combined effective federal and Pennsylvania state income tax rate in
1997 is:

30.02% 32.93% 37.79% 41.29%

Your taxable investment would have to earn the following yield:

3% 4.29% 4.47% 4.82% 5.11%
4% 5.72% 5.96% 6.43% 6.81%
5% 7.14% 7.45% 8.04% 8.52%
6% 8.57% 8.95% 9.64% 10.22%
7% 10.00% 10.44% 11.25% 11.92%

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 CLASS A, INSTITUTIONAL CLASS OR INSTITUTIONAL II CLASS OF A PORTFOLIO ARE
EACH CALCULATED SEPARATELY. THE YIELDS OF THE CLASS A 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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