NICHOLAS APPLEGATE MUTUAL FUNDS, 497, 1998-04-01

NICHOLAS APPLEGATE MUTUAL FUNDS
497, 1998-04-01

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NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
HIGH YIELD BOND FUND
CLASS A, B AND C SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043

STATEMENT OF ADDITIONAL INFORMATION

March 2, 1998

As Supplemented April 1, 1998

Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified portfolios. This Statement of Additional Information contains
information regarding the Class A, B and C shares of the Nicholas-Applegate High
Yield Bond Fund (the "Fund" or "High Yield Bond Fund").

This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Fund's Prospectus and should be read in conjunction with such Prospectus. The
Prospectus may be obtained without charge by calling or writing the Trust at the
address and phone number given above.

TABLE OF CONTENTS

Page
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General Information B-2
Investment Objectives, Policies and Risks B-2
Investment Restrictions B-27
Trustees and Principal Officers B-29
Investment Adviser B-31
Administrators B-33
Distributor B-34
Portfolio Transactions and Brokerage B-36
Purchase and Redemption of Fund Shares B-37
Shareholder Services B-41
Net Asset Value B-42
Dividends, Distributions and Taxes B-44
Performance Information B-48

Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel B- 52
Miscellaneous B- 52

Appendix A - Description of Securities Ratings A-1

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GENERAL INFORMATION

The Trust was organized in December 1992 as a business trust under the
laws of Delaware. Information regarding the Class A, B and C shares of the High
Yield Bond Fund is included in this Statement of Additional Information.

INVESTMENT OBJECTIVES, POLICIES AND RISKS

The following discussion describes the various investment policies and
techniques employed by the Fund. There can be no assurance that the Fund will
achieve its investment objectives.

EQUITY SECURITIES OF GROWTH COMPANIES

The Fund may invest in equity securities of domestic and foreign
companies, the earnings and stock prices of which are expected by the Investment
Adviser to grow at an above-average rate. Such investments will be diversified
over a cross-section of industries and individual companies. Some of these
companies will be organizations with market capitalizations of $500 million or
less or companies that have limited product lines, markets and financial
resources and are dependent upon a limited management group. Examples of
possible investments include emerging growth companies employing new technology,
cyclical companies, initial public offerings of companies offering high growth
potential, or other corporations offering good potential for high growth in
market value. The securities of such companies may be subject to more abrupt or
erratic market movements than larger, more established companies both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and prospects.

PREFERRED STOCK

The Fund may invest in preferred stock. Preferred stock, unlike
common stock, offers a stated dividend rate payable from a corporation's
earnings. Such preferred stock dividends may be cumulative or non-cumulative,
participating, or auction rate. If interest rates rise, the fixed dividend on
preferred stocks may be less attractive, causing the price of preferred stocks
to decline. Preferred stock may have mandatory sinking fund provisions, as well
as call/redemption provisions prior to maturity, a negative feature when
interest rates decline. Dividends on some preferred stock may be "cumulative,"
requiring all or a portion of prior unpaid dividends to be paid before dividends
are paid on the issuer's common stock. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks on the distribution of a
corporation's assets in the event of a liquidation are generally subordinate to
the rights associated with a corporation's debt securities.

CONVERTIBLE SECURITIES AND WARRANTS

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investment value of a convertible security. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. To the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value.

The market value of convertible debt securities tends to vary
inversely with the level of interest rates. The value of the security declines
as interest rates increase and increases as interest rates decline. Although
under normal market conditions longer term debt securities have greater yields
than do shorter term debt securities of similar quality, they are subject to
greater price fluctuations. A convertible security may be subject to redemption
at the option of the issuer at a price established in the instrument governing
the convertible security. If a convertible security held by the Fund is called
for redemption, the Fund must permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Rating
requirements do not apply to convertible debt securities purchased by the Fund
because the Fund purchases such securities for their equity characteristics.

As a matter of operating policy, the Fund will not invest more than 5%
of its net assets in warrants. A warrant gives the holder a right to purchase
at any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt securities or preferred stock,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for resale of the
warrants, potential price fluctuations as a result of speculation or other
factors, and failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised,
resulting in a loss of the Fund's entire investment therein).

SYNTHETIC CONVERTIBLE SECURITIES.

The Fund may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, the Fund may purchase a non-convertible debt security
and a warrant or option, which enables the Fund to have a convertible-like
position with respect to a company, group of companies or stock index.
Synthetic convertible securities are typically offered by financial institutions
and investment banks in private placement transactions. Upon conversion, the
Fund generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike
a true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market
value of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. The Fund only invests in synthetic convertibles with
respect to companies whose corporate debt securities are rated "A" or higher by
Moody's or "A" or higher by S&P and will not invest more than 15% of its net
assets in such synthetic securities and other illiquid securities.

EURODOLLAR CONVERTIBLE SECURITIES

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Eurodollar securities are payable in U.S. dollars outside of the United States.
The Fund may invest without limitation in Eurodollar convertible securities that
are convertible into foreign equity securities listed, or represented by ADRs
listed, on the New York Stock Exchange or the American Stock Exchange or
convertible into publicly traded common stock of U.S. companies. The Fund may
also invest up to 15% of its total assets invested in convertible securities,
taken at market value, in Eurodollar convertible securities that are convertible
into foreign equity securities which are not listed, or represented by ADRs
listed, on such exchanges.

EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS

The Fund may invest in Eurodollar and Yankee Dollar instruments.
Eurodollar instruments are bonds that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Eurodollar
instruments are usually issued on behalf of multinational companies and foreign
governments by large underwriting groups composed of banks and issuing houses
from many countries. Yankee Dollar instruments are U.S. Dollar denominated
bonds issued in the U.S. by foreign banks and corporations. These investments
involve risks that are different from investments in securities issued by U.S.
issuers. See "Foreign Investment Considerations."

RISKS OF INVESTING IN DEBT SECURITIES

There are a number of risks generally associated with an investment in
debt securities (including convertible securities). Yields on short,
intermediate, and long-term securities depend on a variety of factors, including
the general condition of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with short maturities and lower yields.

Securities with ratings below "Baa" and/or "BBB" are commonly referred
to as "junk bonds." Such bonds are subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds for a variety of
reasons, including the following:

SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of
a bond defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Fund's
asset values.

PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If the Fund experiences unexpected net redemptions,
it may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.

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LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact the Investment Adviser's ability to accurately value high yield bonds
and the Fund's assets and hinder the Fund's ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.

CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. The rating of
an issuer is also heavily weighted by past developments and does not necessarily
reflect probable future conditions. There is frequently a lag between the time
a rating is assigned and the time it is updated. Also, since credit rating
agencies may fail to timely change the credit ratings to reflect subsequent
events, the Investment Adviser must monitor the issuers of high yield bonds in
the Fund's portfolio to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
bonds' liquidity so the Fund can meet redemption requests.

SHORT-TERM INVESTMENTS

The Fund may invest in any of the following securities and
instruments:

BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.

When the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry. Federal and state laws and
regulations require domestic banks to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.

In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in its Prospectus, the Fund may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.

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SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in
certificates of deposit (interest-bearing time deposits) issued by savings
banks or savings and loan associations that have capital, surplus and
undivided profits in excess of $100 million, based on latest published
reports, or less than $100 million if the principal amount of such
obligations is fully insured by the U.S. Government.

COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Fund may invest a portion of its assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes
issued by corporations. Issues of commercial paper and short-term notes will
normally have maturities of less than nine months and fixed rates of return,
although such instruments may have maturities of up to one year.

Commercial paper and short-term notes will consist of issues rated
at the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by
Moody's, or similarly rated by another nationally recognized statistical
rating organization or, if unrated, will be determined by the Investment
Adviser to be of comparable quality. These rating symbols are described in
Appendix A.

Corporate obligations include bonds and notes issued by
corporations to finance longer-term credit needs than supported by commercial
paper. While such obligations generally have maturities of ten years or
more, the Fund may purchase corporate obligations which have remaining
maturities of one year or less from the date of purchase and which are rated
"AA" or higher by S&P or "Aa" or higher by Moody's.

GOVERNMENT OBLIGATIONS

The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United
States, Tennessee Valley Authority, Resolution Funding Corporation, Farmers
Home Administration, Federal Home Loan Banks, Federal Intermediate Credit
Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association. No
assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law.

The Fund may invest in sovereign debt obligations of foreign
countries. A number of factors affect a sovereign debtor's willingness or
ability to repay principal and interest in a timely manner, including its
cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints
to which it may be subject. Emerging market governments could default on
their sovereign debt. Such sovereign debtors also may be dependent on
expected disbursements from foreign governments, multilateral agencies and
other entities abroad to reduce principal and interest arrearages on their
debt. The commitments on the part of these governments, agencies and others
to make such disbursements may be conditioned on a sovereign debtor's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to meet such conditions could
result in the cancellation of such third parties' commitments to lend funds
to the sovereign debtor, which may further impair such debtor's ability or
willingness to service its debt in a timely manner.

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ZERO COUPON SECURITIES

The Fund may invest up to 35% of its net assets in zero coupon
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities. Zero coupon securities may be issued by the U.S. Treasury
or by a U.S. Government agency, authority or instrumentality (such as the
Student Loan Marketing Association or the Resolution Funding Corporation).
In addition, the Money Market Fund may invest up to 5% of its net assets in
separately traded interest and principal component parts of U.S. Treasury
securities that are sold as zero coupon securities and are transferable
through the Federal book-entry system known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupons Under Book Entry
Safekeeping ("CUBES"). Zero coupon securities are sold at a substantial
discount from face value and redeemed at face value at their maturity date
without interim cash payments of interest and principal. This discount is
amortized over the life of the security and such amortization will constitute
the income earned on the security for both accounting and tax purposes.
Because of these features, such securities may be subject to greater
volatility as a result of changes in prevailing interest rates than interest
paying investments in which the Fund may invest. Because income on such
securities is accrued on a current basis, even though the Fund does not
receive the income currently in cash, the Fund may have to sell other
portfolio investments to obtain cash needed to make income distributions.

PARTICIPATION INTERESTS

The Fund may invest in participation interests, subject to the
limitation on investments by the Fund in illiquid investments. The Fund
currently does not intend to invest more than 5% of its net assets in such
interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than
5% of the Fund's net assets can be invested in participation interests of the
same issuing borrower. Participation interests are primarily dependent upon
the financial strength of the borrowing corporation, which is obligated to
make payments of principal and interest on the loan, and there is a risk that
such borrowers may have difficulty making payments. In the event the
borrower fails to pay scheduled interest or principal payments, the Fund
could experience a reduction in its income and might experience a decline in
the net asset value of its shares. In the event of a failure by the
financial institution to perform its obligation in connection with the
participation, the Fund might incur certain costs and delays in realizing
payment or may suffer a loss of principal and/or interest. The Investment
Adviser has set certain creditworthiness standards for issuers of loan
participations and monitors their creditworthiness.

VARIABLE AND FLOATING RATE INSTRUMENTS

The Fund may acquire variable and floating rate instruments.
Credit rating agencies frequently do not rate such instruments; however, the
Investment Adviser under guidelines established by the Trust's Board of
Trustees will determine what unrated variable and floating rate instruments
are of comparable quality at the time of the purchase to rated instruments
eligible for purchase by the Fund. In making such determinations, the
Investment Adviser considers the earning power, cash flow and other liquidity
ratios of the issuers of such instruments (such issuers include financial,
merchandising, bank holding and other companies) and will monitor their
financial condition. An active secondary market may not exist with respect
to particular variable or floating rate instruments purchased by the Fund.
The absence of such an active secondary market could make it difficult for
the Fund to dispose of the variable or floating rate instrument involved in
the event of the issuer of the instrument defaulting on its payment
obligation or during periods in which the Fund is not entitled to exercise
its demand rights, and the Fund could, for these or other reasons,

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suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.

INDEX AND CURRENCY-LINKED SECURITIES

The Fund may invest in "index-linked" or "commodity-linked" notes,
which are debt securities of companies that call for interest payments and/or
payment at maturity in different terms than the typical note where the
borrower agrees to make fixed interest payments and to pay a fixed sum at
maturity. Principal and/or interest payments on an index-linked note depend
on the performance of one or more market indices, such as the S&P 500 Index
or a weighted index of commodity futures such as crude oil, gasoline and
natural gas. The Fund may also invest in "equity linked" and
"currency-linked" debt securities. At maturity, the principal amount of an
equity-linked debt security is exchanged for common stock of the issuer or is
payable in an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are short-term or intermediate
term instruments having a value at maturity, and/or an interest rate,
determined by reference to one or more foreign currencies. Payment of
principal or periodic interest may be calculated as a multiple of the
movement of one currency against another currency, or against an index.

Index and currency-linked securities are derivative instruments which
may entail substantial risks. Such instruments may be subject to significant
price volatility. The company issuing the instrument may fail to pay the amount
due on maturity. The underlying investment or security may not perform as
expected by the Investment Adviser. Markets, underlying securities and indexes
may move in a direction that was not anticipated by the Investment Adviser.
Performance of the derivatives may be influenced by interest rate and other
market changes in the U.S. and abroad. Certain derivative instruments may be
illiquid. See "Illiquid Securities" below.

MORTGAGE-RELATED SECURITIES

The Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations.

U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-throughs." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.

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authorized to guarantee, with the full faith and credit of the United States
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of mortgages insured by the
Federal Housing Agency or guaranteed by the Veterans Administration.

Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.

Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign
CMO in which the Fund may invest is a hybrid between a mortgage-backed bond and
a mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.

CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
seniority. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.

FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations (e.g.,
Canada Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market

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with respect to matters such as the sizes of loan pools, pre-payment experience,
and maturities of loans.

"ROLL" TRANSACTIONS

The Fund may enter into "roll" transactions, which are the sale of
GNMA certificates and other securities together with a commitment to purchase
similar, but not identical, securities at a later date from the same party.
During the roll period, the Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the transactions may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.

The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its Custodian in which it will maintain liquid assets in an amount
sufficient to meet its payment obligations with respect to these transactions.
The Fund will not enter into roll transactions if, as a result, more than 15% of
the Fund's net assets would be segregated to cover such contracts.

FOREIGN INVESTMENTS

The Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. The Fund may also invest in depository
receipts.

The United States Government has from time to time imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest substantially all of its assets in
United States securities. In such event, the Board of Trustees of the Trust
would consider alternative arrangements, including reevaluation of the Fund's
investment objectives and policies, or investment of all of the Fund's assets in
another investment company with different investment objectives and policies
than the Fund. However, the Fund would adopt any revised investment objective
and fundamental policies only after approval by the shareholders holding a
majority (as defined in the Investment Company Act) of the shares of the Fund.

DEPOSITORY RECEIPTS. The Fund may invest in American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuers. ADRs, in registered form, are designed for use in U.S. securities
markets. Such depository receipts may be sponsored by the foreign issuer or may
be unsponsored. The Fund may also invest in European and Global Depository
Receipts ("EDRs" and "GDRs"), which, in bearer form, are designed for use in
European securities markets, and in other instruments representing securities of
foreign companies. Such depository receipts may be sponsored by the foreign
issuer or may be unsponsored. Unsponsored depository receipts are organized
independently and without the cooperation of the foreign issuer of the
underlying securities; as a result, available information regarding the issuer
may not be as current as for sponsored depository receipts, and the prices of
unsponsored depository receipts may be more

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<PAGE>

volatile than if they were sponsored by the issuer of the underlying securities.
ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency, although the
underlying security may be subject to foreign government taxes which would
reduce the yield on such securities.

RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:

MARKET CHARACTERISTICS. Settlement practices for transactions in
foreign markets may include delays beyond periods customary in the United
States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.

Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.

LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.

TAXES. The interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
A shareholder otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction of
U.S. federal income tax purposes for his proportionate share of such foreign
taxes paid by the Fund.

COSTS. The expense ratios of the Fund are likely to be higher than
those of investment companies investing in domestic securities, since the cost
of maintaining the custody of foreign securities is higher.

In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which the
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
Prospectus, depending on the Investment Adviser's assessment of prevailing
market, economic and other conditions.

OPTIONS ON SECURITIES AND SECURITIES INDICES

PURCHASING PUT AND CALL OPTIONS. The Fund is authorized to purchase
put and call options with respect to securities which are otherwise eligible for
purchase by the Fund and with

B-11
<PAGE>

respect to various stock indices subject to certain restrictions. Put and call
options are derivative securities traded on United States and foreign exchanges,
including the American Stock Exchange, Chicago Board Options Exchange,
Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock Exchange.
The Fund will engage in trading of such derivative securities exclusively for
hedging purposes.

If the Fund purchases a put option, the Fund acquires the right to
sell the underlying security at a specified price at any time during the term of
the option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Investment Adviser perceives significant short-term
risk but substantial long-term appreciation for the underlying security. The
put option acts as an insurance policy, as it protects against significant
downward price movement while it allows full participation in any upward
movement. If the Fund holds a stock which the Investment Adviser believes has
strong fundamentals, but for some reason may be weak in the near term, the Fund
may purchase a put option on such security, thereby giving itself the right to
sell such security at a certain strike price throughout the term of the option.
Consequently, the Fund will exercise the put only if the price of such security
falls below the strike price of the put. The difference between the put's
strike price and the market price of the underlying security on the date the
Fund exercises the put, less transaction costs, is the amount by which the Fund
hedges against a decline in the underlying security. If during the period of
the option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the premium paid for the put option less any
amount for which the put may be sold reduces the profit the Fund realizes on the
sale of the securities.

If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the Fund purchases the
call option to hedge a short position in the underlying security and the price
of the underlying security thereafter falls, the premium paid for the call
option less any amount for which such option may be sold reduces the profit the
Fund realizes on the cover of the short position in the security.

Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.

WRITING CALL OPTIONS. The Fund may write covered call options. A
call option is "covered" if the Fund owns the security underlying the call or
has an absolute right to acquire the security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by the
Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period. If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase

B-12
<PAGE>

transaction." This is accomplished by buying an option of the same series as
the option previously written. A writer may not effect a closing purchase
transaction after it has been notified of the exercise of an option.

Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also,
effecting a closing transaction allows the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other investments of
the Fund. If the Fund desires to sell a particular security from its portfolio
on which it has written a call option, it will effect a closing transaction
prior to or concurrent with the sale of the security.

The Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. The Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option generally reflect increases in the market price of the
underlying security, appreciation of the underlying security owned by the Fund
generally offsets, in whole or in part, any loss to the Fund resulting from the
repurchase of a call option.

STOCK INDEX OPTIONS. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. The Fund may purchase such
options as a hedge against changes in the values of portfolio securities or
securities which it intends to purchase or sell, or to reduce risks inherent in
the ongoing management of the Fund.

The distinctive characteristics of options on stock indices create
certain risks not found in stock options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss on the
purchase or sale of an option on an index depends upon movements in the level of
stock prices in the stock market generally rather than movements in the price of
a particular stock. Accordingly, successful use by the Fund of options on a
stock index depends on the Investment Adviser's ability to predict correctly
movements in the direction of the stock market generally. This requires
different skills and techniques than predicting changes in the price of
individual stocks.

Index prices may be distorted if circumstances disrupt trading of
certain stocks included in the index, such as if trading were halted in a
substantial number of stocks included in the index. If this happens, the Fund
could not be able to close out options which it had purchased, and if
restrictions on exercise were imposed, the Fund might be unable to exercise an
option it holds, which could result in substantial losses to the Fund. The Fund
purchases put or call options only with respect to an index which the Investment
Adviser believes includes a sufficient number of stocks to minimize the
likelihood of a trading halt in the index.

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<PAGE>

opening transactions or closing transactions or both; trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of option of underlying securities; unusual or unforeseen circumstances
may interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.

A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code requirements for qualification of the corresponding
Portfolio as a regulated investment company. See "Dividends, Distributions and
Taxes."

In addition, foreign option exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this entire
amount could be lost. Moreover, the Fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements typically associated with such option writing. See
"Dealer Options" below.

DEALER OPTIONS. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to
dealer options. While the Fund might look to a clearing corporation to exercise
exchange-traded options, if the Fund purchases a dealer option it must rely on
the selling dealer to perform if the Fund exercises the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.

Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, the Fund can realize the value of a
dealer option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when the Fund writes a dealer option, the Fund can
close out the option prior to its expiration only by entering into a closing
purchase transaction with the dealer. While the Fund seeks to enter into dealer
options only with dealers who will agree to and can enter into closing
transactions with the Fund, no assurance exists that the Fund will at any time
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Unless the Fund, as a covered dealer call option writer, can effect
a closing purchase transaction, it will not be able to liquidate securities (or
other assets) used as cover until the option expires or is exercised. In the
event of insolvency of the other party, the Fund may be unable to liquidate a
dealer option. With respect to options written by the Fund, the inability to
enter into a closing transaction may result in material losses to the Fund. For
example, since the Fund must maintain a secured position with respect to any
call option on a security it writes, the Fund may not sell the assets which it
has segregated to secure the position while it is obligated under the option.
This requirement may impair the Fund's ability to sell portfolio securities at a
time when such sale might be advantageous.

B-14
<PAGE>

The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. The
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
With that exceptions, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.

FOREIGN CURRENCY OPTIONS

The Fund may buy or sell put and call options on foreign currencies.
A put or call option on a foreign currency gives the purchaser of the option the
right to sell or purchase a foreign currency at the exercise price until the
option expires. The Fund uses foreign currency options separately or in
combination to control currency volatility. Among the strategies employed to
control currency volatility is an option collar. An option collar involves the
purchase of a put option and the simultaneous sale of call option on the same
currency with the same expiration date but with different exercise (or "strike")
prices. Generally, the put option will have an out-of-the-money strike price,
while the call option will have either an at-the-money strike price or an
in-the-money strike price. Foreign currency options are derivative securities.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Fund to reduce foreign currency risk
using such options.

As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movement adverse to
the Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.

FORWARD CURRENCY CONTRACTS

The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an
obligation to purchase or sell a specific currency at a future date, which may
be any fix number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. For example, the Fund
might purchase a particular currency or enter into a forward currency contract
to preserve the U.S. dollar price of securities it intends to or has contracted
to purchase. Alternatively, it might sell a particular currency on either a
spot or forward basis to hedge against an anticipated decline in the dollar
value of securities it intends to or has contracted to sell. Although this
strategy could minimize the risk of loss due to a decline in the value of the
hedged currency, it could also limit any potential gain from an increase in the
value of the currency.

FUTURES CONTRACTS AND RELATED OPTIONS

The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates.
The Fund trades in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund segregates liquid assets in a separate account
with its

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<PAGE>

Custodian when required to do so by CFTC guidelines in order to cover its
obligation in connection with futures and options transactions.

The Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets equal to
approximately 5% of the contract amount. This amount is known as initial
margin. The margin requirements for foreign futures contracts may be different.

The nature of initial margin in futures transactions differs from that
of margin in securities transactions. Futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfies all contractual obligations. Subsequent
payments (called variation margin) to and from the broker will be made on a
daily basis as the price of the underlying stock index fluctuates, to reflect
movements in the price of the contract making the long and short positions in
the futures contract more or less valuable. For example, when the Fund
purchases a stock index futures contract and the price of the underlying stock
index rises, that position will have increased in value and the Fund will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the Fund purchases a stock index futures contract and
the price of the underlying stock index declines, the position will be less
valuable requiring the Fund to make a variation margin payment to the broker.

At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. The Fund either pays or
receives cash, thus realizing a loss or a gain.

STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures
contracts on stock indices. A stock index futures contracts is a bilateral
agreement pursuant to which the parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the index value at the close of the last trading day of the contract and the
price at which the contract is originally struck. No physical delivery of the
underlying stocks in the index is made. Currently, stock index futures
contracts can be purchased or sold with respect to the S&P 500 Stock Price Index
on the Chicago Mercantile Exchange, the Major Market Index on the Chicago Board
of Trade, the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Foreign financial and stock index futures are traded on foreign exchanges
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.

INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established
in the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.

The sale of an interest rate or financial futures sale by the Fund
obligates the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific

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<PAGE>

future time for a specified price. A futures contract purchased by the Fund
obligates the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.

Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. The Fund closes out a futures contract sale by entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund receives the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the Fund
closes out a futures contract purchase by entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the Fund realizes a
gain, and if the purchase price exceeds the offsetting sale price, the Fund
realizes a loss.

The Fund deals only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. The Fund may trade
in any futures contract for which there exists a public market, including,
without limitation, the foregoing instruments. International interest rate
futures contracts are traded on the London International Financial Futures
Exchange, the Singapore International Monetary Exchange, the Sydney Futures
Exchange Limited and the Tokyo Stock Exchange.

FOREIGN CURRENCY FUTURES CONTRACTS. The Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A
public market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the European Currency Unit ("ECU"). Other foreign currency
futures contracts are likely to be developed and traded in the future. The Fund
will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more

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<PAGE>

than the price of the hedged securities, the Fund will experience either a loss
or a gain on the future which will not be completely offset by movements in the
price of the securities which are subject to the hedge.

To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Investment Adviser believes that over
time the value of a diversified portfolio will tend to move in the same
direction as the market indices upon which the futures are based.

When futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.

In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.

Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.

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<PAGE>

Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.

Successful use of futures by the Fund depends on the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund hedges against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.

In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase options on the
futures contracts they can purchase or sell, as described above. A futures
option gives the holder, in return for the premium paid, the right to buy (call)
from or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.

Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Fund because the maximum amount at
risk is limited to the premium paid for the options (plus transaction costs).

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a

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hedge against changes resulting from market conditions in the values of
securities held in the Fund's portfolio or which it intends to purchase and
where the transactions are economically appropriate to the reduction of risks
inherent in the ongoing management of the Fund. The Fund also may not purchase
or sell futures or purchase related options if, immediately thereafter, the sum
of the amount of margin deposits on the Fund's existing futures positions and
premiums paid for such options would exceed 5% of the market value of the Fund's
net assets.

Upon the purchase of futures contracts, the Fund will deposit an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.

These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Master Trust may change them
if applicable law permits such a change and the change is consistent with the
overall investment objective and policies of the Fund.

The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment company.
See "Taxes."

INTEREST RATE AND CURRENCY SWAPS

The Fund may enter into interest rate swap transactions and purchase
or sell interest rate caps and floors, and may enter into currency swap cap
transactions. An interest rate or currency swap involves an agreement between
the Fund and another party to exchange payments calculated as if they were
interest on a specified ("notional") principal amount (e.g., an exchange of
floating rate payments by one party for fixed rate payments by the other). An
interest rate cap or floor entitles the purchaser, in exchange for a premium, to
receive payments of interest on a notional principal amount from the seller of
the cap or floor, to the extent that a specified reference rate exceeds or falls
below a predetermined level.

The Fund usually enters into such transactions on a "net" basis, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payment streams. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis, and an amount of cash or high-quality liquid securities having an
aggregate net asset value at least equal to the accrued excess is maintained in
a segregated account by the Trust's custodian. If the Fund enters into a swap
on other than a net basis, or sells caps or floors, the Fund maintains a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the transaction. Such segregated accounts are
maintained in accordance with applicable regulations of the Commission.

The Fund will not enter into any of these derivative transactions
unless the unsecured senior debt or the claims paying ability of the other party
to the transaction is rated at least "high quality" at the time of purchase by
at least one of the established rating agencies (e.g., AAA or AA by S&P). The
swap market has grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and agents
utilizing standard swap documentation, and the Investment Adviser has determined
that the swap market has become relatively liquid. Swap transactions do not
involve the delivery of securities or other underlying assets or principal, and
the risk of loss with respect to such transactions is limited to the net amount
of payments that the Fund is contractually obligated to make or receive. Caps
and floors are more

B-20
<PAGE>

recent innovations for which standardized documentation has not yet been
developed; accordingly, they are less liquid than swaps, and caps and floors
purchased by the Fund are considered to be illiquid assets.

INTEREST RATE SWAPS. As indicated above, an interest rate swap is a
contract between two entities ("counterparties") to exchange interest payments
(of the same currency) between the parties. In the most common interest rate
swap structure, one counterparty agrees to make floating rate payments to the
other counterparty, which in turn makes fixed rate payments to the first
counterparty. Interest payments are determined by applying the respective
interest rates to an agreed upon amount, referred to as the "notional principal
amount." In most such transactions, the floating rate payments are tied to the
London Interbank Offered Rate, which is the offered rate for short-term
Eurodollar deposits between major international banks. As there is no exchange
of principal amounts, an interest rate swap is not an investment or a borrowing.

CROSS-CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future rate for the exchange risk). The currency swap
market convention is to use the spot rate rather than the forward rate for the
exchange at maturity. The economic difference is realized through the coupon
exchanges over the life of the swap. In contrast to single currency interest
rate swaps, cross-currency swaps involve both interest rate risk and foreign
exchange risk.

SWAP OPTIONS. The Fund may invest in swap options. A swap option is
a contract that gives a counterpart the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts at some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or
American-style ( exercisable during a designated period). The right pursuant to
a swap option must be exercised by the right holder. The buyer of the right to
receive fixed pursuant to a swap option is said to own a call.

CAPS AND FLOORS. The Fund may invest in interest rate caps and floors
and currency swap cap transactions. An interest rate cap is a right to receive
periodic cash payments over the life of the cap equal to the difference between
any higher actual level of interest rates in the future and a specified strike
(or "cap") level. The cap buyer purchases protection for a floating rate move
above the strike. An interest rate floor is the right to receive periodic cash
payments over the life of the floor equal to the difference between any lower
actual level of interest rates in the future and a specified strike (or "floor")
level. The floor buyer purchases protection for a floating rate move below the
strike. The strikes are typically based on the three-month LIBOR (although
other indices are available) and are measured quarterly. Rights arising
pursuant to both caps and floors are exercised automatically if the strike is in
the money. Caps and floors eliminate the risk that the buyer fails to exercise
an-in-the-money option.

B-21
<PAGE>

perform its obligations pursuant to the underlying agreement. If there were a
default by the other party to the transaction, the Fund would have contractual
remedies pursuant to the agreement, but could incur delays in obtaining the
expected benefit of the transaction or loss of such benefit. In the event of
insolvency of the other party, the Fund might be unable to obtain its expected
benefit. In addition, while the Fund will seek to enter into such transaction
only with parties which are capable of entering into closing transactions with
the Fund, there can be no assurance that the Fund will be able to close out such
a transaction with the other party, or obtain an offsetting position with any
other party, at any time prior to the end of the term of the underlying
agreement. This may impair the Fund's ability to enter into other transactions
at a time when doing so might be advantageous.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent
foreign system. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaults on its repurchase
obligation, the Fund will suffer a loss to the extent that the proceeds from a
sale of the underlying securities is less than the repurchase price under the
agreement. Bankruptcy or insolvency of such a defaulting seller may cause the
Fund's rights with respect to such securities to be delayed or limited.
Repurchase agreements are considered to be loans under the Investment Company
Act.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements, which involve
the sale of a security by the Fund and its agreement to repurchase the security
(or, in the case of mortgage-backed securities, substantially similar but not
identical securities) at a specified time and price. The Fund will maintain in
a segregated account with the Custodian cash, U.S. Government securities or
other appropriate liquid securities in an amount sufficient to cover its
obligations under these agreements with broker-dealers (no such collateral is
required on such agreements with banks). Under the 1940 Act, these agreements
are considered borrowings by the Fund, and are subject to the percentage
limitations on borrowings described below. The agreements are subject to the
same types of risks as borrowings.

WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS

The Fund may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, the Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.

B-22
<PAGE>

The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will set aside cash or liquid portfolio securities to satisfy
its purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.

The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.

The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.

BORROWING

Short sales "not against the box" and roll transactions are considered
borrowings for purposes of the percentage limitations applicable to borrowings.

The use of borrowing by the Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of the Fund's assets fluctuate in value,
whereas the interest obligation resulting from a borrowing remain fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund tends to increase more when its portfolio securities increase in value and
to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time when fundamental investment
considerations would not favor such sales.

The Trust entered into a Credit Agreement on behalf of its various
series, including the Fund, with several banks and The Chase Manhattan Bank, as
administrative agent for the lenders, to borrow up to $75,000,000 from time to
time to satisfy shareholder redemption requests without the necessity of
requiring the Fund and its other portfolios to sell portfolio securities, at
times when the Investment Adviser believes such sales are not in the best
interests of the shareholders of the Fund or other series of the Trust, in order
to provide the Fund or such other series with cash to meet such redemption
requests. The Credit Agreement expires on April 10, 1998, unless renewed by the
parties.

Under the Credit Agreement, the Fund will each other series of the
Trust may borrow, repay and reborrow amounts (collectively, the "Revolving
Credit Loans") in increments of $50,000, provided the Revolving Credit Loans
outstanding at any time aggregate at least $350,000

B-23
<PAGE>

(the "Credit Facility"). The Trust will pay a commitment fee at the rate of
0.10% per annum of the average daily unused portion of the Credit Facility, and
may at any time terminate the Credit Agreement or reduce the lenders' commitment
thereunder in increments of $2,500,000.

While outstanding, the Revolving Credit Loans bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or (ii)
the prime rate of interest of The Chase Manhattan Bank. If, as a result of
changes in applicable laws, regulations or guideline with respect to the capital
adequacy of any lender, the return on such lender's capital is reduced, the
Trust may be required to adjust the rate of interest to compensate such lender
for such reduction. Each Revolving Credit Loan is payable in thirty days, and
may be prepaid at any time in increments of $100,000 without premium or penalty.
The Fund is not liable for repayment of a Revolving Credit Loan to any other
series.

The Credit Agreement contains, among other things, covenants that
require the Fund to maintain certain minimum ratios of debt to net worth; limit
the ability of the Trust to incur other indebtedness and create liens on its
assets or guarantee obligations of others; merge or consolidate with, or sell
its assets to, others; make material changes in its method of conducting
business; make distributions to shareholders in excess of the requirements of
Subchapter M of the Internal Revenue Code in the event of a default under the
Credit Agreement; or make changes in fundamental investment policies. The
Credit Agreement also contains other terms and conditions customary in such
agreements, including various events of default.

LENDING PORTFOLIO SECURITIES

Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at least
equal the value of the loaned securities and must consist of cash, letters of
credit of domestic banks or domestic branches of foreign banks, or securities of
the U.S. Government or its agencies. To be acceptable as collateral, letters of
credit must obligate a bank to pay amounts demanded by the Fund if the demand
meets the terms of the letter. Such terms and the issuing bank must satisfy the
Fund. Any loan might be secured by any one or more of the three types of
collateral. The terms of the Fund's loans must permit the Fund to reacquire
loaned securities on five days' notice or in time to vote on any serious matter
and must meet certain tests under the Internal Revenue Code.

SHORT SALES

The Fund may make short sales of securities it owns or has the right
to acquire at no added cost through conversion or exchange of other securities
it owns (referred to as short sales "against the box") and short sales of
securities which it does not own or have the right to acquire.

B-24
<PAGE>

current margin requirements, the Fund must deposit with the broker additional
cash or securities so that it maintains with the broker a total deposit equal to
150% of the current market value of the securities sold short (100% of the
current market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).

Short sales by the Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share tends to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Short sales theoretically involve unlimited
loss potential, as the market price of securities sold short may continually
increase, although the Fund may mitigate such losses by replacing the securities
sold short before the market price has increased significantly. Under adverse
market conditions the Fund might have difficulty purchasing securities to meet
its short sale delivery obligations, and might have to sell portfolio securities
to raise the capital necessary to meet its short sale obligations at a time when
fundamental investment considerations would not favor such sales.

If the Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, the Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.

The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Adviser believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position
would be reduced by a gain in the short position. The extent to which such
gains or losses in the long position are reduced will depend upon the amount of
securities sold short relative to the amount of the securities the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities.

In the view of the Commission, a short sale involves the creation
of a "senior security" as such term is defined in the 1940 Act, unless the
sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities orother liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and
any such collateral required to be deposited with a broker in connection with
the sale (not including the proceeds from the short sale), which difference
is adjusted daily for changes in the value of the securities sold short. The
total value of the cash, U.S. Government securities or

B-25
<PAGE>

other liquid debt or equity securities deposited with the broker and
otherwise segregated may not at any time be less than the market value of the
securities sold short at the time of the short sale. The Fund will comply
with these requirements. In addition, as a matter of policy, the Trust's
Board of Trustees has determined that the Fund will not make short sales of
securities or maintain a short position if to do so could create liabilities
or require collateral deposits and segregation of assets aggregating more
than 25% of the Fund's total assets, taken at market value.

The extent to which the Fund may enter into short sales transactions
may be limited by the Internal Revenue Code requirements for qualification of
the corresponding Portfolio as a regulated investment company. See "Taxes."

ILLIQUID SECURITIES

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and the Fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption within seven days. The Fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
uninterested in purchasing such securities.

INVESTMENT TECHNIQUES AND PROCESSES

The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in the Prospectus. In making decisions with respect to equity
securities for the Fund, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal. It's how the Investment Adviser built its
reputation. Over the past ten years, the Investment Adviser has built a record
as one of the finest performing investment managers in the United States. It
has successfully delivered growth over time to many institutional investors,
pension plans, foundations, endowments and high net worth individuals. The
Investment Adviser's

B-26
<PAGE>

methods have proven their ability to achieve growth over time through a variety
of investment vehicles.

The Investment Adviser emphasizes growth over time through investment
in securities of companies with earnings growth potential. The Investment
Adviser's style is a "bottom-up" growth approach that focuses on the growth
prospects of individual companies rather than on economic trends. It builds
portfolios stock by stock. The Investment Adviser's decision-making is guided
by three critical questions: Is there a positive change? Is it sustainable? Is
it timely? The Investment Adviser uses these three factors because it focuses
on discovering positive developments when they first show up in an issuer's
earnings, but before they are fully reflected in the price of the issuer's
securities. The Investment Adviser is always looking for companies that are
driving change and surpassing analysts' expectations. It seeks to identify
companies poised for rapid growth. The Investment Adviser focuses on
recognizing successful companies, regardless of their capitalization or whether
they are domestic or foreign companies.

The Investment Adviser's techniques and processes include
relationships with an extensive network of brokerage research firms located
throughout the world. These analysts are often located in the same geographic
regions as the companies they follow, have followed those companies for a number
of years, and have developed excellent sources of information about them. The
Investment Adviser does not employ in-house analysts other than the personnel
actually engaged in managing investments for the Fund and the Investment
Adviser's other clients. However, information obtained from a brokerage
research firm is confirmed with other research sources or the Investment
Adviser's computer-assisted quantitative analysis (including "real time" pricing
data) of a substantial universe of potential investments.

DIVERSIFICATION

The Fund is "diversified" within the meaning of the 1940 Act. In
order to qualify as diversified, the Fund must diversify its holdings so that at
all times at least 75% of the value of its total assets is represented by cash
and cash items (including receivables), securities issued or guaranteed as to
principal or interest by the United States or its agencies or instrumentalities,
securities of other investment companies, and other securities (for this purpose
other securities of any one issuer are limited to an amount not greater than 5%
of the value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of the issuer).

The equity securities of each issuer that are included in the
investment portfolio of the Fund are purchased by the Investment Adviser in
approximately equal amounts, and the Investment Adviser attempts to stay fully
invested within the applicable percentage limitations set forth in the
Prospectus. In addition, for each issuer whose securities are added to an
investment portfolio, the Investment Adviser sells the securities of one of the
issuers currently included in the portfolio.

INVESTMENT RESTRICTIONS

The Trust, on behalf of the Fund, has adopted the following
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of the Fund (as defined in the Investment
Company Act).

B-27
<PAGE>

All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.

The investment objective of the Fund is a fundamental policy. In
addition, the Fund may not:

1. Invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of the Fund's total assets may be invested without
regard to this restriction and the Fund will be permitted to invest all or a
portion of its assets in another diversified, open-end management investment
company with substantially the same investment objective, policies and
restrictions as the Fund. This restriction also does not apply to investments
by the Fund in securities of the U.S. Government or any of its agencies and
instrumentalities.

2. Purchase more than 10% of the outstanding voting securities, or
of any class of securities, of any one issuer, or purchase the securities of any
issuer for the purpose of exercising control or management, except that the Fund
will be permitted to invest all or a portion of its assets in another
diversified, open-end management investment company with substantially the same
investment objective, policies and restrictions as the Fund.

3. Invest 25% or more of the market value of its total assets in the
securities of issuers in any one particular industry, except that the Fund will
be permitted to invest all or a portion of its assets in another diversified,
open-end management investment company with substantially the same investment
objective, policies and restrictions as the Fund. This restriction does not
apply to investments by the Fund in securities of the U.S. Government or its
agencies and instrumentalities.

4. Purchase or sell real estate. However, the Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.

5. Make loans of money, except that the Fund may purchase publicly
distributed debt instruments and certificates of deposit and enter into
repurchase agreements. The Fund reserves the authority to make loans of its
portfolio securities in an aggregate amount not exceeding 30% of the value of
its total assets.

6. Borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Fund will
take prompt action to reduce its borrowings as required by applicable law.

7. Pledge or in any way transfer as security for indebtedness any
securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Fund from engaging
in options, futures and foreign currency transactions.

8. Underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.

B-28
<PAGE>

9. Invest more than 15% of the value of its net assets in securities
that at the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid.

10. Purchase securities on margin, except for initial and variation
margin on options and futures contracts, and except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of securities.

11. Invest in securities of other investment companies, except
(a) that the Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities laws;
or (c) as part of a merger, consolidation, acquisition or reorganization
involving the Fund.

12. Issue senior securities, except that the Fund may borrow money as
permitted by restrictions 6 and 7 above. This restriction shall not prohibit
the Fund from engaging in short sales, options, futures and foreign currency
transactions.

13. Enter into transactions for the purpose of arbitrage, or invest
in commodities and commodities contracts, except that the Fund may invest in
stock index, currency and financial futures contracts and related options in
accordance with any rules of the Commodity Futures Trading Commission.

14. Purchase or write options on securities, except for hedging
purposes and then only if (i) aggregate premiums on call options purchased by
the Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put
options purchased by the Fund do not exceed 5% of its net assets, (iii) not more
than 25% of the Fund's net assets would be hedged, and (iv) not more than 25% of
the Fund's net assets are used as cover for options written by the Fund.

OPERATING RESTRICTIONS

As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust, the Fund may not:

1. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, or real estate limited partnerships, although
the Fund may invest in the securities of companies which invest in or sponsor
such programs.

2. Lend any securities from its portfolio unless the value of the
collateral received therefor is continuously maintained in an amount not less
than 100% of the value of the loaned securities by marking to market daily.

TRUSTEES AND PRINCIPAL OFFICERS

TRUST

The names, ages and addresses of the Trustees and principal officers
of the Trust, including their positions and principal occupations during the
past five years, are shown below. Trustees whose names are followed by an
asterisk are "interested persons" of the Trust (as defined by the Investment
Company Act). Unless otherwise indicated, the address of each Trustee and
officer is 600 West Broadway, 30th Floor, San Diego, California 92101.

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<PAGE>

FRED C. APPLEGATE (52), TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.
885 La Jolla Corona Court, La Jolla, California. Private investor. Formerly
President, Nicholas-Applegate Capital Management (from August 1984 to December
1991). Director of Nicholas-Applegate Fund, Inc. (since 1987). Mr. Applegate's
interests in Nicholas-Applegate Capital Management, Inc., the general partner of
the Investment Adviser, were acquired by Mr. Nicholas in 1991 and 1992.

ARTHUR B. LAFFER (57), TRUSTEE.*/ 5405 Morehouse Drive, Suite 340,
San Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an
economic consulting firm (since 1979); Chairman, Laffer Advisers Incorporated,
economic consultants (since 1981); Director, Nicholas-Applegate Fund, Inc.
(since 1987); Director, U.S. Filter Corporation (since March 1991), MasTec Inc.,
construction (since 1994), and Coinmach Laundry Corporation (since 1996);
Chairman, Calport Asset Management, Inc. (since 1992); formerly Distinguished
University Professor and Director, Pepperdine University (from September 1985 to
May 1988) and Professor of Business Economics, University of Southern California
(1976 to 1984). Mr. Laffer is considered to be an "interested person" of the
Trust because A.B. Laffer, V.A. Canto & Associates or its affiliates received
material compensation from the Investment Adviser for consulting services
provided from time to time to the Investment Adviser, and because during the
last two fiscal years his son was an employee of the Investment Adviser.

CHARLES E. YOUNG (66), TRUSTEE. UCLA, 2224 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (1968-1997); Director, Nicholas-Applegate Fund,
Inc. (since 1992); Director, Intel Corp. (since 1974), Academy of Television
Arts and Sciences Foundation (since October 1988), Los Angeles World Affairs
Council (since 1977) and Town Hall of California (since 1982).

ARTHUR E. NICHOLAS (51), PRESIDENT.*/ Managing Partner and Chief
Investment Officer, Nicholas-Applegate Capital Management (since 1984), and
Chairman / President Nicholas-Applegate Securities. Director and Chairman of
the Board of Directors of Nicholas-Applegate Fund, Inc., a registered open-end
investment company, since 1987. Trustee, Nicholas-Applegate Investment Trust
(since 1993).

THOMAS PINDELSKI (47), CHIEF FINANCIAL OFFICER. Partner (since
January 1996) and Chief Financial Officer, Nicholas-Applegate Capital Management
(since January 1993), and Chief Financial Officer, Nicholas-Applegate Securities
(since January 1993); formerly Chief Financial Officer, Aurora Capital
Partners/WSGP Partners L.P., an investment partnership (from November 1988 to
January 1993), and Vice President and Controller, Security Pacific Merchant
Banking Group (from November 1986 to November 1988).

PETER J. JOHNSON (42), VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992)
and Vice President, Nicholas-Applegate Securities (since December 1995);
formerly, Marketing Director, Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991), and Senior
Marketing Representative, Fidelity Investments Institutional Services (from
August 1987 to July 1989).

E. BLAKE MOORE, JR. (39), SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).

Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a

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<PAGE>

Trustee of the Trust, and $1,000 for each meeting attended ($2,000 per Committee
meeting for Committee chairmen). Each Trustee is also reimbursed for
out-of-pocket expenses incurred as a Trustee.

The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1997, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):

Total Compensation from
Aggregate Compensation Pension or Retirement Estimated Annual Trust and Trust Complex
from Trust Benefits Accrued as Part Benefits Upon Retirement Paid to Trustee
Name of Trust Expenses
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $ 10,635 None N/A $ 36,250(47*)
Arthur B. Laffer $ 9,558 None N/A $ 31,750(47*)
Charles E. Young $ 9,827 None N/A $ 31,750(47*)
</TABLE>

* Indicates total number of funds in Trust complex, including the Fund.

INVESTMENT ADVISER

The Investment Adviser to the Trust is Nicholas-Applegate Capital
Management, a California limited partnership, with offices at 600 West Broadway,
30th Floor, San Diego, California 92101.

The Investment Adviser was organized in August 1984 to manage
discretionary accounts investing primarily in publicly traded equity securities
and securities convertible into or exercisable for publicly traded equity
securities, with the goal of capital appreciation. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership, the general partner of which is Nicholas-Applegate Capital
Management Holdings, Inc., a California corporation owned by Mr. Nicholas.

Personnel of the Investment Adviser may invest in securities for their
own accounts pursuant to a Code of Ethics that sets forth all partners' and
employees' fiduciary responsibilities regarding the Fund, establishes procedures
for personal investing, and restricts certain transactions. For example, all
personal trades in most securities require pre-clearance, and participation in
initial public offerings is prohibited. In addition, restrictions on the timing
of personal investing in relation to trades by the Fund and on short-term
trading having been adopted.

THE INVESTMENT ADVISORY AGREEMENT

Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Fund, the Trust retains the Investment
Adviser to manage the Fund's investment portfolios, subject to the direction of
the Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Fund and in what
amounts.

B-31
<PAGE>

The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by the
Fund or the Trust in connection with the matters to which the Investment
Advisory Agreement relates, except for liability resulting from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of the Investment Adviser's reckless disregard of its duties and
obligations under the Investment Advisory Agreement. The Trust has agreed to
indemnify the Investment Adviser against liabilities, costs and expenses that
the Investment Adviser may incur in connection with any action, suit,
investigation or other proceeding arising out of or otherwise based on any
action actually or allegedly taken or omitted to be taken by the Investment
Adviser in connection with the performance of its duties or obligations under
the Investment Advisory Agreement or otherwise as an investment adviser of the
Trust. The Investment Adviser is not entitled to indemnification with respect
to any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
of its reckless disregard of its duties and obligations under the Investment
Advisory Agreement.

The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to the Fund by the
Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Fund, as defined in the Investment Company
Act) or the Investment Adviser upon not more than 60 days' written notice,
without payment of any penalty. The Investment Advisory Agreement provides that
it will continue in effect with respect to the Fund for a period of more than
two years from its execution only so long as such continuance is specifically
approved at least annually in conformity with the Investment Company Act.

EXPENSE LIMITATION

Under the Investment Advisory Agreement, the Investment Adviser has
agreed to defer its fees, and to absorb other expenses of the Fund (including
administrative fees and distribution expenses for the Fund, but excluding
interest, taxes, brokerage commissions and other costs incurred in connection
with portfolio securities transactions, organizational expenses and other
capitalized expenditures and extraordinary expenses), subject to possible
reimbursement during a five year period, to ensure that the operating expenses
for the Fund do not exceed the amounts specified in the Fund's prospectus.

B-32
<PAGE>

ADMINISTRATORS

The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.

Pursuant to an Administration Agreement with the Trust, ICAC is
responsible for performing all administrative services required for the daily
business operations of the Trust, subject to the supervision of the Board of
Trustees of the Trust. ICAC has no supervisory responsibility over the
investment operations of the Fund. The management or administrative services of
ICAC for the Trust are not exclusive under the terms of the Administration
Agreement and ICAC is free to, and does, render management and administrative
services to others.

For its services, ICAC receives under the Administration Agreement
annual fees from the Fund equal to the Fund's pro rata portion (based on its net
assets compared to the Trust's total net assets) of a fee equal to 0.05% of the
first $100 million of the Trust's average net assets, 0.04% of the next $150
million, 0.03% of the next $300 million, 0.02% of the next $300 million and
0.01% thereafter, subject to a $40,000 annual minimum. As a result, for the
fiscal year ended March 31, 1997, ICAC received aggregate compensation of
$581,542 for all of the series of the Trust.

In connection with its management of the corporate affairs of the
Trust, the Administrator pays the salaries and expenses of all its personnel and
pays all expenses incurred in connection with managing the ordinary course of
the business of the Trust, other than expenses assumed by the Trust as described
below.

Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with ICAC or the
Investment Adviser, (c) out-of-pocket travel expenses for the officers and
Trustees of the Trust and other expenses of Board of Trustees' meetings, (d) the
fees and certain expenses of the Custodian, (e) the fees and expenses of the
Transfer and Dividend Disbursing Agent that relate to the maintenance of each
shareholder account, (f) the charges and expenses of the Trust's legal counsel
and independent accountants, (g) brokerage commissions and any issue or transfer
taxes chargeable to Trustees and officers of the Trust in connection with
securities transactions, (h) all taxes and corporate fees payable by the Trust
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Trust may be a member, (j) the cost of maintaining the
Trust's existence, taxes and interest, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining the
registration of the Trust and of its shares with the Commission and registering
the Trust as a broker or dealer and qualifying their shares under state
securities laws, including the preparation and printing of the Trust's
registration statement, prospectuses and statements of additional information,
(m) allocable communication expenses with respect to investor services and all
expenses of shareholders' and Board of Trustees' meetings and of preparing,
printing and mailing prospectuses and reports to shareholders, (n) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of the business of the Trust, and (o) expenses assumed by
the Trust pursuant to any plan of distribution adopted in conformity with Rule
12b-1 under the Investment Company Act.

B-33
<PAGE>

automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.

Pursuant to an Administrative Services Agreement with the Trust, the
Investment Adviser is responsible for providing all administrative services
which are not provided by ICAC or by the Trust's Distributor, transfer agents,
accounting agents, independent accountants and legal counsel. These services
are comprised principally of assistance in coordinating with the Trust's various
service providers, providing certain officers of the Trust, responding to
inquiries from shareholders which are directed to the Trust rather than other
service providers, calculating performance data, providing various reports to
the Board of Trustees, and assistance in preparing reports, prospectuses, proxy
statements and other shareholder communications. The Agreement contains
provisions regarding liability and termination similar to those of the
Administration Agreement.

DISTRIBUTOR

Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Fund. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management Holdings, L.P., the
general partner of the Investment Adviser.

DISTRIBUTION AGREEMENT

Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Fund, but is
not obligated to sell any specified number of shares. The Distribution Agreement
contains provisions with respect to renewal and termination similar to those in
the Investment Advisory Agreement discussed above. Pursuant to the Distribution
Agreement, the Trust has agreed to indemnify the Distributor to the extent
permitted by applicable law against certain liabilities under the Securities
Act.

Sales charges on sales of Class A shares of the Fund are payable only
with respect to purchases of less than $1,000,000. However, the Distributor pays
an initial commission to broker- dealers and others on purchases of Class A
shares of the Fund of $1 million or more, and on purchases made at net asset
value by certain retirement plans. See "Purchase and Redemption of Portfolio
Shares -- Dealer Commissions."

DISTRIBUTION PLAN

Under a plan of distribution for the Trust with respect to the Class
A, B and C shares of the Fund (the "Distribution Plan") adopted pursuant to Rule
12b-1 under the Investment Company Act and distribution agreement (the
"Distribution Agreement"), the Distributor incurs the expense of distributing
such shares of the Fund. The Distribution Plan provides for compensation to the
Distributor for the services it provides, and the costs and expenses it incurs,
related to marketing such shares of the Fund. The Distributor is paid for: (a)
expenses incurred in connection with advertising and marketing such shares of
the Fund, including but not limited to any advertising by radio, television,
newspapers, magazines, brochures, sales literature, telemarketing or direct mail
solicitations;

B-34
<PAGE>

(b) periodic payments of fees or commissions for distribution assistance made to
one or more securities brokers, dealers or other industry professionals such as
investment advisers, accountants, estate planning firms and the Distributor
itself in respect of the average daily value of such shares owned by clients of
such service organizations, and (c) expenses incurred in preparing, printing and
distributing the Fund's prospectus and statement of additional information with
respect to such shares.

The Distribution Plan continues in effect from year to year, provided
that each such continuance is approved at least annually by a vote of the Board
of Trustees of the Trust, including a majority vote of the Trustees of the Trust
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any
agreements related to the Distribution Plan (the "Rule 12b-1 Trustees"), cast in
person at a meeting called for the purpose of voting on such continuance. The
Distribution Plan may be terminated with respect to any Class of shares of the
Fund at any time, without penalty, by the vote of a majority of the Rule 12b-1
Trustees or by the vote of the holders of a majority of the outstanding shares
of the Fund. The Distribution Plan may not be amended to increase materially
the amounts to be paid by a Class of shares of the Fund for the services
described therein without approval by a majority of such outstanding shares of
the Fund, and all material amendments are required to be approved by the Board
of Trustees in the manner described above. The Distribution Plan will
automatically terminate in the event of its assignment. A Class of shares of
the Fund will not be contractually obligated to pay expenses incurred under the
Distribution Plan if the Plan is terminated or not continued with respect to
such shares.

Under the Distribution Plan, the Distributor is compensated for
distribution-related expenses with respect to the Fund at the following annual
rates, payable monthly, based on the average daily net assets of each class of
the Fund: for the Class A shares of the Fund, 0.25%; for the Class B and Class
C shares of the Fund, 0.75%. The Distributor recovers the distribution expenses
it incurs through the receipt of compensation payments from the Trust under the
Distribution Plan and the receipt of that portion of initial sales charges on
purchases of shares of the Fund remaining after the Distributor's reallowance to
selected dealers.

If the Distributor incurs expenses greater than the maximum
distribution fees payable under the Distribution Plan, as described above, with
respect to a Class of shares of the Fund, the Class will not reimburse the
Distributor for the excess in the subsequent fiscal year. However, because the
Distribution Plan is a "compensation-type" plan, the distribution fees are
payable even if the Distributor's actual distribution related expenses are less
than the percentages described above.

The Distributor pays broker-dealers and others out of its distribution
fees quarterly trail commissions of up to the following annual percentages of
the average daily net assets attributable to shares of respective classes held
in the accounts of their customers: 0.25% for the Class A and B shares of the
Fund; 0.75% for Class C shares of the Fund.

SHAREHOLDER SERVICE PLAN

The Trust has also adopted a Shareholder Service Plan with respect to
the Fund. Under the Shareholder Service Plan, the Distributor is compensated at
the annual rate of 0.10% of the average daily net assets of the Fund
attributable to the Class A shares of the Fund, and 0.25% of the average daily
net assets of the Fund attributable to the Class B and C shares of the Fund, for
certain shareholder service expenses provided by the Distributor and fees paid
to broker-dealers and others for the provision of support services to their
clients who are beneficial owners of shares of the Fund.

Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in Fund
shares; processing dividend and distribution

B-35
<PAGE>

payments from the Fund on behalf of clients; preparing tax reports; arranging
for bank wires; responding to client inquiries concerning their investments in
Fund shares; providing the information to the Fund necessary for accounting and
subaccounting; preparing tax reports, forms and related documents; forwarding
shareholder communications from the Trust (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to clients; assisting in processing exchange and redemption requests
from clients; assisting clients in changing dividend options, account
designations and addresses; and providing such other similar services.

The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees of the Trust, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder Service
Plan (the "Independent Trustees"), cast in person at a meeting called for the
purpose of voting on such continuance. The Shareholder Service Plan may be
amended at any time by the Board, provided that any material amendments of the
terms of the Plan will become effective only upon the approval by a majority of
the Board and a majority of the Independent Trustees pursuant to a vote cast in
person at a meeting called for the purpose of voting on the Plan. The
Shareholder Service Plan may be terminated with respect to the Fund or class at
any time, without penalty, by the Board.

Under the Shareholder Service Plan, the Distributor pays
broker-dealers and others an account servicing fee of up to 0.25% annually of
the average daily net assets of the Fund attributable to the Class C shares of
such Fund in the accounts of their customers, as compensation for providing
certain shareholder-related services.

MISCELLANEOUS

Pursuant to the Distribution Plan and Shareholder Service Plan, the
Board of Trustees reviews at least quarterly a written report of the
distribution and service expenses incurred on behalf of shares of the Fund by
the Distributor. The report includes an itemization of the distribution and
service expenses and the purposes of such expenditures. In addition, as long as
the Plans remain in effect, the selection and nomination of Trustees who are not
interested persons of the Trust is committed to the Trustees who are not
interested persons of the Trust.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Fund's portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Fund, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Fund
invests may be traded in the over-the- counter markets, and the Fund deals
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere. The
Investment Adviser negotiates commission rates with brokers or dealers based on
the quality or quantity of services provided in light of generally prevailing
rates, and while the Investment Adviser generally seeks reasonably competitive
commission rates, the Fund does not necessarily pay the lowest commissions
available. The Board of Trustees of the Trust periodically reviews the
commission rates and allocation of orders.

B-36
<PAGE>

The Fund has no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. Subject to obtaining the
best price and execution, brokers who sell shares of the Fund or provide
supplemental research, market and statistical information and other research
services and products to the Investment Adviser may receive orders for
transactions by the Fund. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser are not necessarily reduced as a result
of the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Trust, and not all such
information, services and products are used by the Investment Adviser in
connection with the Fund. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Fund. The Investment
Adviser may pay higher commissions on brokerage transactions for the Fund to
brokers in order to secure the information, services and products described
above, subject to review by the Trust's Board of Trustees from time to time as
to the extent and continuation of this practice.

Although the Investment Adviser makes investment decisions for the
Trust independently from those of its other accounts, investments of the kind
made by the Fund may often also be made by such other accounts. When the
Investment Adviser buys or sells the same security at the same time on behalf of
the Fund and one or more other accounts managed by the Investment Adviser, the
Investment Adviser allocates available investments by such means as, in its
judgment, result in fair treatment. The Investment Adviser aggregates orders
for purchases and sales of securities of the same issuer on the same day among
the Fund and its other managed accounts, and the price paid to or received by
the Fund and those accounts is the average obtained in those orders. In some
cases, such aggregation and allocation procedures may affect adversely the price
paid or received by the Fund or the size of the position purchased or sold by
the Fund.

Securities trade in the over-the-counter market on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's commission or discount. On occasion, certain money market
instruments and agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid.

PURCHASE AND REDEMPTION OF FUND SHARES

Class A, B, and C shares of the Fund may be purchased and redeemed at
their net asset value without any initial or deferred sales charge by former
partners of Whitehall Partners and Coventry Partners, California limited
partnerships, who received shares of the predecessor to the Class I shares of
the Trust's Core Growth Fund and Income & Growth Fund, respectively, in the
reorganization and conversion of such partnerships into such predecessor.
Similarly, Class A, B and C shares of the Fund may be purchased and redeemed at
their net asset value without any initial or deferred sales charge by former
partners and participants of Stratford Partners and Nicholas-Applegate Emerging
Growth Pooled Trust, who received shares of the predecessor to the Class I
Shares of the Trust's Emerging Growth Fund in the reorganization and conversion
of such partnerships and pooled trust into such predecessor.

B-37
<PAGE>

The price paid for purchase and redemption of shares of the Fund is
based on the net asset value per share, which is calculated once daily at the
close of trading (currently 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Martin Luther King's Birthday,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day. The offering price is effective for orders
received by the Transfer Agent prior to the time of determination of net asset
value. Dealers are responsible for promptly transmitting purchase orders to the
Transfer Agent. The Trust reserves the right in its sole discretion to suspend
the continued offering of the Fund's shares and to reject purchase orders in
whole or in part when such rejection is in the best interests of the Trust and
the Fund. Payment for shares redeemed will be made more than seven days after
receipt of a written or telephone request in appropriate form, except as
permitted by the 1940 Act and the rules thereunder.

REDUCED SALES CHARGES

Sales charges on purchases of Class A shares of the Fund are subject
to a reduction in certain circumstances, as indicated in the Prospectus.

RIGHTS OF ACCUMULATION. The Fund makes available to its Class A
shareholders the ability to aggregate the value (at the current maximum offering
price on the date of the purchase) of their existing holdings of all Class A
shares to determine the reduced sales charge, provided the shares are held in a
single account. The value of existing holdings for purposes of determining the
reduced sales charge is calculated using the maximum offering price (net asset
value plus sales charge) as of the previous business day. The Transfer Agent
must be notified at the time of purchase that the shareholder is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings.

CONCURRENT PURCHASES. Purchasers may combine concurrent purchases of
Class A shares of two or more series of the Trust to qualify for a reduced sales
charge. If the shares of the series purchased concurrently are subject to
different sales charges, the concurrent purchases are aggregated to determine
the reduced sales charge applicable to series purchased, and each separate
reduced sales charge is imposed on the amount of shares purchased for that
series.

To illustrate, suppose an investor concurrently purchases $40,000 of
the Class A shares of the Core Growth Fund and $20,000 of the Class A shares of
the Fund, for an aggregate concurrent purchase of $60,000. Because the sales
charges are reduced for purchases of $50,000 or more and because concurrent
purchases can be combined, the applicable sales charge imposed on the $40,000
purchase of shares of the Core Growth Fund would be reduced to 4.50% (from
5.25%), and the sales charge imposed on the concurrent $20,000 purchase of
shares of the Fund would be reduced to 4.00% (from 4.75%).

LETTER OF INTENT. Reduced sales charges are available to purchasers
of Class A shares of the Fund who enter into a written Letter of Intent
providing for the purchase, within a 13-month period, of Class A shares of the
series of the Trust, provided the shares are held in a single account. All
Class A shares of such series which were previously purchased and are still
owned are also included in determining the applicable reduction. The Letter of
Intent privilege may be withdrawn by the Distributor or the Transfer Agent for
future purchases upon receipt of information that any shares subject to the
Letter of Intent have been transferred or redeemed during the 13-month Period.

A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a 13-month period. Each
investment made during the

B-38
<PAGE>

period will receive the reduced sales charge applicable to the amount
represented by the goal, as if it were a single investment. Investors should
refer to their Letter of Intent when placing orders for Class A shares of the
Fund. During the 13-month period, an investor may increase his or her Letter of
Intent goal and all subsequent purchases will be treated as a new Letter of
Intent except as to the 13-month period, which does not change. The sales
charge paid on purchases made before the increase to the Letter of Intent goal
will be retroactively reduced at the end of the period.

The Transfer Agent will hold in escrow Class A shares of the Fund and
other series of the Trust totaling 5% of the dollar amount of the Letter of
Intent in the name of the purchaser. Any dividends and capital gains
distributions on the escrowed shares will be paid to the investor or as
otherwise directed by the investor. The effective date of a Letter of Intent
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal. Upon completion of the Letter of Intent goal
within the 13-month period, the investor will promptly receive the escrowed
shares.

The Letter of Intent does not obligate the investor to purchase, or
the Fund to sell, the indicated amount of Class A shares. In the event the
Letter of Intent goal is not achieved within the 13-month period, the investor
must pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such payment
may be made directly to the Transfer Agent or, if not paid within 20 days after
written request, the Transfer Agent will liquidate sufficient escrowed shares to
obtain such difference. If the redemption or liquidation proceeds are
inadequate to cover the differences, investors will be liable for the extent of
the inadequacy. By executing the Letter of Intent, investors irrevocably
appoint the Transfer Agent as attorney in fact with full power of substitution
in the premises to surrender for redemption any or all escrowed shares. If the
goal Letter of Intent is exceeded in an amount which qualified for a lower sales
charge, a price adjustment is made by refunding to the purchaser the amount of
excess sales charge, if any, paid during the 13-month period.

DEALER COMMISSIONS

The Distributor pays the following commissions to dealers who initiate
and are responsible for purchases of a Class of Fund shares of $1 million or
more and for purchases made at net asset value by certain retirement plans of
organizations with 50 or more eligible employees. Such commissions are paid
twice monthly at the following annual rates:

Current Market Value
of Accounts at
Commission Rate Time of Purchase
--------------- ----------------

1.00% $1,000,000 up to $2,000,000.
.80% over $2,000,000 up to $5,000,000.
.50% over $5,000,000 up to $25,000,000.
.25% over $25,000,000.

For this purpose, exchanges between series are not considered to be purchases.
The Distributor reserves the right to require reimbursement of any such
commissions paid with respect to such purchases if such shares are redeemed
within twelve months after purchase. Dealers requesting further information may
call (800) 551-8045.

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<PAGE>

REDEMPTION IN KIND

The Trust intends to pay in cash for all shares of the Fund redeemed,
the Trust reserves the right to make payment wholly or partly in shares of
portfolio securities. In such cases, a shareholder may incur brokerage costs in
converting such securities to cash. However, the Trust has elected to be
governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.

WAIVER OF CDSC

The CDSC is waived for redemptions by: (1) current or retired
directors, trustees, partners, officers and employees of the Trust, the
Distributor, the Investment Adviser and its general partner, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) former limited partners and participants of certain investment partnerships
and pooled trusts previously managed by the Investment Adviser; and
(3) participants in certain pension, profit-sharing or employee benefit plans
that are sponsored by the Distributor and its affiliates.

The CDSC is also waived for:

(1) exchanges of Class B or C shares of the Fund (however, the shares
acquired by exchange will continue to be subject to a CDSC on the same
basis as the shares exchanged);

(2) redemptions in connection with mergers, acquisitions and exchange
offers involving Class B or C shares of the Fund;

(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;

(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or IRAs due to death, disability or attainment of age
591/2;

(5) tax-free returns of excess contributions to IRAs;

(6) any partial or complete redemptions following the death or disability
of a shareholder, provided the redemption is made within one year of death
or initial determination of disability; and

(7) redemptions when the Distributor did not pay an advance commission to
a broker upon the purchase of the shares being redeemed.

CERTAIN EMPLOYEE BENEFIT PLANS

Class A shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the date the plan sponsor
signs the Merrill Lynch Recordkeeping Service Agreement, the plan has $3 million
or more in assets invested in broker/dealer funds not advised or managed by
Merrill Lynch Asset Management, L.P. ("MLAM") that are made available pursuant
to a Services Agreement between Merrill Lynch and the Distributor and in funds
advised or managed by MLAM (collectively, the "Applicable Investments"); or (ii)
the plan is recordkept on a daily valuation basis by an independent recordkeeper
whose services are provided through a contract or alliance arrangement with
Merrill Lynch, and on the date the plan sponsor

B-40
<PAGE>

signs the Merrill Lynch Recordkeeping Service Agreement, the plan has $3
million or more in assets, excluding money market funds, invested in
Applicable Investments; or (iii) the plan has 500 or more eligible employees,
as determined by the Merrill Lynch plan conversion manager, on the date the
plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement.

Class B shares are made available to certain 401(k) plans at net asset
value, with waiver of the CDSC, if (i) the plan is recordkept on a daily
valuation basis by Merrill Lynch and, on the date the plan sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the plan has less than $3 million
in assets invested in Applicable Investments; or (ii) the plan is recordkept on
a daily valuation basis by an independent recordkeeper whose services are
provided through a contract or alliance arrangement with Merrill Lynch, and on
the date the plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or (iii) the plan has less than 500
eligible employees, as determined by the Merrill Lynch plan conversion manager,
on the date the plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.

Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares of the Fund will be converted to Class A shares once the plan has
reached $5 million invested in Applicable Investments. The conversion will be
effected at the plan level.

SHAREHOLDER SERVICES

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of shares of the Fund, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. If a share certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time. There
is no charge to the investor for issuance of a certificate. Whenever a
transaction takes place in the Shareholder Investment Account, the shareholder
will be mailed a statement showing the transaction and the status of the
Account.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable Class
of shares of the Fund at net asset value. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.

AUTOMATIC INVESTMENT PLAN

Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of the Fund on a monthly or
quarterly basis on any day of the month or

B-41
<PAGE>

quarter by authorizing his or her bank account to be debited to invest specified
dollar amounts in shares of the Fund. The investor's bank must be a member of
the Automatic Clearing House System. Stock certificates are not issued to
participants of the Automatic Investment Plan. Participation in the Plan will
begin within 30 days after receipt of the account application. If the
investor's bank account cannot be charged due to insufficient funds, a
stop-payment order or closing of the account, the investor's Plan may be
terminated and the related investment reversed. The investor may change the
amount of the investment or discontinue the Plan at any time by writing to the
Transfer Agent. Further information about this program and an application form
can be obtained from the Transfer Agent or the Distributor.

CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

A shareholder of Class A, B and C shares of the Fund may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by the
Fund (the "paying Fund") into Class A, B or C shares of any other series of the
Trust (the "receiving Fund") subject to the following conditions: (i) the
aggregate value of the shareholder's account(s) in the paying Fund(s) must equal
or exceed $5,000 (this condition is waived if the value of the account in the
receiving Fund equals or exceeds that Fund's minimum initial investment
requirement), (ii) as long as the value of the account in the receiving Fund is
below that Fund's minimum initial investment requirement, dividends and capital
gain distributions paid by the receiving Fund must be automatically reinvested
in the receiving Fund, and (iii) if this privilege is discontinued with respect
to a particular receiving Fund, the value of the account in that Fund must equal
or exceed the Fund's minimum initial investment requirement or the Fund will
have the right, if the shareholder fails to increase the value of the account to
such minimum within 90 days after being notified of the deficiency,
automatically to redeem the account and send the proceeds to the shareholder.
These cross-reinvestments of dividends and capital gain distributions will be at
net asset value (without a sales charge).

AUTOMATIC WITHDRAWAL

The Transfer Agent arranges for the redemption by the Fund of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.

NET ASSET VALUE

Investment securities, including ADRs and EDRs, that are traded on a
stock exchange or on the NASDAQ National Market System are valued at the last
sale price as of the close of business on the New York Stock Exchange (normally
4:00 P.M. New York time) on the day the securities are being valued, or lacking
any sales, at the mean between the closing bid and asked prices. Securities
listed or traded on certain foreign exchanges whose operations are similar to
the United States over-the-counter market are valued at the price within the
limits of the latest available current bid and

B-42
<PAGE>

asked prices deemed by the Investment Adviser best to reflect fair value. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security
by the Investment Adviser. Listed securities that are not traded on a
particular day and other over-the-counter securities are valued at the mean
between the closing bid and asked prices.

In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt different
trading hours on either a permanent or temporary basis, the Board of Trustees of
the Trust will reconsider the time at which they compute net asset value. In
addition, the asset value of the Fund may be computed as of any time permitted
pursuant to any exemption, order or statement of the Commission or its staff.

The Fund values long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day of
valuation from a bond pricing service, as discussed below. The Fund values debt
securities with maturities of 60 days or less at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by the Fund is more
than 60 days, unless this is determined by the Board of Trustees of the Trust
not to represent fair value. The Fund values repurchase agreements at cost plus
accrued interest.

The Fund values U.S. Government securities which trade in the
over-the-counter market at the last available bid prices, except that securities
with a demand feature exercisable within one to seven days are valued at par.
Such valuations are based on quotations of one or more dealers that make markets
in the securities as obtained from such dealers, or on the evaluation of a
pricing service.

The Fund values options, futures contracts and options thereon which
trade on exchanges at their last sale or settlement price as of the close of
such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes later
than 4:00 p.m. New York time, the options or futures traded on it are valued
based on the sale price, or on the mean between the bid and ask prices, as the
case may be, as of 4:00 p.m. New York time.

Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
day in New York. In addition, foreign securities trading may not take place on
all business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees of the Trust deems that the particular event would
materially affect net asset value, in which case an adjustment will be made.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value into U.S.
dollars at the spot exchange rates at 1:00 p.m. New York time or at such other
rates as the Investment Adviser may determine to be appropriate in computing net
asset value.

Securities and assets for which market quotations are not readily
available, or for which the Trust's Board of Trustees or persons designated by
the Board determine that the foregoing methods

B-43
<PAGE>

do not accurately reflect current market value, are valued at fair value as
determined in good faith by or under the direction of the Trust's Board of
Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees.

The Trust may use a pricing service approved by its Board of Trustees.
Prices provided by such a service represent evaluations of the mean between
current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of its Board of Trustees,
which may replace a service at any time if it determines that it is in the best
interests of the Fund to do so.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund declares and pays dividends of all investment income. The
Fund makes distributions at least annually of its net capital gains, if any. In
determining amounts of capital gains to be distributed by the Fund, any capital
loss carryovers from prior years will be offset against its capital gains.

REGULATED INVESTMENT COMPANY

The Trust has elected to qualify the Fund as a regulated investment
company under Subchapter M of the Code, and intends that each Portfolio will
remain so qualified.

As a regulated investment company, the Fund will not be liable for
federal income tax on its income and gains provided it distributes all of its
income and gains currently. Qualification as a regulated investment company
under the Code requires, among other things, that the Fund (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) for taxable years beginning on
or before August 5, 1997 derive less than 30% of its gross income from the sale
or other disposition of stock, securities, options, futures, forward contracts,
certain foreign currencies and certain options, futures, and forward contracts
on foreign currencies held less than three months; (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value of
the Fund's assets is represented by cash, U.S. Government securities and
securities of other regulated investment companies, and other securities (for
purposes of this calculation generally limited, in respect of any one issuer, to
an amount not greater than 5% of the market value of the Fund's assets and 10%
of the outstanding voting securities of such issuer) and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or two or more issuers which the Trust controls and which
are determined to be engaged in the same or similar trades or businesses; and
(d) distribute at least 90% of its investment company taxable income (which
includes dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year.

B-44
<PAGE>

least 98% of its ordinary income and net capital gain (not taking into account
any capital gains or losses as an exception) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (and adjusted for
certain ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by the Fund in
October, November, or December of that year to shareholders of record on a date
in such a month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Fund intends to make timely distributions of its
income in compliance with these requirements and anticipate that it will not be
subject to the excise tax.

Dividends paid by the Fund from ordinary income, and distributions of
the Fund's net realized short-term capital gains, are taxable to its
shareholders as ordinary income. Distributions to corporate shareholders will
be eligible for the 70% dividends received deduction to the extent that the
income of the Fund is derived from dividends on common or preferred stock of
domestic corporations. Dividend income earned by the Fund will be eligible for
the dividends received deduction only if the Fund has satisfied a 46-day holding
period requirement with respect to the underlying portfolio security (91 days in
the case of dividends derived from preferred stock). In addition, a corporate
shareholder must have held its shares in the Fund for not less than 46 days (91
days in the case of dividends derived from preferred stock) in order to claim
the dividend received deduction. Not later than 60 days after the end of its
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during such year which may be
taken into account by its shareholders for purposes of such deduction provisions
of the Code. Net capital gain distributions are not eligible for the dividends
received deduction.

Under the Code, any distributions designated as being made from net
capital gains are taxable to the Fund's shareholders as long-term capital gains,
regardless of the holding period of such shareholders. Such distributions of
net capital gains will be designated by the Fund as a capital gains distribution
in a written notice to its shareholders which accompanies the distribution
payment. Any loss on the sale of shares held for less than six months will be
treated as a long-term capital loss for federal tax purposes to the extent a
shareholder receives net capital gain distributions on such shares. The maximum
federal income tax rate applicable to long-term capital gains is currently 28%
(20% for property sold after July 28, 1997 that was held more than 18 months)
for individual shareholders and 35% for corporate shareholders. Dividends and
distributions are taxable as such whether received in cash or reinvested in
additional shares of the Fund.

Any loss realized on a sale, redemption or exchange of shares of the
Fund by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund
if the shareholder acquires shares in a series of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.

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<PAGE>

SPECIAL TAX CONSIDERATIONS

U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from the Fund provided that certain conditions are satisfied.
Interest received on repurchase agreements collateralized by U.S. Government
obligations normally is not exempt from state taxation. The Trust will inform
shareholders annually of the percentage of income and distributions derived from
direct U.S. Government obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
the Fund is considered tax exempt in their particular states.

SECTION 1256 CONTRACTS. Many of the futures contracts and forward
contracts used by the Fund are "section 1256 contracts." Any gains or losses on
section 1256 contracts are generally credited 60% long-term and 40% short-term
capital gains or losses ("60/40") although gains and losses from hedging
transactions, certain mixed straddles and certain foreign currency transactions
from such contracts may be treated as ordinary in character. Also, section 1256
contracts held by the Fund at the end of each taxable year (and, for purposes of
the 4% excise tax, on certain other dates as prescribed under the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, depending on the circumstances.

STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund. In
addition, losses realized by the Fund on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Fund are not entirely clear. The transactions may
increase the amount of short-term capital gain realized by the Fund which is
taxed as ordinary income when distributed to shareholders.

The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.

Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to the shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.

The qualifying income and diversification requirements applicable to
the Fund's assets may limit the extent to which the Fund will be able to engage
in transactions in options, futures contracts or forward contracts.

B-46
<PAGE>

Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, gains or losses on disposition
of debt securities denominated in a foreign currency and on disposition of
certain futures attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as "section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to the shareholders.

FOREIGN TAX. Foreign countries may impose withholding and other taxes
on income received by the Fund from sources within those countries. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. In addition, the Investment Adviser intends to manage the Fund with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of the Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible to elect to "pass-through" to the Fund's shareholders the amount of
foreign income and similar taxes paid by the Fund. Each shareholder will be
notified within 60 days after the close of the Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year.

Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the Fund elects
pass-through treatment, the source of the Fund's income flows through to
shareholders of the Fund. With respect to such election, the Fund treats gains
from the sale of securities as derived from U.S. sources and certain currency
fluctuation gains, including fluctuation gains from foreign currency denominated
debt securities, receivables and payables as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit applies separately to foreign
source passive income, and to certain other types of income. Shareholders may
be unable to claim a credit for the full amount of their proportion at share of
the foreign taxes paid by the Fund. The foreign tax credit is modified for
purposes of the federal alternative minimum tax and can be used to offset only
90% of the alternative minimum tax imposed on corporations and individuals and
foreign taxes generally are not deductible in computing alternative minimum
taxable income.

SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short-term depending on the holding period of
the short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired substantially similar property. Similarly, if the
Fund held property substantially identical to that sold short for the long-term
holding period as of the date of the short sale, any loss on closing the short
position will be long-term capital loss. These special rules do not apply to
substantially similar property to the extent such property exceeds the property
used by the Fund to close its short position.

ORIGINAL ISSUE DISCOUNT. The Fund may treat some of the debt
securities (with a fixed maturity date of more than one year from the date of
issuance) it may acquire as issued originally at a discount. Generally, the
Fund treats the amount of the original issue discount ("OID") as interest income
and include it in income over the term of the debt security, even though they do
not receive payment of that amount until a later time, usually when the debt
security matures. The Fund treats a portion of the OID includable in income
with respect to certain high-yield corporation debt securities as a dividend for
Federal income tax purposes.

The Fund may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that it may acquire in the
secondary market as having market

B-47
<PAGE>

discount. Generally, the Fund treats any gain recognized on the disposition of,
and any partial payment of principal on, a debt security having market discount
as ordinary interest income to the extent the gain, or principal payment, does
not exceed the "accrued market discount" on such debt security. Market discount
generally accrues in equal daily installments. The Fund may make one or more of
the elections applicable to debt securities having market discount, which could
affect the character and timing the recognition of income.

The Fund generally must distribute dividends to shareholders
representing discount on debt securities that is currently includable in income,
even though the Fund has yet to receive cash representing such income. The Fund
may obtain cash to pay such dividends from sales proceeds of securities held by
the Fund.

OTHER TAX INFORMATION

The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions payable to shareholders who fail to provide the
Trust with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain
other shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.

The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of the
Fund with respect to distributions by the Fund may differ from federal tax
treatment. Distributions to shareholders may be subject to additional state and
local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.

PERFORMANCE INFORMATION

The Trust may from time to time advertise total returns and yields for
the Fund, compare Fund performance to various indices, and publish rankings of
the Fund prepared by various ranking services. Any performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the its portfolio, and the market conditions
during the given time period, and should not be considered to be representative
of what may be achieved in the future.

TOTAL RETURN

The total return for the Fund is computed by assuming a hypothetical
initial payment of $1,000. It is assumed that all investments are made at net
asset value (as opposed to market price) and that all of the dividends and
distributions by the Fund over the relevant time periods are invested at net
asset value. It is then assumed that, at the end of each period, the entire
amount is redeemed without regard to any redemption fees or costs. The average
annual total return is then determined by calculating the annual rate required
for the initial payment to grow to the amount which would have been received
upon redemption. Total return does not take into account any federal or state
income taxes.

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<PAGE>

Total return is computed according to the following formula:

n
P(1 + T) = ERV

Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the beginning of the
period.

YIELD

The yield for the Fund is calculated based on a 30-day or one-month
period, according to the following formula:

6
Yield = 2[{a - b + 1) -1]
-----
{c x d }

For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.

COMPARISON TO INDICES AND RANKINGS

The Fund may compare the performance of its Classes of shares to
various unmanaged indices such as the Dow Jones Composite Average or its
component averages, Standard and Poor's 500 Stock Index or its component
indices, Standard and Poor's 100 Stock Index, the Russell Midcap Growth Index,
the Russell 2000 Growth Index, the Russell 1000 Index, the CS First Boston
Convertible Index, the Lehman Brothers Government Bond Index, the Morgan Stanley
Capital International World Index, the Morgan Stanley Capital International
Emerging Markets Free Index, the Emerging Markets Investible Index, the Morgan
Stanley Capital International Europe, Australia and Far East Index, the IFC
Emerging Markets Investible Index, The New York Stock Exchange composite or
component indices, the Wilshire 5000 Equity Index, indices prepared by Lipper
Analytical Services and Morningstar, Inc., the CDA Mutual Fund Report published
by CDA Investment Technologies, Inc., performance statistics reported in
financial publications such as The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune and Money magazines, the Consumer Price
Index (or Cost of Living Index) published by the U.S. Bureau of Labor
Statistics, Stocks, Bonds, Bills and Inflation published by Ibbotson Associates,
Savings and Loan Historical Interest Rates published in the U.S. Savings & Loan
League Fact Book, and historical data supplied by the research departments of
First Boston Corporation, The J.P. Morgan companies, Salomon Brothers, Merrill
Lynch, Lehman Brothers, Smith Barney Shearson and Bloomberg L.P. Unmanaged
indices (I.E., other than Lipper) generally do not reflect deductions for
administrative and management costs and expenses.

A number of independent mutual fund ranking entities prepare
performance rankings. These entities categorize and rank funds by various
criteria, including fund type, performance over a given period of years, total
return, standardized yield, variations in sales charges and risk\reward
considerations.

B-49
<PAGE>

Prior Performance of the Predecessor to the Fund

The following table sets forth historical performance information
for the Class A, B, and C shares of the High Yield Bond Fund. It includes
historical performance information for the Institutional Portfolio which
preceded the Fund prior to the reorganization of the High Yield Bond
Institutional Portfolio of the Trust in March 1998 (adjusted for deferred
sales loads, 12b-1 fees and shareholder service fees applicable to Class A, B
and C shares) and the Investment Adviser's composite performance data
relating to the historical performance of institutional private accounts
managed by the Investment Adviser, since the dates indicated, that have
investment objectives, policies, strategies and risks substantially similar
to those of such Fund. The composite data is provided to illustrate the past
performance of the Investment Adviser in managing substantially similar
accounts as measured against specified market indices and does not represent
the performance of the Fund. Investors should not consider this performance
data as an indication of future performance of the Fund or of the Investment
Adviser.

The Investment Adviser has advised the Trust that the net
performance results for the Fund are calculated as set forth above under
"Performance Information -- Total Return." All information set forth in the
tables below relies on data supplied by the Investment Adviser or from
statistical services, reports or other sources believed by the Investment
Adviser to be reliable. However, except as otherwise indicated, such
information has not been verified and is unaudited.

The Investment Adviser's composite performance data shown below
were calculated in accordance with recommended standards of the Association
for Investment Management and Research ("AIMR"(1)), retroactively applied to
all time periods. The AIMR method of calculating performance is different
from the Securities and Exchange Commission method of calculating performance
set forth above under "Performance Information--Total Return." All returns
presented were calculated on a total return basis and include all dividends
and interest, accrued income and realized and unrealized gains and loses.
All returns reflect the deduction of investment advisory fees, brokerage
commissions and execution costs paid by the Investment Adviser's
institutional private accounts, without provision for federal or state income
taxes. Custodial fees, if any, were not included in the calculation. The
Investment Adviser's composite includes all actual, fee-paying, discretionary
institutional private accounts managed by the Investment Adviser that have
investment objectives, policies, strategies and risks substantially similar
to those of the High Yield Bond Fund. Securities transactions are accounted
for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The monthly returns of the
Investment Adviser's composite combines the individual accounts' returns
(calculated on a time-weighted rate of return that is revalued whenever cash
flows exceed $500) by asset-weighing each individual account's asset value as
of the beginning of the month. Quarterly and yearly returns are calculated
by geometrically linking the monthly and quarterly returns, respectively.
The yearly returns are computed by geometrically linking the returns of each
quarter within the calendar year.

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

(1)/ AIMR is a
non-profit membership and education organization with more than 60,000
members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.

B-50
<PAGE>

imposed on the Fund by the Investment Company Act or Subchapter M of the
Internal Revenue Code. Consequently, the performance results for the Investment
Adviser's composite could have been adversely affected if the institutional
private accounts included in the composite had the same expenses, and had been
regulated, as investment companies under the federal securities laws.

The results presented below may not necessarily equate with the return
experienced by any particular investor as a result of the timing of investments
and redemptions. In addition, the effect of taxes on any investor will depend
on such person's tax status, and the results have not been reduced to reflect
any income tax which may have been payable.

The investment results presented below are not intended to predict or
suggest the returns that might be experienced by the High Yield Bond Fund or an
individual investor investing in such Fund. Investors should also be aware that
the uses of a methodology different form that used below to calculated
performance could result in different performance data.

CLASS A, B AND C SHARES OF THE HIGH YIELD BOND FUND

High Yield Bond Performance
Investment First
High Yield Adviser's High Boston
Bond Fund Yield Bond High Yield
Year A B C Composite Index(1)
- ---- --- --- --- --------- --------
<S> <C> <C> <C> <C> <C>
1994(2) . . . . . . . . . 1.45% 0.09%
1995 . . . . . . . . . 19.40 17.38
1996(2)(3) . . . . . . . 5.86% 5.95% 9.95% 21.87 12.42
1997 . . . . . . . . . 13.18 13.43 17.43 19.09 10.84
Last Year(3). . . . . . 18.46 18.79 23.79 24.74 15.72
Since inception(3). . . 21.72 23.06 26.36 17.51 11.51
</TABLE>

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

(1) The First Boston High Yield Index includes over 180 U.S. domestic issues
with an average maturity range of seven to ten years and with a minimum
issue size of $100 million. The Index reflects the reinvestment of income,
if any, but does not reflect fees, dealer markups, or other expenses of
investing.

(2) Inception dates are as follows: High Yield Bond Composite - April 1, 1994;
High Yield Bond Institutional Portfolio (predecessor to the Class A, B
and C shares of the High Yield Bond Fund) - July 31, 1996.

(3) Through September 30, 1997.

B-51
<PAGE>

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL

PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Fund and in that capacity maintains certain financial
and accounting books and records pursuant to agreements with the Trust. PFPC
Inc., 103 Bellevue Parkway, Wilmington, Delaware, an affiliate of the Custodian,
provides additional accounting services to the Fund.

State Street Bank and Trust Company, 2 Heritage Drive, 7th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent and
as the Transfer Agent for the Fund. The Transfer Agent provides customary
transfer agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, and related functions. The Dividend Disbursing
Agent provides customary dividend disbursing services to the Trust, including
payment of dividends and distributions and related functions.

The following act as sub-transfer agents for the Fund: Financial Data
Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida 32246;
and William M. Mercer Plan Participant Services, Inc., 1417 Lake Cook Road,
Deerfield, Illinois 60015.

Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles,
California 90071, serves as the independent auditors for the Trust, and in that
capacity examines the annual financial statements of the Trust.

Paul, Hastings, Janofsky & Walker LLP, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust. It also acts as
legal counsel for the Investment Adviser and Distributor.

MISCELLANEOUS

SHARES OF BENEFICIAL INTEREST

The Trust is currently comprised of 62 series. On any matter
submitted to a vote of shareholders of the Trust, all shares then entitled to
vote will be voted by the affected series unless otherwise required by the
Investment Company Act, in which case all shares of the Trust will be voted in
the aggregate or by Classes, as the case may be. For example, a change in the
Fund's fundamental investment policies would be voted upon by shareholders of
all Classes of the Fund, as would the approval of any advisory or distribution
contract for the Fund. However, all shares of the Trust may vote together in
the election or selection of Trustees, principal underwriters and accountants
for the Trust.

Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of the series of
the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be
affected by a matter, unless the interests of each series in the matter are
identical or the matter does not affect any interest of such series. Under Rule
18f-2 the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to
the Fund only if approved by a majority of its outstanding shares. However, the
rule also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts and the election of directors may
be effectively acted upon by the shareholders of the Trust voting without regard
to series.

B-52
<PAGE>

As used in the Fund's prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of the Fund, means the vote of the lesser of (i) 67% of the
shares of the Fund represented at a meeting if the holders of more than 50% of
the outstanding shares of the Fund are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the Fund. The term "majority," when
referring to the approvals to be obtained from shareholders of the Trust, means
the vote of the lesser of (i) 67% of the Trust's shares represented at a meeting
if the holders of more than 50% of the Trust's outstanding shares are present in
person or by proxy, or (ii) more than 50% of the Trust's outstanding shares.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held. Unless otherwise provided by law (for
example, by Rule 18f-2 discussed above) or by the Trust's Declaration of Trust
or Bylaws, the Trust may take or authorize any action upon the favorable vote of
the holders of more than 50% of the outstanding shares of the Trust.

The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.

Each share of each Class of the Fund represents an equal proportional
interest in the Fund with each other share of the same Class and is entitled to
such dividends and distributions out of the income earned on the assets
allocable to the Class as are declared in the discretion of the Trustees. In
the event of the liquidation or dissolution of the Trust, shareholders of the
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular series that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may determine.

Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.

DECLARATION OF TRUST

The Declaration of Trust of the Trust provides that obligations of the
Trust are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trust or its investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declaration of Trust also provides that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to
the Fund shall be enforceable against the assets and property of the Fund only,
and not against the assets or property of any other series or the investors
therein.

REGISTRATION STATEMENT

The Registration Statement of the Trust, including the Fund's
Prospectuses, the Statements of Additional Information and the exhibits filed
therewith, may be examined at the office of the Commission in Washington, D.C.
Statements contained in the Fund's Prospectuses or the Statements of Additional
Information as to the contents of any contract or other document referred to
herein or in the Prospectuses are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to these Registration Statements, each such statement being
qualified in all respects by such reference.

B-53
<PAGE>

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS

The following paragraphs summarize the descriptions for the rating
symbols of securities.

COMMERCIAL PAPER

The following paragraphs summarize the description for the rating
symbols of commercial paper.

MOODY'S INVESTORS SERVICE, INC.

Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:

PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (A) leading market positions in well-established industries;
(B) high rates of return on funds employed; (C) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (D) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (E) well-established access to a range of financial markets and
assured sources of alternate liquidity.

PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning 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.

PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.

STANDARD & POOR'S CORPORATION

Standard & Poor's ratings are a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:

A-1
<PAGE>

A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.

A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.

A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.

B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

C: Issues rated "C" are regarded as having a doubtful capacity for
payment.

FITCH INVESTORS SERVICE, INC.

F-1+: Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment.

F-1: Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
F-1+.

F-2: Good credit quality. Commercial paper assigned this rating has
a satisfactory degree of assurance for timely payment but the margin of safety
is not as great as for issuers assigned F-1+ and F-1 ratings.

F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to be
rated below investment grade.

DUFF & PHELPS

The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:

DUFF 1+ - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.

DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

A-2

<PAGE>

DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.

DUFF 3 - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.

DUFF 4 - Debt possesses speculative investment characteristics.

DUFF 5 - Issuer has failed to meet scheduled principal and/or interest
payments.

THOMSON BANKWATCH

Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:

TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.

TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."

TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.

IBCA

IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:

A1+ - Obligations are supported by the highest capacity for timely
repayment.

A1 - Obligations are supported by a strong capacity for timely
repayment.

A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.

A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.

A-3

<PAGE>

CORPORATE BONDS

MOODY'S

Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "Aaa" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:

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

A: Bonds in this category possess many favorable investment
attributes and are considered to be 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 in this category are considered 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 in this category 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 in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Caa: Bonds in this category 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 in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.

C: Bonds in this category 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.

A-4
<PAGE>

STANDARD & POOR'S

A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
Ratings are graded into ten categories, ranging from "AAA" for the highest
quality obligation to "D" for debt in default. Issues are further refined with
a "PLUS" or "MINUS" sign to show relative standing within the categories. Bonds
with the following Standard & Poor's ratings have the following investment
qualities:

AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.

AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.

A: Bonds in this category have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.

BBB: Bonds in this category have an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

BB: Bonds in this category have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-"rating.

B: Bonds in this category have a greater vulnerability to default but
currently have 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 is also used
for debt subordinated to senior debt that is assigned an actual or implied "BB"
or "BB-" rating.

CCC: Bonds in this category have currently identifiable vulnerability
to default, and are 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, they are not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.

C: This rating 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.

DUFF & PHELPS

The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:

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

A-5

<PAGE>

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

A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.

BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.

BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.

To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.

FITCH INVESTORS SERVICE, INC.

The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:

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

AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."

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

BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.

BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.

A-6

<PAGE>

To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.

ICBA

IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:

AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.

AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.

A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.

BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.

BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings
where it is considered that speculative characteristics are present. "BB"
represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.

IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.

THOMSON BANKWATCH

Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:

AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.

AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.

A-7

<PAGE>

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

BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.

BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.

D - This designation indicates that the long-term debt is in default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

A-8
<PAGE>

NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
HIGH YIELD BOND FUND
CLASS Q SHARES
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8643

STATEMENT OF ADDITIONAL INFORMATION

March 2, 1998
As Supplemented April 1, 1998

Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified funds. This Statement of Additional Information contains
information regarding the Class Q shares of the Nicholas-Applegate High Yield
Bond Fund (the "Fund" or "High Yield Bond Fund").

TABLE OF CONTENTS

PAGE

General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . . . . . B-2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . B-25
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . . . . . B-27
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-31
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . B-32
Purchase and Redemption of Fund Shares . . . . . . . . . . . . . . . . . . B-33
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . B-34
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-36
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . B-37
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . B-41
Custodian, Transfer and Dividend Disbursing Agent,
Independent Auditors and Legal Counsel . . . . . . . . . . . . . . . . . B-44
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-4
Appendix A - Description of Securities Ratings . . . . . . . . . . . . . . A-1

B-1
<PAGE>

GENERAL INFORMATION

The Trust was organized in December 1992 as a business trust under the
laws of Delaware. Information regarding the Class Q shares of the High Yield
Bond Fund is included in this Statement of Additional Information.

INVESTMENT OBJECTIVES, POLICIES AND RISKS

The following discussion describes the various investment policies and
techniques employed by the Fund. There can be no assurance that the Fund will
achieve its investment objectives.

EQUITY SECURITIES OF GROWTH COMPANIES

PREFERRED STOCK

CONVERTIBLE SECURITIES AND WARRANTS

The Fund may invest in convertible securities and warrants. The value
of a convertible security is a function of its "investment value" (determined by
its yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying
common stock approaches

B-2
<PAGE>

or exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value.

SYNTHETIC CONVERTIBLE SECURITIES

EURODOLLAR CONVERTIBLE SECURITIES

The Fund may invest in Eurodollar convertible securities, which are
fixed-income securities of a U.S. issuer or a foreign issuer that are issued
outside the United States and are convertible into equity securities of the same
or a different issuer. Interest and dividends on Eurodollar securities are
payable in U.S. dollars outside of the United States. The Fund may invest
without limitation in Eurodollar convertible securities that are convertible
into foreign equity securities listed, or represented by ADRs listed, on the New
York Stock Exchange or the American Stock Exchange or convertible into publicly
traded common stock of U.S. companies. The Fund may also invest up to 15% of
its total assets invested in convertible securities, taken at market value, in
Eurodollar convertible securities that are convertible into foreign equity
securities which are not listed, or represented by ADRs listed, on such
exchanges.

B-3
<PAGE>

EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS

RISKS OF INVESTING IN DEBT SECURITIES

CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. The rating of
an issuer is also heavily weighted by

B-4
<PAGE>

past developments and does not necessarily reflect probable future conditions.
There is frequently a lag between the time a rating is assigned and the time it
is updated. Also, since credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events, the Investment Adviser must monitor
the issuers of high yield bonds in the Fund's portfolio to determine if the
issuers will have sufficient cash flow and profits to meet required principal
and interest payments, and to assure the bonds' liquidity so the Fund can meet
redemption requests.

SHORT-TERM INVESTMENTS

The Fund may invest in any of the following securities and
instruments:

In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its Prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.

SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.

COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.

B-5
<PAGE>

Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.

Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.

GOVERNMENT OBLIGATIONS

The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association. No assurance can be
given that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.

The Fund may invest in sovereign debt obligations of foreign
countries. A number of factors affect a sovereign debtor's willingness or
ability to repay principal and interest in a timely manner, including its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.

ZERO COUPON SECURITIES

The Fund may invest up to 35% of its net assets in zero coupon
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities. Zero coupon securities may be issued by the U.S. Treasury or
by a U.S. Government agency, authority or instrumentality (such as the Student
Loan Marketing Association or the Resolution Funding Corporation). Zero coupon
securities are sold at a substantial discount from face value and redeemed at
face value at their maturity date without interim cash payments of interest and
principal. This discount is amortized over the life of the security and such
amortization will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater volatility as a result of changes in prevailing interest
rates than interest paying investments in which the Fund may invest. Because
income on such securities is accrued on a current basis, even though the Fund
does not receive the income currently in cash, the Fund may have to sell other
portfolio investments to obtain cash needed by the Fund to make income
distributions.

B-6
<PAGE>

PARTICIPATION INTERESTS

The Fund may invest in participation interests, subject to the
limitation on investments by the Fund in illiquid investments. The Fund
currently does not intend to invest more than 5% of its net assets in such
interests. Participation interests represent an undivided interest in or
assignment of a loan made by an issuing financial institution. No more than 5%
of the Fund's net assets can be invested in participation interests of the same
issuing borrower. Participation interests are primarily dependent upon the
financial strength of the borrowing corporation, which is obligated to make
payments of principal and interest on the loan, and there is a risk that such
borrowers may have difficulty making payments. In the event the borrower fails
to pay scheduled interest or principal payments, the Fund could experience a
reduction in its income and might experience a decline in the net asset value of
its shares. In the event of a failure by the financial institution to perform
its obligation in connection with the participation, the Fund might incur
certain costs and delays in realizing payment or may suffer a loss of principal
and/or interest. The Investment Adviser has set certain creditworthiness
standards for issuers of loan participations and monitors their
creditworthiness.

VARIABLE AND FLOATING RATE INSTRUMENTS

The Fund may acquire variable and floating rate instruments. Credit
rating agencies frequently do not rate such instruments; however, the Investment
Adviser under guidelines established by the Trust's Board of Trustees will
determine what unrated and variable and floating rate instruments are of
comparable quality at the time of the purchase to rated instruments eligible for
purchase by the Fund. In making such determinations, the Investment Adviser
considers the earning power, cash flow and other liquidity ratios of the issuers
of such instruments (such issuers include financial, merchandising, bank holding
and other companies) and will monitor their financial condition. An active
secondary market may not exist with respect to particular variable or floating
rate instruments purchased by the Fund. The absence of such an active secondary
market could make it difficult for the Fund to dispose of the variable or
floating rate instrument involved in the event of the issuer of the instrument
defaulting on its payment obligation or during periods in which the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss to the extent of the default. Variable and floating rate
instruments may be secured by bank letters of credit.

INDEX AND CURRENCY-LINKED SECURITIES

The Fund may invest in "index-linked" or "commodity-linked" notes,
which are debt securities of companies that call for interest payments and/or
payment at maturity in different terms than the typical note where the borrower
agrees to make fixed interest payments and to pay a fixed sum at maturity.
Principal and/or interest payments on an index-linked note depend on the
performance of one or more market indices, such as the S&P 500 Index or a
weighted index of commodity futures such as crude oil, gasoline and natural gas.
The Fund may also invest in "equity linked" and "currency-linked" debt
securities. At maturity, the principal amount of an equity-linked debt security
is exchanged for common stock of the issuer or is payable in an amount based on
the issuer's common stock price at the time of maturity. Currency-linked debt
securities are short-term or intermediate term instruments having a value at
maturity, and/or an interest rate, determined by reference to one or more
foreign currencies. Payment of principal or periodic interest may be calculated
as a multiple of the movement of one currency against another currency, or
against an index.

B-7
<PAGE>

underlying securities and indexes may move in a direction that was not
anticipated by the Investment Adviser. Performance of the derivatives may be
influenced by interest rate and other market changes in the U.S. and abroad.
Certain derivative instruments may be illiquid. See "Illiquid Securities"
below.

MORTGAGE-RELATED SECURITIES

The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is a
wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Agency or
guaranteed by the Veterans Administration.

B-8
<PAGE>

actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.

CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.

FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (E.G., Canada
Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.

"ROLL" TRANSACTIONS

B-9
<PAGE>

FOREIGN INVESTMENTS

The Fund may invest in securities of foreign issuers that are not
publicly traded in the United States. The Fund may also invest in depository
receipts.

The United States Government from time to time has imposed
restrictions, through taxation or otherwise, on foreign investments by U.S.
entities such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest substantially all of its assets in
United States securities. In such event, the Board of Trustees of the Trust
would consider alternative arrangements, including reevaluation of the Fund's
investment objectives and policies or investment of all of the Fund's assets in
another investment company with different investment objectives and policies
than the Fund. However, the Fund would adopt any revised investment objective
and fundamental policies only after approval by the shareholders holding a
majority (as defined in the Investment Company Act) of the shares of the Fund.

RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:

LEGAL AND REGULATORY MATTERS. In addition to nationalization, foreign
governments may take other actions that could have a significant effect on
market prices of securities and payment of interest, including restrictions on
foreign investment, expropriation of goods and imposition of taxes, currency
restrictions and exchange control regulations.

B-10
<PAGE>

OPTIONS ON SECURITIES AND SECURITIES INDICES

PURCHASING PUT AND CALL OPTIONS. The Fund is authorized to purchase
put and call options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions. Put and call options are derivative securities traded on
United States and foreign exchanges, including the American Stock Exchange,
Chicago Board Options Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange and New York Stock Exchange. The Fund will engage in trading of such
derivative securities exclusively for hedging purposes.

B-11
<PAGE>

representing a loss of the price paid for the option, plus transaction costs.
If the Fund purchases the call option to hedge a short position in the
underlying security and the price of the underlying security thereafter falls,
the premium paid for the call option less any amount for which such option may
be sold reduces the profit the Fund realizes on the cover of the short position
in the security.

B-12
<PAGE>

Index prices may be distorted if circumstances disrupt trading of
certain stocks included in the index, such as if trading were halted in a
substantial number of stocks included in the index. If this happens, the Fund
could not close out options which it had purchased, and if restrictions on
exercise were imposed, the Fund might be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Fund purchases put or
call options only with respect to an index which the Investment Adviser believes
includes a sufficient number of stocks to minimize the likelihood of a trading
halt in the index.

RISKS OF INVESTING IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.

A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code requirements for qualification of the Fund as a
regulated investment company. See "Dividends, Distributions and Taxes."

In addition, foreign options exchanges do not afford to participants
many of the protections available in United States option exchanges. For
example, there may be no daily price fluctuation limits in such exchanges or
markets, and adverse market movements could therefore continue to an unlimited
extent over a period of time. Although the purchaser of an option cannot lose
more than the amount of the premium plus related transaction costs, this entire
amount could be lost. Moreover, the Fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements typically associated with such option writing. See
"Dealer Options" below.

B-13
<PAGE>

time prior to expiration. Unless the Fund, as a covered dealer call option
writer, can effect a closing purchase transaction, it will not be able to
liquidate securities (or other assets) used as cover until the option expires or
is exercised. In the event of insolvency of the other party, the Fund may be
unable to liquidate a dealer option. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, because the Fund must maintain a secured
position with respect to any call option on a security it writes, the Fund may
not sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair the Fund's ability to
sell portfolio securities at a time when such sale might be advantageous.

The Staff of the Securities and Exchange Commission (the "Commission")
takes the position that purchased dealer options are illiquid securities. The
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
With that exception, however, the Fund will treat dealer options as subject to
the Fund's limitation on illiquid securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.

FOREIGN CURRENCY OPTIONS

As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to
the Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.

FORWARD CURRENCY CONTRACTS

B-14
<PAGE>

FUTURES CONTRACTS AND RELATED OPTIONS

B-15
<PAGE>

The sale of an interest rate or financial futures sale by the Fund
obligates the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchased by the Fund obligates the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specific future time at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.

B-16
<PAGE>

B-17
<PAGE>

with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The Fund
also may not purchase or sell futures or purchase related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets.

Upon the purchase of futures contracts, the Fund will deposit an
amount of cash or liquid debt or equity securities, equal to the market value of
the futures contracts, in a segregated account with the Custodian or in a margin
account with a broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.

B-18
<PAGE>

These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of the Fund.

The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Fund as a regulated investment company. See
"Taxes."

INTEREST RATE AND CURRENCY SWAPS

B-19
<PAGE>

at the start of the swap (the initial exchange) is optional. An initial
exchange of notional principal amounts at the spot exchange rate serves the same
function as a spot transaction in the foreign exchange market (for an immediate
exchange of foreign exchange risk). An exchange at maturity of notional
principal amounts at the spot exchange rate serves the same function as a
forward transaction in the foreign exchange market (for a future rate for the
exchange risk). The currency swap market convention is to use the spot rate
rather than the forward rate for the exchange at maturity. The economic
difference is realized through the coupon exchanges over the life of the swap.
In contrast to single currency interest rate swaps, cross-currency swaps involve
both interest rate risk and foreign exchange risk.

RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, the Fund relies on the other party to the transaction to perform
its obligations pursuant to the underlying agreement. If there were a default
by the other party to the transaction, the Fund would have contractual remedies
pursuant to the agreement, but could incur delays in obtaining the expected
benefit of the transaction or loss of such benefit. In the event of insolvency
of the other party, the Fund might be unable to obtain its expected benefit. In
addition, while the Fund will seek to enter into such transaction only with
parties which are capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to close out such a
transaction with the other party, or obtain an offsetting position with any
other party, at any time prior to the end of the term of the underlying
agreement. This may impair the Fund's ability to enter into other transactions
at a time when doing so might be advantageous.

REPURCHASE AGREEMENTS

B-20
<PAGE>

the value of the underlying securities at not less than 102% of the repurchase
price under the agreement. If the seller defaults on its repurchase obligation,
the Fund will suffer a loss to the extent that the proceeds from a sale of the
underlying securities is less than the repurchase price under the agreement.
Bankruptcy or insolvency of such a defaulting seller may cause the Fund's rights
with respect to such securities to be delayed or limited. Repurchase agreements
are considered to be loans under the Investment Company Act.

REVERSE REPURCHASE AGREEMENTS

WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS

The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will set aside cash or liquid Fund securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.

B-21
<PAGE>

BORROWING

Short sales "not against the box" and roll transactions are considered
borrowings for purposes of the percentage limitations applicable to borrowings.

The Trust has entered into a Credit Agreement on behalf of its various
series, including the Fund, with several banks and The Chase Manhattan Bank, as
administrative agent for the lenders, to borrow up to $75,000,000 from time to
time to satisfy shareholder redemption requests without the necessity of
requiring the Fund and its other Portfolios to sell portfolio securities, at
times when the Investment Adviser believes such sales are not in the best
interests of the shareholders of the Fund or other series of the Trust, in order
to provide the Fund or such other series with cash to meet such redemption
requests. The Credit Agreement expires on April 10, 1998, unless renewed by the
parties.

Under the Credit Agreement, the Fund and each other series of the
Trust may borrow, repay and reborrow amounts (collectively, the "Revolving
Credit Loans") in increments of $50,000, provided the Revolving Credit Loans
outstanding at any time aggregate at least $350,000 (the "Credit Facility").
The Trust will pay a commitment fee at the rate of 0.10% per annum of the
average daily unused portion of the Credit Facility, and may at any time
terminate the Credit Agreement or reduce the lenders' commitment thereunder in
increments of $2,500,000.

While outstanding, the Revolving Credit Loans bear interest,
fluctuating daily and payable monthly, at either of the following rates or a
combination thereof, at the Trust's option: (i) at the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, plus 0.625% per annum; or (ii)
the prime rate of interest of The Chase Manhattan Bank. If, as a result of
changes in applicable laws, regulations or guidelines with respect to the
capital adequacy of any lender, the return on such lender's capital is reduced,
the Trust may be required to adjust the rate of interest to compensate such
lender for such reduction. Each Revolving Credit Loan is payable in thirty
days, and may be prepaid at any time in increments of $100,000 without premium
or penalty. The Fund is not liable for repayment of a Revolving Credit Loan to
any other series.

B-22
<PAGE>

LENDING PORTFOLIO SECURITIES

SHORT SALES

In a short sale that is not "against the box," the Fund sells a
security which it does not own, in anticipation of a decline in the market value
of the security. To complete the sale, the Fund must borrow the security
generally from the broker through which the short sale is made) in order to make
delivery to the buyer. The Fund must replace the security borrowed by
purchasing it at the market price at the time of replacement. The Fund is said
to have a "short position" in the securities sold until it delivers them to the
broker. The period during which the Fund has a short position can range from
one day to more than a year. Until the Fund replaces the security, the proceeds
of the short sale are retained by the broker, and the Fund must pay to the
broker a negotiated portion of any dividends or interest which accrue during the
period of the loan. To meet current margin requirements, the Fund must deposit
with the broker additional cash or securities so that it maintains with the
broker a total deposit equal to 150% of the current market value of the
securities sold short (100% of the current market value if a security is held in
the account that is convertible or exchangeable into the security sold short
within 90 days without restriction other than the payment of money).

B-23
<PAGE>

its short position by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities already held by the
Fund, because the Fund might want to continue to receive interest and dividend
payments on securities in its portfolio that are convertible into the securities
sold short.

In the view of the Commission, a short sale involves the creation of a
"senior security" as such term is defined in the Investment Company Act, unless
the sale is "against the box" and the securities sold short are placed in a
segregated account (not with the broker), or unless the Fund's obligation to
deliver the securities sold short is "covered" by placing in a segregated
account (not with the broker) cash, U.S. Government securities or other liquid
debt or equity securities in an amount equal to the difference between the
market value of the securities sold short at the time of the short sale and any
such collateral required to be deposited with a broker in connection with the
sale (not including the proceeds from the short sale), which difference is
adjusted daily for changes in the value of the securities sold short. The total
value of the cash, U.S. Government securities or other liquid debt or equity
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. The Fund will comply with these requirements. In addition, as
a matter of policy, the Trust's Board of Trustees has determined that the Fund
will not make short sales of securities or maintain a short position if to do so
could create liabilities or require collateral deposits and segregation of
assets aggregating more than 25% of the Fund's total assets, taken at market
value.

The extent to which the Fund may enter into short sales transactions
may be limited by the Internal Revenue Code requirements for qualification of
the Fund as a regulated investment company. See "Dividends, Distributions and
Taxes."

ILLIQUID SECURITIES

B-24
<PAGE>

readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees has determined that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. Investing in restricted securities eligible for
resale under Rule 144A could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
uninterested in purchasing such securities.

INVESTMENT TECHNIQUES AND PROCESSES

The Investment Adviser's investment techniques and processes, which it
has used in managing institutional portfolios for many years, are described
generally in the Fund's prospectus. In making decisions with respect to equity
securities for the Fund, GROWTH OVER TIME-Registered Trademark- is the
Investment Adviser's underlying goal, and the Investment Adviser emphasizes
growth over time through investment in securities of companies with earnings
growth potential. Its investment techniques focus on discovering positive
developments when they first show up in an issuer's earnings, but before they
are fully reflected in the price of the issuer's securities.

As indicated in the Fund's prospectus, the Investment Adviser's
techniques and processes include relationships with an extensive network of
brokerage research firms located throughout the world. These analysts are often
located in the same geographic regions as the companies they follow, have
followed those companies for a number of years, and have developed excellent
sources of information about them. The Investment Adviser does not employ
in-house analysts other than the personnel actually engaged in managing
investments for the Fund and the Investment Adviser's other clients. However,
information obtained from a brokerage research firm is confirmed with other
research sources or the Investment Adviser's computer-assisted quantitative
analysis (including "real time" pricing data) of a substantial universe of
potential investments.

DIVERSIFICATION

The Fund is "diversified" within the meaning of the Investment Company
Act. In order to qualify as diversified, the Fund must diversify its holdings
so that at all times at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), securities issued or
guaranteed as to principal or interest by the United States or its agencies or
instrumentalities, securities of other investment companies, and other
securities (for this purpose other securities of any one issuer are limited to
an amount not greater than 5% of the value of the total assets of the Fund and
to not more than 10% of the outstanding voting securities of the issuer).

INVESTMENT RESTRICTIONS

B-25
<PAGE>

The investment objective of the Fund is a fundamental policy. In
addition, the Fund may not:

4. Purchase or sell real estate. However, the Fund may invest in
securities secured by, or issued by companies that invest in, real estate or
interests in real estate.

8. Underwrite securities of other issuers, except insofar as it may
be deemed an underwriter under the Securities Act in selling portfolio
securities.

9. Invest more than 15% of the value of its net assets in securities
that at the time of purchase have legal or contractual restrictions on resale or
are otherwise illiquid.

B-26
<PAGE>

11. Invest in securities of other investment companies, except (a)
that the Fund will be permitted to invest all or a portion of its assets in
another diversified, open-end management investment company with substantially
the same investment objective, policies and restrictions as the Fund; (b) in
compliance with the Investment Company Act and applicable state securities laws;
or (c) as part of a merger, consolidation, acquisition or reorganization
involving the Fund.

OPERATING RESTRICTIONS

As a matter of operating (not fundamental) policy adopted by the Board
of Trustees of the Trust, the Fund may not:

TRUSTEES AND PRINCIPAL OFFICERS

TRUST

ARTHUR B. LAFFER (57), TRUSTEE.*/ 5405 Morehouse Drive, Suite 340,
San Diego, California. Chairman, A.B. Laffer, V.A. Canto & Associates, an
economic consulting firm (since 1979); Chairman, Laffer Advisors Incorporated,
economic consultants (since 1981); Director, Nicholas-Applegate Fund, Inc.
(since 1987); Director, U.S. Filter Corporation (since March 1991) and MasTec,
Inc. (construction) (since 1994), and Coinmach Laundry Corporation (since 1996);
Chairman, Calport Asset Management, Inc. (since 1992); formerly Distinguished
University Professor and Director, Pepperdine University (from Sept. 1985 to May
1988) and Professor of Business Economics, University of Southern California
(1976 to 1984). Mr. Laffer is considered to be an "interested person" of the
Trust because A.B. Laffer, V.A. Canto & Associates received material
compensation from the Investment Adviser for consulting services provided from
time to time to the Investment Adviser, and because during the last two fiscal
years his son was an employee of the Investment Adviser.

ARTHUR E. NICHOLAS (51), PRESIDENT*/. Managing Partner and Chief
Investment Officer, Nicholas-Applegate Capital Management (since 1984), and
Chairman / President Nicholas-Applegate Securities. Director and Chairman of
the Board of Directors of Nicholas-Applegate Fund, Inc., a registered open-end
investment company, since 1987. Trustee, Nicholas-Applegate Investment Trust
(since 1993).

PETER J. JOHNSON (42), VICE PRESIDENT. Partner and Director - Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992)
and Vice President, Nicholas-Applegate Securities (since December 1995);
formerly, Marketing Director, Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991), and Senior
Marketing Representative, Fidelity Investments Institutional Services (from
August 1987 to July 1989).

Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $14,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended ($2,000 per Committee meeting for Committee chairmen).
Each Trustee is also reimbursed for out-of-pocket expenses incurred as a
Trustee.

B-28
<PAGE>
<TABLE>
<CAPTION>

AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM BENEFITS ACCRUED AS PART BENEFITS UPON RETIREMENT FROM TRUST AND TRUST
NAME TRUST OF TRUST EXPENSES COMPLEX PAID TO TRUSTEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $10,635 None N/A $36,250 (47*)

Arthur B. Laffer $ 9,558 None N/A $31,750 (47*)

Charles E. Young $ 9,827 None N/A $31,750 (47*)

* Indicates number of funds in Trust complex, including the Fund.
</TABLE>

INVESTMENT ADVISER

The Investment Adviser to the Trust is Nicholas-Applegate Capital
Management, a California limited partnership, with offices at 600 West Broadway,
30th Floor, San Diego, California 92101.

The Investment Adviser was organized in 1984 to manage discretionary
accounts investing in publicly traded securities for a variety of investors.
Its general partner is Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership the general partner of which is
Nicholas-Applegate Capital Management Holdings, Inc., a California corporation
owned by Mr. Nicholas.

THE INVESTMENT ADVISORY AGREEMENT

Under the Investment Advisory Agreement between the Trust and the
Investment Adviser with respect to the Fund, the Trust retains the Investment
Adviser to manage the Fund's investment portfolio, subject to the direction of
the Trust's Board of Trustees. The Investment Adviser is authorized to
determine which securities are to be bought or sold by the Fund and in what
amounts.

B-29
<PAGE>

vote of a majority of the outstanding voting securities of the Fund, as defined
in the Investment Company Act) or the Investment Adviser upon not more than 60
days' written notice, without payment of any penalty. The Investment Advisory
Agreement provides that it will continue in effect with respect to the Fund for
a period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in conformity with the
Investment Company Act.

EXPENSE LIMITATION

ADMINISTRATOR

The principal administrator of the Trust is Investment Company
Administration Corporation ("ICAC"), 4455 East Camelback Road, Suite 261-E,
Phoenix, Arizona 85018.

For its services, ICAC receives under the Administration Agreement
annual fees from the Fund equal to the Fund's pro rata portion (based on its net
assets compared to the Trust's total net assets) of a fee equal to 0.05% of the
first $100 million of the Trust's average net assets, 0.04% of the next $150
million, 0.03% of the next $300 million, 0.02% of the next $300 million and
0.01% thereafter, subject to a $40,000 annual minimum. As a result, for the
fiscal year ended March 31, 1997 ICAC received aggregate compensation of
$581,542 for all of the series of the Trust.

B-30
<PAGE>

Trust may be a member, (j) the cost of maintaining the Trust's existence, taxes
and interest, (k) the cost of fidelity and liability insurance, (l) the fees and
expenses involved in registering and maintaining the registration of the Trust
and of its shares with the Commission and registering the Trust as a broker or
dealer and qualifying their shares under state securities laws, including the
preparation and printing of the Trust's registration statement, prospectuses and
statements of additional information, (m) allocable communication expenses with
respect to investor services and all expenses of shareholders' and Board of
Trustees' meetings and of preparing, printing and mailing prospectuses and
reports to shareholders, (n) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the business of
the Trust, and (o) expenses assumed by the Trust pursuant to any plan of
distribution adopted in conformity with Rule 12b-1 under the Investment Company
Act.

The Administration Agreement provides that ICAC will not be liable for
any error of judgment or for any loss suffered by the Trust in connection with
the matters to which the Administration Agreement relates, except a loss
resulting from ICAC's willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties. The Administration Agreement will terminate
automatically if assigned, and may be terminated without penalty by either ICAC
or the Trust (by the Board of Trustees of the Trust or vote of a majority of the
outstanding voting securities of the Trust, as defined in the Investment Company
Act), upon 60 days' written notice. The Administration Agreement will continue
in effect only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.

DISTRIBUTOR

DISTRIBUTION AGREEMENT

Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Fund, but is
not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. The minimum assets
for investors in Class Q shares of the Fund may be waived from time to time.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act.

SHAREHOLDER SERVICE PLAN

The Trust has also adopted a Shareholder Service Plan with respect to
the Fund. Under the Shareholder Service Plan, the Distributor is compensated at
the annual rate of 0.25% of the average

B-31
<PAGE>

daily net assets of the Fund attributable to the Class Q shares of the Fund, for
certain shareholder service expenses provided by the Distributor and fees paid
to plan sponsors and others for the provision of support services to their
clients who are beneficial owners of shares of the Fund.

Support services include, among other things, establishing and
maintaining accounts and records relating to their clients that invest in Fund
shares; processing dividend and distribution payments from the Fund on behalf of
clients; preparing tax reports; arranging for bank wires; responding to client
inquiries concerning their investments in Fund shares; providing the information
to the Fund necessary for accounting and subaccounting; preparing tax reports,
forms and related documents; forwarding shareholder communications from the
Trust (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to clients; assisting in
processing exchange and redemption requests from clients; assisting clients in
changing dividend options, account designations and addresses; and providing
such other similar services.

The Shareholder Service Plan continues in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Trustees of the Trust, including a majority of the Trustees who
have no direct or indirect financial interest in the operation of the
Shareholder Service Plan or in any agreement related to the Shareholder Service
Plan (the "Independent Trustees"), cast in person at a meeting called for the
purpose of voting on such continuance. The Shareholder Service Plan may be
amended at any time by the Board, provided that any material amendments of the
terms of the Plan will become effective only upon the approval by a majority of
the Board and a majority of the Independent Trustees pursuant to a vote cast in
person at a meeting called for the purpose of voting on the Plan. The
Shareholder Service Plan may be terminated with respect to any Fund or class at
any time, without penalty, by the Board.

Under the Shareholder Service Plan, the Distributor pays plan sponsors
and others an account servicing fee of up to 0.25% annually of the average daily
net assets of the Fund attributable to the Class Q shares of the Fund in the
accounts of their customers, as compensation for providing certain
shareholder-related services.

MISCELLANEOUS

Pursuant to the Shareholder Service Plan, the Board of Trustees
reviews at least quarterly a written report of the service expenses incurred on
behalf of shares of the Fund by the Distributor. The report includes an
itemization of the service expenses and the purposes of such expenditures.
Because the Trust offers shares of numerous series (other than those to which
this Statement of Additional Information applies) which are subject to Rule
12b-1 under the Investment Company Act, the selection and nomination of Trustees
who are not interested persons of the Trust is committed to the Trustees who are
not interested persons of the Trust.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Trust's Board of Trustees, the
Investment Adviser executes the Fund's portfolio transactions and allocates the
brokerage business. In executing such transactions, the Investment Adviser
seeks to obtain the best price and execution for the Fund, taking into account
such factors as price, size of order, difficulty and risk of execution and
operational facilities of the firm involved. Securities in which the Fund
invests may be traded in the over-the-counter markets, and the Fund deals
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere. The
Investment Adviser negotiates commission rates with brokers or dealers based on
the quality or quantity of services provided in light of generally prevailing
rates, and while the Investment Adviser generally seeks reasonably competitive
commission rates, the Fund does not necessarily

B-32
<PAGE>

pay the lowest commissions available. The Board of Trustees of the Trust
periodically reviews the commission rates and allocation of orders.

Although the Investment Adviser makes investment decisions for the
Trust independently from those of its other accounts, investments of the kind
made by the Fund may often also be made by such other accounts. When the
Investment Adviser buys or sells the same security at substantially the same
time on behalf of the Fund and one or more other accounts managed by the
Investment Adviser, the Investment Adviser allocates available investments by
such means as, in its judgment, result in fair treatment. The Investment
Adviser aggregates orders for purchases and sales of securities of the same
issuer on the same day among the Fund and its other managed accounts, and the
price paid to or received by the Fund and those accounts is the average obtained
in those orders. In some cases, such aggregation and allocation procedures may
affect adversely the price paid or received by the Fund or the size of the
position purchased or sold by the Fund.

PURCHASE AND REDEMPTION OF FUND SHARES

Class Q shares of the Fund may be purchased and redeemed at their net
asset value without any initial or deferred sales charge.

The price paid for purchases and redemptions of shares of the Fund is
based on the net asset value per share, which is calculated once daily at the
close of trading (normally 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Martin Luther King's Birthday,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas Day. The offering price is effective for orders
received by the Transfer Agent or any sub-transfer agent prior to the time of
determination of net asset value.

B-33
<PAGE>

Dealers are responsible for promptly transmitting purchase orders to the
Transfer Agent or a sub-transfer agent. The Trust reserves the right in its
sole discretion to suspend the continued offering of the Fund's shares and to
reject purchase orders in whole or in part when such rejection is in the best
interests of the Trust and the Fund. Payment for shares redeemed will be made
not more than seven days after receipt of a written or telephone request in
appropriate form, except as permitted by the Investment Company Act and the
rules thereunder. Such payment may be postponed or the right of redemption
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on such Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.

SHAREHOLDER SERVICES

The services offered by the Trust to shareholders of the Class Q
shares can vary, depending on the needs of the retirement plan, and should be
arranged by contacting the Trust, the Distributor, the Administrator or the
Transfer Agent.

SHAREHOLDER INVESTMENT ACCOUNT

AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable Class Q
shares of the Fund at net asset value. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.

AUTOMATIC INVESTMENT PLAN

Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of the Fund on a monthly or
quarterly basis on any day of the month or quarter by authorizing his or her
bank account to be debited to invest specified dollar amounts in shares of the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to participants of the Automatic
Investment Plan. Participation in the Plan will begin within 30 days after
receipt of the account application. If the investor's bank account cannot be
charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.

B-34
<PAGE>

CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

A shareholder of Class Q shares of the Fund may elect to
cross-reinvest dividends or dividends and capital gain distributions paid by the
Fund (the "paying Fund") into Class Q shares of any other series of the Trust
(the "receiving Fund") subject to the following conditions: (i) the aggregate
value of the shareholder's account(s) in the paying Fund must equal or exceed
$5,000 (this condition is waived if the value of the account in the receiving
Fund equals or exceeds that Fund's minimum initial investment requirement), (ii)
as long as the value of the account in the receiving Fund is below that Fund's
minimum initial investment requirement, dividends and capital gain distributions
paid by the receiving Fund must be automatically reinvested in the receiving
Fund, and (iii) if this privilege is discontinued with respect to a particular
receiving Fund, the value of the account in that Fund must equal or exceed the
Fund's minimum initial investment requirement or the Fund will have the right,
if the shareholder fails to increase the value of the account to such minimum
within 90 days after being notified of the deficiency, automatically to redeem
the account and send the proceeds to the shareholder. These cross-reinvestments
of dividends and capital gain distributions will be at net asset value (without
a sales charge).

AUTOMATIC WITHDRAWAL

REDEMPTION IN KIND

The Trust intends to pay in cash for all shares of the Fund redeemed,
but when the Trust makes payment to the Fund in readily marketable investment
securities, the Trust reserves the right to make payment wholly or partly in
shares of such securities. In such cases, a shareholder may incur brokerage
costs in converting such securities to cash. However, the Trust has elected to
be governed by the provisions of Rule 18f-1 under the Investment Company Act,
pursuant to which it is obligated to pay in cash all requests for redemptions by
any shareholder of record, limited in amount with respect to each shareholder
during any 90-day period to the lesser of $250,000 or 1% of the net asset value
of the Trust at the beginning of such period.

EXCHANGE PRIVILEGE

Shares of the Fund may be exchanged into shares of any other series of
the Trust or Class A shares of the Fund as provided in the Prospectus. The
Trust's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly the Trust reserves the
right to limit the number of exchanges an investor or participant may make in
any year, to avoid excessive Fund expenses.

Before effecting an exchange, investors should obtain the currently
effective prospectus of the series into which the exchange is to be made.
Exchange purchases are subject to the minimum investment requirements of the
series being purchased. An exchange will be treated as a redemption and
purchase for tax purposes.

TELEPHONE PRIVILEGE

Investors may exchange or redeem shares by telephone if they have
elected the telephone privilege on their account applications as provided in the
Prospectus.

B-35
<PAGE>

The Trust will employ procedures designed to provide reasonable
assurance that instructions communicated by telephone are genuine and, if it
does not do so, it may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the Trust include requiring
personal identification by account number and social security number, tape
recording of telephone instructions, and providing written confirmation of
transactions. The Trust reserves the right to refuse a telephone exchange or
redemption request if it believes, for example, that the person making the
request is neither the record owner of the shares being exchanged or redeemed
nor otherwise authorized by the investor to request the exchange or redemption.
Investors will be promptly notified of any refused request for a telephone
exchange or redemption. The Fund or its agents will not be liable for any loss,
liability or cost which results from acting upon instructions of a person
reasonably believed to be an investor with respect to the telephone privilege.

REPORTS TO INVESTORS

The Fund will send its investors annual and semi-annual reports. The
financial statements appearing in annual reports will be audited by independent
accountants. In order to reduce duplicate mailing and printing expenses, the
Fund may provide one annual and semi-annual report and annual prospectus per
household. In addition, quarterly unaudited financial data are available from
the Fund upon request.

NET ASSET VALUE

The net asset value of a share of a Class of the Fund is calculated by
dividing (i) the value of the securities held by the Fund (I.E., the value of
its investments in the Fund), plus any cash or other assets, minus the Class'
proportional interest in the Fund's liabilities (including accrued estimated
expenses on an annual basis) and all liabilities allocable to such Class, by
(ii) the total number of shares of the Class outstanding. The value of the
investments and assets of the Fund is determined each business day. Investment
securities, including ADRs and EDRs, that are traded on a stock exchange or on
the NASDAQ National Market System are valued at the last sale price as of the
close of business on the New York Stock Exchange (normally 4:00 P.M. New York
time) on the day the securities are being valued, or lacking any sales, at the
mean between the closing bid and asked prices. Securities listed or traded on
certain foreign exchanges whose operations are similar to the United States
over-the-counter market are valued at the price within the limits of the latest
available current bid and asked prices deemed by the Investment Adviser best to
reflect fair value. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security by the Investment Adviser. Listed securities that are
not traded on a particular day and other over-the-counter securities are valued
at the mean between the closing bid and asked prices.

The Fund values long-term debt obligations at the quoted bid prices
for such securities or, if such prices are not available, at prices for
securities of comparable maturity, quality and type; however, the Investment
Adviser will use, when it deems it appropriate, prices obtained for the day of
valuation from a bond pricing service, as discussed below. The Fund values debt
securities with maturities of 60 days or less at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by the Fund or the Fund
is more than 60 days, unless this is determined by the Board of Trustees of the
Trust not to represent fair value. The Fund values repurchase agreements at
cost plus accrued interest.

B-36
<PAGE>

Securities and assets for which market quotations are not readily
available, or for which the Trust's Board of Trustees or persons designated by
the Board determine that the foregoing methods do not accurately reflect current
market value, are valued at fair value as determined in good faith by or under
the direction of the Trust's Board of Trustees. Such valuations and procedures
will be reviewed periodically by the Board of Trustees.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund declares and pays monthly dividends of net investment income.
The Fund makes distributions at least annually of its net capital gains, if any.
In determining amounts of capital gains to be distributed by the Fund, any
capital loss carryovers from prior years will be offset against its capital
gains.

B-37
<PAGE>

REGULATED INVESTMENT COMPANY

The Trust has elected to qualify the Fund as a regulated investment
company under Subchapter M of the Code, and intends that the Fund will remain so
qualified.

The Fund generally will be subject to a nondeductible excise tax of 4%
to the extent that it does not meet certain minimum distribution requirements as
of the end of each calendar year. To avoid the tax, the Fund must distribute
during each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income and net capital gain (not taking into account any capital gains
or losses as an exception) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (and adjusted for certain ordinary
losses) for the twelve month period ending on October 31 of the calendar year,
and (3) all ordinary income and capital gains for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November, or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders (other than those not subject to
federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Fund intends to make timely distributions of its
income in compliance with these requirements and anticipate that it will not be
subject to the excise tax.

Dividends paid by the Fund from ordinary income, and distributions of
the Fund's net realized short-term capital gains, are taxable to its
shareholders as ordinary income. Distributions to corporate shareholders will
be eligible for the 70% dividends received deduction to the extent that the
income of the Fund is derived from dividends on common or preferred stock of
domestic corporations. Dividend income earned by the Fund will be eligible for
the dividends received deduction only if the Fund have satisfied a 46-day
holding period requirement with respect to the underlying portfolio security (91
days in the case of dividends derived from preferred stock). In addition, a
corporate shareholder must have held its shares in the Fund for not less than 46
days (91 days in the case of dividends derived from preferred stock) in order to
claim the dividend received deduction. Not later than 60 days after the end of
its taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during such year which may be
taken into account by its shareholders for purposes of such deduction provisions
of the Code. Net capital gain distributions are not eligible for the dividends
received deduction.

B-38
<PAGE>

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund
if the shareholder acquires shares in the series of the Trust pursuant to a
reinvestment right that reduces the sales charges in the subsequent acquisition
of shares.

SPECIAL TAX CONSIDERATIONS

B-39
<PAGE>

SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time the
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of the Fund's investment company taxable income to be
distributed to the shareholders.

SHORT SALES. Generally, capital gain or loss realized by the Fund in
a short sale may be long-term or short term depending on the holding period of
the short position. Under a special rule, however, the capital gain will be
short-term gain if (1) as of the date of the short sale, the Fund owned property
for the short-term holding period that was substantially identical to that which
the Fund used to close the sale or (2) after the short sale and on or before its
closing, the Fund acquired

B-40
<PAGE>

substantially similar property. Similarly, if the Fund held property
substantially identical to that sold short for the long-term holding period as
of the date of the short sale, any loss on closing the short position will be
long-term capital loss. These special rules do not apply to substantially
similar property to the extent such property exceeds the property used by the
Fund to close its short position.

ORIGINAL ISSUE DISCOUNT. The Fund may treat some of the debt
securities (with a fixed maturity date of more than one year from the date of
issuance) it may acquire as issued originally at a discount. Generally, the
Fund treats the amount of the original issue discount ("OID") as interest income
and includes it in income over the term of the debt security, even though it
does not receive payment of that amount until a later time, usually when the
debt security matures. The Fund treats a portion of the OID includable in
income with respect to certain high-yield corporation debt securities as a
dividend for federal income tax purposes.

The Fund may treat some of the debt securities (with a fixed maturity
date of more than one year from the date of issuance) that it may acquire in the
secondary market as having market discount. Generally, the Fund treats any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount as ordinary interest income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
securities having market discount, which could affect the character and timing
the recognition of income.

OTHER TAX INFORMATION

PERFORMANCE INFORMATION

The Trust may from time to time advertise total returns and yields for
the Fund, compare Fund performance to various indices, and publish rankings of
the Fund prepared by various ranking services. Any performance information
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of its portfolio, and the market conditions during
the given period, and should not be considered to be representative of what may
be achieved in the future.

B-41
<PAGE>

TOTAL RETURN

Total return is computed according to the following formula:

n
P(1 + T) = ERV

Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the period.

YIELD

The yield for the Fund is calculated based on a 30-day or one-month
period, according to the following formula:

6
Yield = 2[{A - B + 1) -1]
-----
{c x d }

COMPARISON TO INDICES AND RANKINGS

The Fund may compare its performance to various unmanaged indices such
as the Dow Jones Composite Average or its component averages, Standard and
Poor's 500 Stock Index or its component indices, Standard and Poor's 100 Stock
Index, the Russell Midcap Growth Index, the Russell 2000 Growth Index, the
Russell 1000 Index, the CS First Boston Convertible Index, the Lehman Brothers
Government Bond Index, the Morgan Stanley Capital International World Index, the
Morgan Stanley Capital International Emerging Markets Free Index, the Emerging
Markets Investible Index, the Morgan Stanley Capital International Europe,
Australia and Far East Index, the IFC Emerging Markets Investible Index, The New
York Stock Exchange composite or component indices, the Wilshire 5000 Equity
Index, indices prepared by Lipper Analytical Services and Morningstar, Inc., the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc.,
performance statistics reported in financial publications such as The Wall
Street Journal, Business Week, Changing Times, Financial World, Forbes, Fortune
and Money magazines, the Consumer Price Index (or Cost of Living Index)
published by the U.S. Bureau of Labor Statistics, Stocks, Bonds, Bills and
Inflation published by Ibbotson Associates, Savings and Loan Historical Interest
Rates published in the U.S. Savings & Loan League Fact Book, and historical data
supplied by the research departments of First Boston Corporation, The J.P.
Morgan companies, Salomon Brothers, Merrill Lynch, Lehman Brothers, Smith Barney
Shearson and Bloomberg L.P. Unmanaged indices (I.E., other than Lipper)
generally do not reflect deductions for administrative and management costs and
expenses.

B-42
<PAGE>

PRIOR PERFORMANCE OF THE PREDECESSOR TO THE FUND

The following table sets forth historical performance information for
the Class Q shares of the High Yield Bond Fund. It includes historical
performance information for the Institutional Portfolio which preceded the Fund
prior to the reorganization of the High Yield Bond Institutional Portfolio of
the Trust in March 1998 (adjusted for shareholder service fees applicable to
Class Q shares) and the Investment Adviser's composite performance data relating
to the historical performance of institutional private accounts managed by the
Investment Adviser, since the dates indicated, that have investment objectives,
policies, strategies and risks substantially similar to those of such Fund. The
composite data is provided to illustrate the past performance of the Investment
Adviser in managing substantially similar accounts as measured against specified
market indices and does not represent the performance of the Fund. Investors
should not consider this performance data as an indication of future performance
of the Fund or of the Investment Adviser.

The Investment Adviser has advised the Trust that the net performance
results for the Fund are calculated as set forth above under "Performance
Information--Total Return." All information set forth in the tables below
relies on data supplied by the Investment Adviser or from statistical services,
reports or other sources believed by the Investment Adviser to be reliable.
However, except as otherwise indicated, such information has not been verified
and is unaudited.

The Investment Adviser's composite performance data shown below were
calculated in accordance with recommended standards of the Association for
Investment Management and Research ("AIMR"), retroactively applied to all time
periods. The AIMR method of calculating performance is different from the SEC
method of calculating performance set forth above under "Performance
Information--Total Return." All returns presented were calculated on a total
return basis and include all dividends and interest, accrued income and realized
and unrealized gains and loses. All returns reflect the deduction of investment
advisory fees, brokerage commissions and execution costs paid by the Investment
Adviser's institutional private accounts, without provision for federal or state
income taxes. Custodial fees, if any, were not included in the calculation.
The Investment Adviser's composite includes all actual, fee-paying,
discretionary institutional private accounts managed by the Investment Adviser
that have investment objectives, policies, strategies and risks substantially
similar to those of the High Yield Bond Fund. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The monthly returns of the
Investment Adviser's composite combines the individual accounts' returns
(calculated on a time-weighted rate of return that is revalued whenever cash
flows exceed $500) by asset-weighing each individual account's asset value as of
the beginning of the month. Quarterly and yearly returns are calculated by
geometrically linking the monthly and quarterly returns, respectively. The
yearly returns are computed by geometrically linking the returns of each quarter
within the calendar year.

- ----------------
(1)/ AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and
(ii) ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.

B-43
<PAGE>

The institutional private accounts that are included in the Investment
Adviser's composite are not subject to the same types of expenses to which the
High Yield Bond Fund is subject nor to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Fund by the
Investment Company Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for the Investment Adviser's composite
could have been adversely affected if the institutional private accounts
included in the composite had the same expenses, and had been regulated, as
investment companies under the federal securities laws.

CLASS Q SHARES OF THE HIGH YIELD BOND FUND
HIGH YIELD BOND PERFORMANCE

INVESTMENT ADVISER'S FIRST BOSTON
HIGH YIELD HIGH YIELD HIGH YIELD
YEAR BOND FUND BOND COMPOSITE INDEX(1)
<S> <C> <C> <C>
1994(2). . . . . 1.45% 0.09%
1995 . . . . . . 19.40 17.38
1996(2, 3) . . . 11.15% 21.87 12.42
1997 . . . . . . 18.84% 19.09 10.84
Last Year(3) . . 24.39% 24.74 15.72
Since inception(3) 26.93% 17.51 11.51
</TABLE>

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

(2) Inception dates are as follows: High Yield Bond Composite - April 1, 1994;
High Yield Bond Institutional Portfolio (predecessor to the Class Q shares
of the High Yield Bond Fund) - July 31, 1996.

(3) Through September 30, 1997.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT AUDITORS AND LEGAL COUNSEL

B-44
<PAGE>

The Charles Schwab Trust Company, 101 Montgomery Street, San
Francisco, California 94104, serves as co-transfer agent for shares of the Fund.
The following act as sub-transfer agents for the Fund: Financial Data Services,
Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville, Florida 32246; William M.
Mercer Plan Participant Services, Inc., 1417 Lake Cook Road, Deerfield, Illinois
60015; and Schwab Retirement Plan Services, Inc., 101 Montgomery Street, San
Francisco, California 94104.

MISCELLANEOUS

SHARES OF BENEFICIAL INTEREST

The Trust is currently comprised of 62 series. On any matter
submitted to a vote of shareholders of the Trust, all shares then entitled to
vote will be voted by the affected series unless otherwise required by the
Investment Company Act, in which case all shares of the Trust will be voted in
the aggregate or by Classes, as the case may be. For example, a change in the
Fund's fundamental investment policies would be voted upon only by shareholders
of all Classes of the Fund, as would the approval of any advisory or
distribution contract for the Fund. However, all shares of the Trust may vote
together in the election or selection of Trustees, principal underwriters and
accountants for the Trust.

Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of the series of the Trust affected by the matter. Under Rule 18f-2, a series
is presumed to be affected by a matter, unless the interests of each series in
the matter are identical or the matter does not affect any interest of such
series. Under Rule 18f-2 the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to the Fund only if approved by a majority of its outstanding
shares. However, the rule also provides that the ratification of independent
public accountants, the approval of principal underwriting contracts and the
election of directors may be effectively acted upon by the shareholders of the
Trust voting without regard to series.

B-45
<PAGE>

(for example, by Rule 18f-2 discussed above) or by the Trust's Declaration of
Trust or Bylaws, the Trust may take or authorize any action upon the favorable
vote of the holders of more than 50% of the outstanding shares of the Trust.

Each share of each class of the Fund represents an equal proportional
interest in the Fund with each other share of the same Class and is entitled to
such dividends and distributions out of the income earned on the assets
allocable to the Class as are declared in the discretion of the Trustees. In
the event of the liquidation or dissolution of the Trust, shareholders of the
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular series that are available for distribution in such
manner and on such basis as the Trustees in their sole discretion may determine.

Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.

DECLARATION OF TRUST

The Declaration of Trust of the Trust provides that obligations of the
Trust are not binding upon its Trustees, officers, employees and agents
individually and that the Trustees, officers, employees and agents will not be
liable to the trust or its investors for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee, officer, employee or
agent against any liability to the trusts or their respective investors to which
the Trustee, officer, employee or agent would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of his
or her duties. The Declaration of Trust also provides that the debts,
liabilities, obligations and expenses incurred, contracted for or existing with
respect to the Fund shall be enforceable against the assets and property of the
Fund only, and not against the assets or property of any other series or the
investors therein.

REGISTRATION STATEMENT

The Registration Statement of the Trust, including the Fund's
Prospectuses, the Statements of Additional Information and the exhibits filed
therewith, may be examined at the office of the Commission in Washington, D.C.
Statements contained in the Fund's Prospectuses or the Statements of Additional
Information as to the contents of any contract or other document referred to
herein or in the Prospectus are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to these Registration Statements, each such statement being qualified in
all respects by such reference.

B-46
<PAGE>

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS

THE FOLLOWING PARAGRAPHS SUMMARIZE THE DESCRIPTIONS FOR THE RATING SYMBOLS
OF SECURITIES.

COMMERCIAL PAPER

The following paragraphs summarize the description for the rating
symbols of commercial paper.

MOODY'S INVESTORS SERVICE, INC.

STANDARD & POOR'S CORPORATION

A-1
<PAGE>

A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.

B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

C: Issues rated "C" are regarded as having a doubtful capacity for
payment.

FITCH INVESTORS SERVICE, INC.

F-1+: Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment.

F-1: Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
F-1+.

DUFF & PHELPS

DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.

DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.

DUFF 4 - Debt possesses speculative investment characteristics.

DUFF 5 - Issuer has failed to meet scheduled principal and/or interest
payments.

A-2
<PAGE>

THOMSON BANKWATCH

TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.

IBCA

A1+ - Obligations are supported by the highest capacity for timely
repayment.

A1 - Obligations are supported by a strong capacity for timely
repayment.

A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.

CORPORATE BONDS

MOODY'S

Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "AAA" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:

A-3
<PAGE>

Caa: Bonds in this category 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 in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.

C: Bonds in this category 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.

STANDARD & POOR'S

AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.

AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.

A-4
<PAGE>

DUFF & PHELPS

The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:

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

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

A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.

FITCH INVESTORS SERVICE, INC.

The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:

AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated

A-5
<PAGE>

"AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated "F-1+."

ICBA

IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.

THOMSON BANKWATCH

Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States

A-6
<PAGE>

commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the rating categories used by Thomson
BankWatch for long-term debt ratings:

AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.

AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.

D - This designation indicates that the long-term debt is in default.

PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.

A-7