GRIFFIN FUNDS INC, 497, 1996-06-19

GRIFFIN FUNDS INC
497, 1996-06-19

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THE GRIFFIN FUNDS, INC.

MONEY MARKET FUND
TAX-FREE MONEY MARKET FUND
SHORT-TERM BOND FUND
U.S. GOVERNMENT INCOME FUND
MUNICIPAL BOND FUND
CALIFORNIA TAX-FREE FUND
BOND FUND
GROWTH & INCOME FUND
GROWTH FUND

STATEMENT OF ADDITIONAL INFORMATION

JANUARY 31, 1996
AS SUPPLEMENTED ON
JUNE 19, 1996

The Griffin Funds, Inc. ("The Griffin Funds") is a professionally managed, open-
end investment company. This Statement of Additional Information contains
information about each of The Griffin Funds' investment portfolios -- the Money
Market Fund, the Tax-Free Money Market Fund (the "Money Market Funds"), the
Short-Term Bond Fund, the U.S. Government Income Fund, the Municipal Bond Fund,
the California Tax-Free Fund, the Bond Fund, the Growth & Income Fund and the
Growth Fund (the "Non-Money Market Funds") (collectively, the "Funds") and
relates to the single class of shares offered by the Money Market Funds and the
two classes of shares offered by each Non-Money Market Fund -- Class A Shares
and Class B Shares. This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' current Prospectus, dated
January 31, 1996, as supplemented from time to time. All terms used herein that
are defined in the Prospectus will have the meanings assigned in the Prospectus.
Please retain this Statement of Additional Information for future reference. To
obtain additional copies of this Statement of Additional Information or of the
Funds' Prospectus, please call The Griffin Funds at 1-800-676-4450.

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TABLE OF CONTENTS PAGE
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General Information...................................................................... 3
Investment Limitations................................................................... 3
Money Market Fund...................................................................... 3
Tax-Free Money Market Fund............................................................. 5
Short-Term Bond Fund................................................................... 6
U.S. Government Income Fund............................................................ 9
Municipal Bond Fund.................................................................... 11
California Tax-Free Fund............................................................... 13
Bond Fund.............................................................................. 15
Growth & Income Fund................................................................... 17
Growth Fund............................................................................ 19
Additional Securities and Investment Practices Shared by Certain Funds................. 21
</TABLE>

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<TABLE>
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TABLE OF CONTENTS PAGE
<S> <C>
Additional Securities and Investment Practices of Specific Funds........................ 28
Additional Securities and Investment Practices of the Tax Free Money Market Fund Only... 37
Additional Securities and Investment Practices of the Bond Fund Only.................... 41
Additional Securities and Investment Practices of the Growth & Income Fund Only......... 42
Special Factors Affecting the California Tax-Free Fund.................................. 42
Portfolio Transactions................................................................... 54
Valuation of Portfolio Securities........................................................ 56
Performance.............................................................................. 57
Additional Purchase and Redemption Information........................................... 63
Distributions and Taxes.................................................................. 64
Service Providers........................................................................ 68
Directors and Officers................................................................... 69
Management Contracts..................................................................... 71
Distribution and Service Plans........................................................... 74
Description of The Griffin Funds......................................................... 77
Appendix................................................................................. 80
</TABLE>

Investment Adviser
- ------------------
Griffin Financial Investment Advisers ("Griffin Advisers")

Sub-Adviser to the Money Market Fund, the Tax-Free Money Market Fund, the U.S.
- ------------------------------------------------------------------------------
Government Income Fund, the Municipal Bond Fund and the California Tax-Free Fund
- --------------------------------------------------------------------------------
Payden & Rygel Investment Counsel ("Payden & Rygel")

Sub-Adviser to the Growth Fund and the Short-Term Bond Fund
- -----------------------------------------------------------
T. Rowe Price Associates, Inc. ("T. Rowe Price")

Sub-Adviser to the Bond Fund and the Growth & Income Fund
- ---------------------------------------------------------
The Boston Company Asset Management, Inc. ("TBCAM")

Distributor
- -----------
Griffin Financial Services ("Griffin Financial")

Transfer Agent and Custodian
- ----------------------------
Investors Fiduciary Trust Company ("IFTC")

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GENERAL INFORMATION

The Griffin Funds was organized as a Maryland corporation on August 5,
1993. The Griffin Funds is an open-end, series management investment company.

INVESTMENT LIMITATIONS

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

Each Fund's fundamental investment policies and limitations may not be
changed without approval by a "majority of the outstanding voting securities"
(as defined in the Investment Company Act of 1940 ("1940 Act")) of the Fund.
However, except for investment limitations described as being fundamental, the
investment policies and limitations described in this Statement of Additional
Information are not fundamental and may be changed without shareholder approval.

INVESTMENT LIMITATIONS OF THE MONEY MARKET FUND
-----------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE MONEY MARKET FUND MAY NOT:

1. purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if, as
a result thereof, more than 5% of its total assets would be invested in the
securities of that issuer, except as permitted under Rule 2a-7;

2. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

3. borrow money, except that the Money Market Fund may borrow money for
temporary or emergency purposes (not for leveraging or investment) or engage in
reverse repurchase agreements in an amount not exceeding 10% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 10% of the value of the Money
Market Fund's total assets will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 10% limitation.
The Money Market Fund will not make additional investments in securities while
borrowings equal or exceed 5% of Fund assets;

4. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Money Market Fund in accordance with
its investment objective, policies and restrictions, either directly from an
issuer or from an underwriter for an issuer may be considered an underwriting
within the meaning of the Securities Act of 1933;

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5. purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government, or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Money Market Fund's
total assets would be invested in the securities of companies whose principal
business activities are in the same industry, except that it will invest more
than 25% of its total assets in the financial services industry;

6. purchase or sell real estate (including real estate limited
partnerships), or securities issued by real estate investment trusts;

7. purchase or sell commodities, or commodity (futures) contracts;

8. lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but the Fund may
purchase debt securities or enter into repurchase agreements without regard to
this limitation);

9. invest in oil, gas or other mineral exploration, lease or development
programs; or

10. invest in companies for the purpose of exercising control or
management.

THE FOLLOWING INVESTMENT lIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Money Market Fund does not currently intend to purchase any
security if, as a result, more than 10% of its total assets would be invested in
securities that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they are
valued.

(ii) The Money Market Fund does not currently intend to purchase warrants,
valued at the lower of cost or market, in excess of 5% of the value of the Money
Market Fund's total assets.

(iii) The Money Market Fund does not currently intend to make short sales
of securities.

(iv) The Money Market Fund does not currently intend to purchase any
securities on margin, except for such short-term credits as are necessary for
the clearance of purchases and sales of securities.

(v) The Money Market Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) if, as a result, more
than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.

(vi) The Money Market Fund does not currently intend to purchase the
securities of any issuer if those officers and directors of The Griffin Funds
and those officers and directors of Griffin Advisers

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who, individually, own more than 1/2 of 1% of the securities of such issuer
together own more than 5% of such issuer's securities.

INVESTMENT LIMITATIONS OF THE TAX-FREE MONEY MARKET FUND
--------------------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE TAX-FREE MONEY MARKET FUND MAY NOT:

1. purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government, or any of its agencies or
instrumentalities) if, as a result thereof, (a) more than 5% of its total assets
would be invested in the securities of that issuer, or (b) the Tax-Free Money
Market Fund would hold more than 10% of the outstanding voting securities of any
issuer;

2. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

3. borrow money, except that the Tax-Free Money Market Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) or
engage in reverse repurchase agreements in an amount not exceeding 10% of the
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 10% of the value of
the Tax-Free Money Market Fund's total assets will be reduced within three days
(not including Sundays and holidays) to the extent necessary to comply with the
10% limitation. The Tax-Free Money Market Fund will not make additional
investments in securities while borrowings equal or exceed 5% of Fund assets;

4. underwrite securities issued by others, except to the extent that the
purchase of municipal bonds in accordance with the Tax-Free Money Market Fund's
investment objective, policies, and restrictions, either directly from the
issuer, or from an underwriter for an issuer, may be considered an underwriting
within the meaning of the Securities Act of 1933;

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

6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Tax-Free Money Market Fund from
investing in municipal bonds or other obligations secured by real estate or
interests therein;

7. purchase or sell commodities or commodity contracts;

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9. invest in oil, gas or other mineral exploration, lease or development
programs.

THE FOLLOWING LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED WITHOUT
SHAREHOLDER APPROVAL.

(i) The Tax-Free Money Market Fund does not currently intend to purchase
any security if, as a result, more than 10% of its total assets would be
invested in securities that are deemed to be illiquid because they are subject
to legal or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued.

(ii) The Tax-Free Money Market Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Tax-Free Money Market Fund's total assets.

(iii) The Tax-Free Money Market Fund does not currently intend to make
short sales of securities.

(iv) The Tax-Free Money Market Fund does not currently intend to purchase
any securities on margin, except for such short-term credits as are necessary
for the clearance of purchase and sales of securities.

(v) The Tax-Free Money Market Fund does not currently intend to purchase
the securities of any issuer (other than securities issued or guaranteed by
domestic or foreign governments or political subdivisions thereof) if, as a
result, more than 5% of its total assets would be invested in the securities of
business enterprises that, including predecessors, have a record of less than
three years of continuous operation.

(vi) The Tax-Free Money Market Fund does not currently intend to purchase
the securities of any issuer if those officers and directors of The Griffin
Funds and those officers and directors of Griffin Advisers who individually own
more than 1/2 of 1% of the securities of such issuer together own more than 5%
of such issuer's securities.

For purposes of the foregoing limitations, Griffin Advisers identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, Griffin Advisers will consider the entity or entities responsible for
payment of interest and repayment of principal and the source of such payments;
the way in which assets and revenues of an issuing political subdivision are
separated from those of other political entities; and whether a governmental
body is guaranteeing the security.

INVESTMENT LIMITATIONS OF THE SHORT-TERM BOND FUND
--------------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE SHORT-TERM BOND FUND MAY NOT:

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issuer, or more than 10% of the issuer's outstanding voting securities would be
owned by the Fund, except that up to 25% of the value of the Fund's total assets
may be invested without regard to these limitations;

2. purchase any securities which would cause 25% or more of the value of
the Short-Term Bond Fund's total assets at the time of purchase to be invested
in the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry);

3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

4. borrow money, except that the Short-Term Bond Fund may borrow money
for temporary or emergency purposes (not for leveraging or investment) or engage
in reverse repurchase agreements in an amount not exceeding 33-1/3% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Short-Term Bond Fund's total assets will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33-
1/3% limitation;

5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Short-Term Bond Fund in accordance
with its investment objective, policies and restrictions, either directly from
an issuer or from an underwriter for an issuer, may be considered an
underwriting within the meaning of the Securities Act of 1933;

6. purchase or sell real estate, including real estate limited
partnerships, (but this shall not prevent the Short-Term Bond Fund from
investing in marketable securities backed by real estate mortgages or issued by
companies such as real estate investment trusts which deal in real estate or
interests therein);

7. purchase or sell physical commodities unless acquired as a result of
ownership of securities of other instruments (but this shall not prevent the
Short-Term Bond Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities);

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

9. invest in oil, gas, or other mineral exploration, leasing or
development programs or leases; or

7
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10. lend any portfolio security unless collateral values are continuously
maintained at not less than 100% by marking to market daily.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Short-Term Bond Fund does not currently intend to make short
sales of securities; provided, however, that the Short-Term Bond Fund may
purchase or sell futures contracts and may make initial and variation margin
payments in connection with purchases and sales of futures contracts or of
options on futures contracts.

(ii) The Short-Term Bond Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Short-Term Bond Fund's total assets, or warrants which are not listed on the
New York Stock Exchange ("NYSE") or American Stock Exchange ("ASE") in excess of
2% of the value of the Short-Term Bond Fund's net assets.

(iii) The Short-Term Bond Fund does not currently intend to purchase
securities on margin, except that it may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
in connection with futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.

(iv) The Short-Term Bond Fund may borrow money only (a) from a bank or
from a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Short-Term Bond Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.

(v) The Short-Term Bond Fund does not currently intend to purchase any
security if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale, or because they cannot be sold or disposed
of in the ordinary course of business at approximately the prices at which they
are valued.

(vi) The Short-Term Bond Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof, securities of pooled
investment vehicles and mortgage or asset-backed securities) if, as a result,
more than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.

(vii) The Short-Term Bond Fund does not currently intend to purchase or
retain the securities of any issuer other than the Short-Term Bond Fund, if, to
its knowledge, those directors and officers of The Griffin Funds or of Griffin
Advisers who individually own beneficially more than 1/2 of 1% of such issuer,
together own beneficially more than 5% of such outstanding securities.

8
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INVESTMENT LIMITATIONS OF THE U.S. GOVERNMENT INCOME FUND
---------------------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE U.S. GOVERNMENT INCOME FUND MAY NOT:

1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the U.S.
Government Income Fund's total assets would be invested in the securities of
such issuer, or more than 10% of the issuer's outstanding voting securities
would be owned by the Fund, except that up to 25% of the value of the Fund's
total assets may be invested without regard to these limitations;

2. purchase any securities which would cause 25% or more of the value of
the U.S. Government Income Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that (a) there is no
limitation with respect to U.S. Government Obligations and repurchase agreements
secured by such obligations; (b) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) utilities
will be divided according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry);

3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

4. borrow money, except that the U.S. Government Income Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) or
engage in reverse repurchase agreements in an amount not exceeding 33-1/3% of
the value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed 33-1/3% of the
value of the U.S. Government Income Fund's total assets will be reduced within
three days (not including Sundays and holidays) to the extent necessary to
comply with the 33-1/3% limitation;

5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the U.S. Government Income Fund in
accordance with its investment objective, policies and restrictions, either
directly from an issuer or from an underwriter for an issuer, may be considered
an underwriting within the meaning of the Securities Act of 1933;

6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the U.S. Government Income Fund from
investing in marketable securities backed by real estate mortgages or issued by
companies such as real estate investment trusts which deal in real estate or
interests therein;

7. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
U.S. Government Income Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities);

9
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8. invest in oil, gas or other mineral exploration, leasing or
development programs; or

9. invest in companies for the purpose of exercising control or
management.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The U.S. Government Income Fund may borrow money only (a) from a bank
or from a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The U.S. Government Income Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.

(ii) The U.S. Government Income Fund does not currently intend to
purchase warrants, valued at the lower of cost or market, in excess of 5% of the
value of the U.S. Government Income Fund's total assets.

(iii) The U.S. Government Income Fund does not currently intend to make
short sales of securities; provided, however, that it may purchase or sell
futures contracts and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts and may make initial and variation margin payments in connection with
purchases or sales of futures contracts or of options on futures contracts.

(iv) The U.S. Government Income Fund does not currently intend to purchase
any securities on margin, except for such short-term credits as are necessary
for the clearance of purchases and sales of securities; provided, however, that
it may purchase or sell futures contracts and may make initial and variation
margin payments in connection with purchases or sales of futures contracts or of
options on futures contracts.

(v) The U.S. Government Income Fund does not currently intend to purchase
the securities of any issuer (other than securities issued or guaranteed by
domestic or foreign governments or political subdivisions thereof) if, as a
result, more than 5% of its total assets would be invested in the securities of
business enterprises that, including predecessors, have a record of less than
three years of continuous operation.

(vi) The U.S. Government Income Fund does not currently intend to purchase
the securities of any issuer if those officers and directors of The Griffin
Funds and those officers and directors of Griffin Advisers who individually own
more than 1/2 of 1% of the securities of such issuer together own more than 5%
of such issuer's securities.

(vii) The U.S. Government Income Fund does not currently intend to purchase
any security if, as a result, more than 15% of its total assets would be
invested in securities that are deemed to be illiquid because they are subject
to legal or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices at
which they are valued.

10
<PAGE>

INVESTMENT LIMITATIONS OF THE MUNICIPAL BOND FUND
-------------------------------------------------

AS A MATTER OF FUNDAMENTAL INVESTMENT POLICY, THE MUNICIPAL BOND FUND MAY NOT:

1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Municipal Bond
Fund's total assets would be invested in the securities of such issuer, or more
than 10% of the issuer's outstanding voting securities would be owned by the
Fund, except that up to 25% of the value of the Fund's total assets may be
invested without regard to these limitations;

2. purchase any securities which would cause 25% or more of the value of
the Municipal Bond Fund's total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) there is no limitation with respect to municipal obligations
(for purposes of this limitation, Industrial Development Revenue bonds that are
backed only by the assets and revenues of a non-governmental user shall not be
deemed to be municipal obligations); (c) wholly owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (d) utilities
will be divided according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry);

3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

4. borrow money, except that the Municipal Bond Fund may borrow money
for temporary or emergency purposes (not for leveraging or investment) or engage
in reverse repurchase agreements in an amount not exceeding 33-1/3% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Municipal Bond Fund's total assets will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33-
1/3% limitation;

5. underwrite securities issued by others, except to the extent that the
disposition of securities purchased by the Municipal Bond Fund in accordance
with its investment objective, policies, and restrictions, either directly from
the issuer, or from an underwriter for an issuer, may be considered an
underwriting within the meaning of the Securities Act of 1933;

6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Municipal Bond Fund from investing
in municipal bonds or other obligations secured by real estate or interests
therein;

7. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Municipal Bond Fund from purchasing or selling

11
<PAGE>

options and futures contracts or from investing in securities or other
instruments backed by physical commodities);

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

9. invest in oil, gas, or other mineral exploration, leasing or
development programs; or

10. invest in companies for the purpose of exercising control or
management.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Municipal Bond Fund does not currently intend to purchase the
securities of any issuer, if, to its knowledge, those directors and officers of
The Griffin Funds or of Griffin Advisers who individually own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities.

(ii) The Municipal Bond Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the Municipal Bond Fund's total assets.

(iii) The Municipal Bond Fund does not currently intend to make short sales
of securities; provided however that the Municipal Bond Fund may purchase or
sell futures contracts and may make initial and variation margin payments in
connection with purchases or sales of futures contracts or of options on futures
contracts.

(iv) The Municipal Bond Fund does not currently intend to purchase any
securities on margin, except for such short-term credits as are necessary for
the clearance of purchase and sales of securities; provided however that the
Municipal Bond Fund may make initial and variation margin payments in connection
with purchases or sales of futures contracts or of options on futures contracts.

(v) The Municipal Bond Fund may borrow money only (a) from a bank or from
a registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Municipal Bond Fund will not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding.

(vi) The Municipal Bond Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or guaranteed by domestic
or foreign governments or political subdivisions thereof) if, as a result, more
than 5% of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three years
of continuous operation.

(vii) The Municipal Bond Fund does not currently intend to purchase any
security if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because

12
<PAGE>

they are subject to legal or contractual restrictions on resale or because they
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued.

INVESTMENT LIMITATIONS OF THE CALIFORNIA TAX-FREE FUND
------------------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE CALIFORNIA TAX-FREE FUND MAY NOT:

1. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

2. borrow money, except that the California Tax-Free Fund may borrow
money for temporary or emergency purposes (not for leveraging or investment) in
an amount not to exceed 33-1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed 33-1/3% of the fund's total assets by reason of a decline in net
assets will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33-1/3% limitation;

3. underwrite any issue of securities, except to the extent that the
disposition of securities purchased by the California Tax-Free Fund in
accordance with its investment objective, policies, and limitations, either
directly from the issuer, or from an underwriter for an issuer, may be deemed to
be underwriting;

4. purchase any securities which would cause 25% or more of the value of
the California Tax-Free Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that (a) there is no
limitation with respect to U.S. Government Obligations and repurchase agreements
secured by such obligations; (b) there is no limitation with respect to
municipal obligations (for purposes of this limitation, private activity bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be municipal obligations); (c) wholly owned finance companies
will be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of the parents; and (d)
utilities will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry;

5. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the California Tax-Free Fund from
investing in municipal bonds or other obligations secured by real estate or
interests therein;

13
<PAGE>

6. purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
California Tax-Free Fund from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities);

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

8. invest in oil, gas or other mineral exploration, leasing or
development programs;

9. invest in companies for the purpose of exercising control or
management; or

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

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

(ii) The California Tax-Free Fund does not currently intend to purchase a
security if, as a result, more than 5% of its total assets would be invested in
industrial revenue bonds where payment of principal and interest are the
responsibility of a company with less than three years' operating history.

(iii) The California Tax-Free Fund does not currently intend to purchase
warrants, valued at the lower of cost or market, in excess of 5% of the value of
the California Tax-Free Fund's total assets.

(iv) The California Tax-Free Fund does not currently intend to make short
sales of securities; provided, however, that the California Tax-Free Fund may
purchase and sell futures contracts, and may make initial and variation margin
payments in connection with purchases or sales of futures contracts or of
options in futures contracts.

(v) The California Tax-Free Fund does not currently intend to purchase
any securities on margin; provided, however, that the California Tax-Free Fund
may make initial and variation margin payments in connection with purchases and
sales of futures contracts or options on futures contracts.

(vi) The California Tax-Free Fund may borrow money only (a) from a bank or
from a registered investment company or (b) by engaging in reverse repurchase
agreement with any party. The California Tax-Free Fund will not purchase any
security while borrowing representing more than 5% of its total assets are
outstanding.

14
<PAGE>

(vii) The California Tax-Free Fund does not currently intend to purchase
the securities of any issuer, if, to its knowledge, those directors and officers
of The Griffin Funds or of Griffin Advisers who individually own beneficially
more than 1/2 of 1% of such issuer, together own beneficially more than 5% of
such outstanding securities.

For purposes of the foregoing limitations, Griffin Advisers identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, Griffin Advisers will consider the entity or entities responsible for
payment of interest and repayment of principal and the source of such payments,
the way in which assets and revenues of an issuing political subdivision are
separated from those of other political entities, and whether a governmental
body is guaranteeing the security.

INVESTMENT LIMITATIONS OF THE BOND FUND
---------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE BOND FUND MAY NOT:

1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Bond Fund's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by the Fund,
except that up to 25% of the value of the Fund's total assets may be invested
without regard to these limitations;

2. purchase any securities which would cause 25% or more of the value of
the Bond Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
U.S. Government Obligations and repurchase agreements secured by such
obligations; (b) wholly owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services (for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry);

3. issue senior securities, except as permitted under the 1940 Act or
applicable SEC rules, regulations or orders;

4. borrow money, except that the Bond Fund may borrow money for
temporary or emergency purposes (not for leveraging or investment) or engage in
reverse repurchase agreements in an amount not exceeding 33-1/3% of the value of
its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the Bond
Fund's total assets will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation;

5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Bond Fund in accordance with its
investment objective, policies and restrictions, either directly from an issuer
or from an underwriter for an issuer, may be considered an underwriting within
the meaning of the Securities Act of 1933;

15
<PAGE>

6. purchase or sell real estate, including real estate limited
partnerships, (but this shall not prevent the Bond Fund from investing in
marketable securities backed by real estate mortgages or issued by companies
such as real estate investment trusts which deal in real estate or interests
therein);

7. purchase or sell physical commodities unless acquired as a result of
ownership of securities of other instruments (but this shall not prevent the
Bond Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities);

9. invest in oil, gas, or other mineral exploration, leasing or
development programs or leases.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Bond Fund does not currently intend to make short sales of
securities; provided, however, that the Bond Fund may purchase or sell futures
contracts and may make initial and variation margin payments in connection with
purchases and sales of futures contracts or of options on futures contracts.

(ii) The Bond Fund does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the value of the Bond Fund's
total assets.

(iii) The Bond Fund does not currently intend to purchase securities on
margin, except that it may obtain such short-term credits as are necessary for
the clearance of transactions, and provided that margin payments in connection
with futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.

(iv) The Bond Fund may borrow money only (a) from a bank or from a
registered investment company or (b) by engaging in reverse repurchase
agreements with any party. The Bond Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.

(v) The Bond Fund does not currently intend to purchase any security if,
as a result, more than 15% of its total assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale, or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.

(vi) The Bond Fund does not currently intend to purchase the securities of
any issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.

16
<PAGE>

(vii) The Bond Fund does not currently intend to purchase or retain the
securities of any issuer other than the Bond Fund, if, to its knowledge, those
directors and officers of The Griffin Funds or of Griffin Advisers who
individually own beneficially more than 1/2 of 1% of such issuer, together own
beneficially more than 5% of such outstanding securities.

INVESTMENT LIMITATIONS OF THE GROWTH & INCOME FUND
--------------------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE GROWTH & INCOME FUND MAY NOT:

1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund, except
that up to 25% of the value of the Fund's total assets may be invested without
regard to these limitations;

2. purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to U.S.
Government obligations and repurchase agreements secured by such obligations;
(b) wholly owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services (for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry);

3. issue senior securities except as permitted under the 1940 Act or
applicable Securities and Exchange Commission ("SEC") rules, regulations or
orders;

4. borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) or engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33-1/3% of the value of the
Fund's total assets will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3% limitation;

5. underwrite securities issued by others, except to the extent that
disposition of securities purchased by the Fund in accordance with its
investment objective, policies and restrictions, either directly from an issuer
or from an underwriter for an issuer may be considered an underwriting within
the meaning of the Securities Act of 1933;

6. purchase or sell real estate (including real estate limited
partnerships), but this shall not prevent the Fund from investing in marketable
securities backed by real estate mortgages or issued by companies such as real
estate investment trusts which deal in real estate or interests therein;

17
<PAGE>

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

8. invest in oil, gas or other mineral exploration, leasing or
development programs; or

9. invest in companies for the purpose of exercising control or
management.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Fund may borrow money only (a) from a bank or from a registered
investment company, or (b) by engaging in reverse repurchase agreements with any
party. The Fund will not purchase any security while borrowings representing
more than 5% of its total assets are outstanding.

(ii) The Fund does not currently intend to purchase warrants, valued at
the lower of cost or market, in excess of 5% of the value of the Fund's total
assets.

(iii) The Fund does not currently intend to make short sales of securities;
provided, however, that the Fund may purchase or sell futures contracts and may
make initial and variation margin payments in connection with purchases or sales
of futures contracts or of options on futures contracts.

(iv) The Fund does not currently intend to purchase any securities on
margin, except for such short-term credits as are necessary for the clearance of
purchases and sales of securities; provided, however that this limitation shall
not limit the Fund's ability to purchase or sell futures contracts.

(v) The Fund does not currently intend to purchase any security if, as a
result, more than 15% of its total assets would be invested in securities that
are deemed to be illiquid because they cannot be sold or disposed of in the
ordinary course of business within seven days at approximately the prices at
which they are valued.

(vi) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.

(vii) The Fund does not currently intend to purchase the securities of any
issuer if those officers and directors of The Griffin Funds and those officers
and directors of Griffin Advisers, who individually, own more than one half of
1% of the securities of such issuer, together own more than 5% of such issuer's
securities.

18
<PAGE>

INVESTMENT LIMITATIONS OF THE GROWTH FUND
-----------------------------------------

AS A MATTER OF FUNDAMENTAL POLICY, THE GROWTH FUND MAY NOT:

1. purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund, except
that up to 25% of the value of the Fund's total assets may be invested without
regard to these limitations;

3. issue senior securities except as permitted under the 1940 Act or
applicable Securities and Exchange Commission ("SEC") rules, regulations or
orders;

8. invest in oil, gas or other mineral exploration, leasing or
development programs;

9. invest in companies for the purpose of exercising control or
management; or

19
<PAGE>

10. lend any portfolio security unless collateral values are continuously
maintained at not less than 100% by marking to market daily.

THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.

(i) The Growth Fund may borrow money only (a) from a bank or from a
registered investment company, or (b) by engaging in reverse repurchase
agreements with any party. The Growth Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.

(ii) The Growth Fund does not currently intend to purchase warrants,
valued at the lower of cost or market, in excess of 5% of the value of the
Growth Fund's total assets, or warrants which are not listed on the NYSE or ASE
in excess of 2% of the value of the Growth Fund's net assets.

(iii) The Growth Fund does not currently intend to make short sales of
securities; provided, however, that the Growth Fund may purchase or sell futures
contracts and may make initial and variation margin payments in connection with
purchases or sales of futures contracts or of options on futures contracts.

(iv) The Growth Fund does not currently intend to purchase any securities
on margin, except for such short-term credits as are necessary for the clearance
of purchases and sales of securities; provided, however that this limitation
shall not limit the Growth Fund's ability to purchase or sell futures contracts.

(v) The Growth Fund does not currently intend to purchase any security
if, as a result, more than 15% of its total assets would be invested in
securities that are deemed to be illiquid because they cannot be sold or
disposed of in the ordinary course of business within seven days at
approximately the prices at which they are valued.

(vi) The Growth Fund does not currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof, securities of pooled investment
vehicles and mortgage or asset-backed securities) if, as a result, more than 5%
of its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.

(vii) The Growth Fund does not currently intend to purchase the securities
of any issuer if those officers and directors of The Griffin Funds and those
officers and directors of Griffin Advisers, who individually, own more than one
half of 1% of the securities of such issuer, together own more than 5% of such
issuer's securities.

20
<PAGE>

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES SHARED BY CERTAIN FUNDS
----------------------------------------------------------------------

CONVERTIBLE BONDS. The Short-Term Bond Fund, the Bond Fund and the Growth
Fund may invest in Convertible Bonds which are fixed-income debt securities
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same issuer. Convertible
securities, while usually subordinate to similar non-convertible securities, are
senior to common stocks in an issuer's capital structure. Convertible
securities offer flexibility by providing the investor with a steady income
stream (generally yielding a lower amount than similar non-convertible
securities and a higher amount than common stocks) as well as the opportunity to
take advantage of increases in the price of the issuer's common stock through
the conversion feature. Fluctuations in the convertible security's price can
reflect changes in the market value of the common stock or changes in market
interest rates. At most, 5% of the Bond Fund's net assets will be invested in
convertible securities that are not either rated in the four highest rating
categories by a Nationally Recognized Statistical Rating Organization ("NRSRO"),
or unrated securities determined by Griffin Advisers, under the direction of the
Board of Directors, to be of comparable quality.

DELAYED DELIVERY TRANSACTIONS. Each of the Funds may buy and sell
securities on a delayed delivery or when-issued basis without limitation. These
transactions involve a commitment by a Fund to purchase or sell specific
securities at a predetermined price and/or yield, with payment and delivery
taking place after the customary settlement period for that type of security
(and more than seven days in the future). Typically, no interest accrues to the
purchaser until the security is delivered.

When purchasing securities on a delayed delivery basis, a Fund assumes the
rights and risks of ownership, including the risk of price and yield
fluctuations. Because a Fund is not required to pay for securities until the
delivery date, these risks are in addition to the risks associated with a Fund's
other investments. If a Fund remains substantially fully invested at a time
when delayed delivery purchases are outstanding, the delayed delivery purchases
may result in a form of leverage. When delayed delivery purchases are
outstanding, a Fund will set aside cash or other liquid high quality assets in a
segregated custodial account to cover its purchase obligations. When a Fund has
sold a security on a delayed delivery basis, the Fund does not participate in
further gains or losses with respect to the security. If the other party to a
delayed delivery transaction fails to deliver or pay for the securities, a Fund
could miss a favorable price or yield opportunity, or could suffer a loss.

Each of the Funds may renegotiate delayed delivery transactions after they
are entered into, and may sell underlying securities before they are delivered,
which may result in capital gains or losses.

A Fund may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. Normally, the settlement date occurs within two
months after the transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment and settlement, no payment
is made for the securities purchased by the purchaser and, thus, no interest
accrues to the purchaser from the transaction. If a Fund chooses to dispose of
the right to acquire a when-issued security prior to its acquisition or dispose
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. The use of when-issued transactions

21
<PAGE>

and forward commitments enables a Fund to hedge against anticipated changes in
interest rates and prices. A Fund also may enter into such transactions to
generate income. In such instances, a Fund agrees to resell its purchase
commitment to a third-party seller at the current market price on the date of
sale and concurrently enters into another purchase commitment for such
securities at a later date. As an inducement for a Fund to "roll over" its
purchase commitment, the Fund receives a negotiated fee. The purchase of
securities with a settlement date occurring on the Pacific Securities
Association approved settlement date is considered a normal delivery and not a
"when-issued" or "forward commitment" purchase.

DOLLAR-DENOMINATED FOREIGN SECURITIES. The Short-Term Bond Fund, the Bond
Fund, the Growth Fund, the U.S. Government Income Fund and the Growth & Income
Fund may invest in Dollar-Denominated Foreign Securities which are securities of
foreign governmental and private issuers that are denominated in and pay
interest in U.S. dollars. Investments in foreign securities involve certain
considerations that are not typically associated with investing in domestic
securities. There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers also are not generally
subject to the same accounting, auditing and financial reporting standards or
governmental supervision as domestic issuers. In addition, with respect to
certain foreign countries, interest may be withheld at the source under foreign
income tax laws, and there is a possibility of expropriation or confiscatory
taxation, political or social instability or diplomatic developments that could
adversely affect investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries.

FUTURES CONTRACTS. Each of the Non-Money Market Funds may engage in
transactions in futures contracts in an effort to hedge against market risks
and/or manage cash flow into a Non-Money Market Fund. A futures contract is a
bilateral agreement providing for the purchase and sale of a specified type and
amount of a financial instrument, or, in the case of futures contracts on
indexes of securities, for the making and acceptance of a cash settlement, at a
stated time in the future for a fixed price. By its terms, a futures contract
provides for a specified settlement date on which, in the case of the majority
of interest rate futures contracts, the fixed income securities underlying a
contract are delivered by the seller and paid for by the purchaser, or on which,
in the case of a stock index futures contract, an amount equal to a dollar
amount multiplied by the difference between the value of a stock index at the
close of the last trading day of the contract and the value of such index at the
time the futures contract was originally entered into is settled between the
purchaser and seller in cash. The purchase or sale of a futures contract
differs from the purchase or sale of a security in that no purchase price is
paid or received at the time the contract is entered into. Instead, an amount
of cash or cash equivalents, the value of which may vary but is generally equal
to 2% or less of the value of the contract, must be deposited with the broker as
initial deposit or "margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of the
index underlying the futures contract fluctuates, making positions in the
futures contract more or less valuable, a process known as "marking to the
market."

At any time prior to the expiration of a futures contract, a Fund may elect
to close out the Fund's position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is

22
<PAGE>

made and any loss experienced by the Fund is required to be paid to the exchange
clearing corporation, while any profit due to the Fund must be delivered to it.

Futures contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures contracts call for settlement only on the expiration
date, and cannot be "exercised" at any other time during their term.

The prices of futures contracts are volatile and are influenced, among
other things, by actual and anticipated changes in the market and interest
rates, which in turn are affected by fiscal and monetary policies and national
and international political and economic events. 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. 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.

A purchase or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract (i.e., margin payments). However,
- -
the Fund would presumably have sustained comparable losses if, instead of the
futures contract, it had invested in the underlying financial instrument and
sold it after the decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient assets to satisfy
its obligations under a futures contract, the Fund earmarks to the futures
contract money market instruments equal in value to the current value of the
underlying instrument less the margin deposit.

Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin.

A decision as to whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior, market or interest rate trends. There
are several risks in connection with the use by a Fund of futures contracts as a
hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of
the underlying instruments which are the subject of the hedge. The Funds'
adviser and sub-adviser will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in their judgment, will have a
significant correlation with movements in the prices of the Fund's underlying
instruments sought to be hedged.

23
<PAGE>

Successful use of futures contracts by the Funds for hedging purposes is
also subject to the ability of the Funds' adviser and sub-adviser to predict
correctly movements in the direction of the market. It is possible that, when a
Fund has sold futures to hedge its portfolio against a decline in the market,
the index, indices, or instruments, underlying futures might advance and the
value of the underlying instruments held in the Fund's portfolio might decline.
It is also possible that if a Fund were to hedge against the possibility of a
decline in the market (adversely affecting the underlying instruments held in
its portfolio) and prices instead increased, the Fund would lose part or all of
the benefit of increased value of those underlying instruments that it hedged,
because it would have offsetting losses in its futures positions.

In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions.

ILLIQUID INVESTMENTS are investments that may not be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Under the supervision of the Board of Directors, Griffin
Advisers determines the liquidity of each Fund's investments and, through
reports from Griffin Advisers, the Board monitors investments in illiquid
instruments. In determining the liquidity of a Fund's investments, Griffin
Advisers may consider various factors including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment). Investments considered by
the Money Market Funds to be illiquid may include repurchase agreements not
entitling the holder to payment of principal and interest within seven days, and
restricted securities and time deposits determined by Griffin Advisers to be
illiquid. Investments currently considered by the Short-Term Bond Fund, the
Municipal Bond Fund, the California Tax-Free Fund, the Bond Fund and the Growth
Fund to be illiquid include repurchase agreements not entitling the holder to
payment of principal and interest within seven days, and restricted securities
and time deposits determined by Griffin Advisers to be illiquid. Investments
currently considered by U.S. Government Income Fund to be illiquid include over-
the-counter options. Investments that may be considered by the Growth & Income
Fund to be illiquid include repurchase agreements not entitling the holder to
payment of principal and interest within seven days, loans and other direct debt
instruments, over-the-counter options, non-government stripped fixed-rate
mortgage-backed securities, restricted securities, government-stripped fixed-
rate mortgage-backed securities, and swap agreements determined by Griffin
Advisers to be illiquid. However, with respect to over-the-counter options that
the Growth & Income Fund writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option and
nature and terms of any agreement the Fund may have to close out the option
before expiration.

If through a change in values, net assets or other circumstances, a Money
Market Fund were in a position where more than 10% of its net assets were
invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity. Similarly, if through a change in values, net assets or
other

24
<PAGE>

circumstances, a Non-Money Market Fund were in a position where more than 15% of
its total assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.

OPTIONS. The Non-Money Market Funds may purchase put and call options in
an amount not exceeding 5% of a Fund's total assets. The Funds may also sell
put and call options. Such options may relate to particular securities or to
various stock or bond indexes. Purchasing options is a specialized investment
technique that entails a substantial risk of a complete loss of the amount paid
as premiums to the writer of the option.

Call options written by a Fund give the holder the right to buy the
underlying securities from the Fund at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Put options
give the holder the right to sell the underlying securities to the Fund during
the term of the option at a fixed exercise price up to a stated expiration date
or, in the case of certain options, on such date. Call options are "covered" by
a Fund, for example, when it owns the underlying securities, and put options are
"covered" by a Fund, for example, when it has established a segregated account
of cash, cash equivalents or securities which can be liquidated promptly to
satisfy any obligation of a Fund to purchase the underlying securities. A Fund
also may write combinations of puts and calls on the same underlying security.

A Fund will receive a premium from writing a put or call option, which
increases the gross income of a Fund in the event the option expires unexercised
or is closed out at a profit. The amount of the premium will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates. By writing a call option, a Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, a
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.

A Fund may terminate an option that it has written prior to its expiration
by entering into a closing purchase transaction in which the Fund purchases an
option having the same terms as the option written. It is possible, however,
that illiquidity in the options markets may make it difficult from time to time
for a Fund to close out its written option positions.

A Fund also may purchase put or call options in anticipation of changes in
interest rates which may adversely affect the value of their portfolio or the
prices of securities that the Fund wants to purchase at a later date. The
premium paid for a put or call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option and, unless the
price of the underlying security changes sufficiently, the option may expire
without value.

A Fund may write and purchase options on securities both for hedging
purposes and for speculative purposes, in an effort to increase current income.
Options on securities that are written or purchased by a Fund will be traded on
U.S. and foreign exchanges and over-the-counter.

25
<PAGE>

The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed 15% of a
Fund's net assets. Griffin Advisers intends to limit a Fund's writing of over-
the-counter options in accordance with the following procedure. Each Fund
intends to write over-the-counter options only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Also,
the contracts that a Fund has in place with such primary dealers will provide
that the Fund has the absolute right to repurchase an option it writes at any
time at a price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event will exceed
a price determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by a Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount that the option is in-the-money). The formula also may
- -
include a factor to account for the difference between the price of the security
and the strike price of the option, if the option is written out-of-the-money.
A Fund will treat all or a part of the formula price as illiquid for purposes of
the 15% test imposed by the SEC staff.

OPTIONS ON FUTURES CONTRACTS. The Non-Money Market Funds may engage in
transactions in options on futures contracts in an effort to hedge against
market risks and/or manage cash flow into the Non-Money Market Funds. An option
on a futures contract gives the purchaser (the "holder") the right, but not the
obligation, to enter into a "long" position in the underlying futures contract
(i.e., a purchase of such futures contract) in the case of an option to purchase
- -
(a "call" option), or a "short" position in the underlying futures contract
(i.e., a sale of such futures contract) in the case of an option to sell (a
- -
"put" option), at a fixed price (the "strike price") up to a stated expiration
date. The holder pays a non-refundable purchase price for the option, known as
the "premium." The maximum amount of risk the purchaser of the option assumes
is equal to the premium plus related transaction costs, although this entire
amount may be lost. Upon exercise of the option by the holder, the exchange
clearing corporation establishes a corresponding long position in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of futures contracts, such
as payment of variation margin deposits. In addition, the writer of an option
on a futures contract, unlike the holder, is subject to initial and variation
margin requirements on the option position.

An option, whether based on a futures contract, a stock index or an equity
security, becomes worthless to the holder when it expires. A position in an
option may be terminated by the purchaser or seller prior to expiration by
effecting a closing purchase or sale transaction subject to the availability of
a secondary market, which is the purchase or sale of an option of the same
series (i.e., the same exercise price and expiration date) as the option
- -
previously purchased or sold. The difference between the premiums paid and
received represents the party's profit or loss on the transaction.

The use of futures contracts and options does involve certain transaction
costs and risks. A Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in futures, options on futures or options on
stock indexes depends on the degree to which movements in the value of the
securities or index underlying such hedging instrument correlate with movements
in the value of the relevant portion of the Fund's holdings. The trading of
futures and options on indexes involves the additional risk of imperfect
correlation between movements in the futures or option price and the value

26
<PAGE>

of the underlying index. While a Fund will establish a future or option position
only if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures or option
contract at any specific time. In such event, it may not be possible to close
out a position held by a Fund, which could require such Fund to purchase or sell
the instrument underlying the position, make or receive a cash settlement, or
meet ongoing variation margin requirements. Investments in futures contracts on
fixed income securities and related indexes involve the risk that if the
adviser's investment judgment concerning the general direction of interest rates
is incorrect, a Fund's overall performance may be poorer than if it had not
entered into any such contract. Income earned from transactions in futures
contracts and options thereon would be treated in part as a short-term, and in
part as a long-term, capital gain and, if not offset by net realized capital
losses, generally would be subject to federal income taxes.

REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed-upon price on an agreed-upon date. The resale price reflects the
purchase price plus an agreed-upon incremental amount which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed-upon price, which
obligation is in effect secured by the value (at least equal to the amount of
the agreed-upon resale price and marked to market daily) of the underlying
security. Each Fund may engage in repurchase agreements with respect to any
security in which it is authorized to invest. While it does not presently
appear possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities, as
well as delays and costs to the Funds in connection with bankruptcy
proceedings), it is the policy of each Fund to limit repurchase agreements to
those parties whose creditworthiness has been reviewed and found satisfactory by
Griffin Advisers.

RESTRICTED SECURITIES. Each Fund may purchase restricted securities that
generally can be sold in privately negotiated transactions, pursuant to an
exemption from registration under the Securities Act of 1933, or in a registered
public offering. Where registration is required, a Fund may be obligated to pay
all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time a Fund may be
permitted to sell a security under an effective registration statement. If
during such a period, adverse market conditions were to develop, a Fund might
obtain a less favorable price than prevailed when it decided to seek
registration of the security. The Growth Fund and the Short-Term Bond Fund may
each invest up to 5% of its net assets in restricted securities.

VARIABLE OR FLOATING-RATE INSTRUMENTS. Each Money Market Fund may invest
in variable or floating-rate instruments that ultimately mature in more than 397
days, if a Fund acquires a right to sell the securities that meets certain
requirements set forth in Rule 2a-7 under the 1940 Act. Variable-rate
instruments (including instruments subject to a demand feature) that mature in
397 days or less may be deemed to have maturities equal to the period remaining
until the next readjustment of the interest rate. Other variable-rate
instruments with demand features may be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand. A floating-rate instrument subject to a demand feature may be deemed to
have a maturity equal to the period remaining until the principal amount can be
recovered through demand.

27
<PAGE>

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES OF SPECIFIC FUNDS
----------------------------------------------------------------

SECURITIES LENDING. The Short-Term Bond Fund, the Bond Fund, the Growth &
Income Fund and the Growth Fund may lend securities to parties such as broker-
dealers or institutional investors.

Securities lending allows a Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by Griffin Advisers to be of good standing. Furthermore,
they will only be made if, in Griffin Advisers' judgment, the consideration to
be earned from such loans would justify the risk.

Griffin Advisers understands that it is the current view of the SEC staff
that a Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive a 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
- -
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on the loan or a flat
fee from the borrower, as well as amounts equivalent to any dividends, interest,
or other distributions on the securities loaned and to any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection with
the loan; and (6) the Board of Directors must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternate arrangement with the borrower.

Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
- -
appreciation or depreciation).

LOANS AND OTHER DIRECT DEBT INSTRUMENTS. The Short-Term Bond Fund, the
Municipal Bond Fund, the California Tax-Free Fund, the Bond Fund and the Growth
& Income Fund may invest in loans and other direct debt instruments. Direct
debt instruments are interests in amounts owed by a corporate, governmental, or
other borrower to lenders or lending syndicates (loans and loan participation)
to suppliers of goods or services (trade claims or other receivables), to other
parties. Direct debt instruments are subject to the Funds' policies regarding
the quality of debt securities.

Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
service. If a Fund does not receive scheduled interest or principal payments on
such indebtedness, the Fund's share price and yield could be adversely affected.
Loans that are fully secured offer the Fund more protection than an unsecured
loan in the event of non-payment of scheduled interest or principal. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligations, or that the collateral can be
liquidated.

Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Funds. For
example, if a loan is foreclosed, a Fund would

28
<PAGE>

become part owner of any collateral, and would bear the costs of liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, a Fund could
be held liable as a co-lender. Direct debt instruments may also involve a risk
of insolvency of the lending bank or other intermediary. Direct debt instruments
that are not in the form of securities may offer less legal protection to a Fund
in the event of fraud or misrepresentation. In the absence of definitive
regulatory guidance, the Funds rely on Griffin Advisers' research in an attempt
to avoid situations where fraud or misrepresentation could adversely affect the
Funds.

A loan is often administered by a bank or other financial institution which
acts as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower. If
assets held by the agent for the benefit of a Fund were determined to be subject
to the claims of the agent's general creditors, the Fund might incur certain
costs and delays in realizing payment on the loan or loan participation and
could suffer a loss of principal or interest.

Direct indebtedness purchased by the Funds may include letters of credit,
revolving credit facilities, or other standby financing commitments obligating a
Fund to pay additional cash on demand. These commitments may have the effect of
requiring a Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. The Funds will set aside appropriate liquid
assets in a segregated custodial account to cover their potential obligations
under standby financing commitments.

Each Fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations for each Fund).
For purposes of these limitations, each Fund generally will treat the borrower
as the "issuer" of indebtedness held by the Fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between a Fund and the borrower, if the participation does not
shift to the Fund the direct debtor-creditor relationship with the borrower, SEC
interpretations require the Fund, in appropriate circumstances, to treat both
the lending bank or other lending institution and the borrower as "issuers" for
the purposes of determining whether the Fund has invested more than 5% of its
total assets in a single issuer. Treating a financial intermediary as an issuer
of indebtedness may restrict a Fund's ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.

FOREIGN INVESTMENTS. The U.S. Government Income Fund and the Bond Fund may
invest in foreign securities or foreign obligations. Foreign investments can
involve significant risks in addition to the risks inherent in U.S. investments.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing,

29
<PAGE>

including withholding taxes, brokerage commissions, and custodial costs, are
generally higher than for U.S. investments.

Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may become substantial delays. It may also be difficult to enforce legal rights
in foreign countries.

Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Griffin Advisers will be
able to anticipate these potential events or counter their effects.

The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.

The U.S. Government Income Fund, the Bond Fund and the Growth & Income Fund
may invest in foreign securities that impose restrictions on transfer within the
U.S. or to U.S. persons. Although securities subject to transfer restrictions
may be marketable abroad, they may be less liquid than foreign securities of the
same class that are not subject to such restrictions.

American Depository Receipts and European Depository Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. Designed for use in
U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. Purchases of ADRs by the Funds will be limited to
sponsored ADRs.

MUNICIPAL SECURITIES. The Municipal Bond Fund and the California Tax-Free
Fund may invest in certain Municipal Securities. The two principal
classifications of municipal securities are "general obligation" securities and
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Industrial Development Revenue bonds held
by a Fund are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of
Industrial Development Revenue bonds is usually directly related to the credit
standing of the corporate user of the facility involved.

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<PAGE>

Municipal securities may include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which created
the issuer.

Municipal securities may include variable or floating or inverse floating
rate instruments issued by industrial development authorities and other
governmental entities. While there may not be an active secondary market with
respect to a particular instrument purchased by a Fund, a Fund may demand
payment of the principal and accrued interest on the instrument or may resell it
to a third party as specified in the instruments. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of the
instrument if the issuer defaulted on its payment obligation or during periods
the Fund is not entitled to exercise its demand rights, and the Fund could, for
these or other reasons, suffer a loss.

Some of these instruments may be unrated, but unrated instruments purchased
by a Fund will be determined by Griffin Advisers to be of comparable quality at
the time of purchase to instruments rated "investment grade" by any major rating
service.

Municipal securities may include participations in privately arranged loans
to municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by
Griffin Advisers to be of comparable quality at the time of purchase to rated
instruments that may be acquired by a Fund. Frequently, privately arranged
loans have variable interest rates and may be backed by a bank letter of credit.
In other cases, they may be unsecured or may be secured by assets not easily
liquidated. Moreover, such loans in most cases are not backed by the taxing
authority of the issuers and may have limited marketability or may be marketable
only by virtue of a provision requiring repayment following demand by the
lender. Such loans made by a Fund may have a demand provision permitting the
Fund to require payment within seven days. Participations in such loans,
however, may not have such a demand provision and may not be otherwise
marketable. To the extent these securities are illiquid, they will be subject
to each Fund's limitation on investments in illiquid securities. Recovery of an
investment in any such loan that is illiquid and payable on demand may depend on
the ability of the municipal borrower to meet an obligation for full repayment
of principal and payment of accrued interest within the demand period, normally
seven days or less (unless a Fund determines that a particular loan issue,
unlike most such loans, has a readily available market). As it deems
appropriate, Griffin Advisers will establish procedures to monitor the credit
standing of each such municipal borrower, including its ability to meet
contractual payment obligations.

Municipal securities may include units of participation in trusts holding
pools of tax-exempt leases. Municipal participation interests may be purchased
from financial institutions, and give the purchaser an undivided interest in one
or more underlying municipal securities. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to each Fund's limitation on the purchase of illiquid
securities. Municipal leases and participating interests therein which may take
the form of a lease or an installment sales contract, are issued by state and
local governments and authorities in order to acquire a wide variety of
equipment and facilities. Interest payments on qualifying leases are exempt
from Federal income taxes.

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<PAGE>

In addition, these Funds may acquire "stand-by commitments" from banks or
broker/dealers with respect to municipal securities held in their portfolios.
Under a stand-by commitment, a dealer would agree to purchase at a Fund's option
specified Municipal Securities at a specified price. A Fund will acquire stand-
by commitments solely to facilitate portfolio liquidity and do not intend to
exercise their rights thereunder for trading purposes.

MUNICIPAL BONDS. The California Tax-Free Fund and the Municipal Bond Fund
may invest in municipal bonds, a type of municipal security. Municipal bonds
are debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as bridges,
highways, housing, hospitals, mass transportation, schools, streets, and water
and sewer works. Other purposes for which municipal bonds may be issued include
the refunding of outstanding obligations and obtaining funds for general
operating expenses or to loan to other public institutions and facilities.
Industrial development bonds are a specific type of revenue bond backed by the
credit and security of a private user. Certain types of industrial development
bonds are issued by or on behalf of public authorities to obtain funds to
provide privately-operated housing facilities, sports facilities, convention or
trade show facilities, an airport, mass transit, port or parking facilities, air
or water pollution control facilities and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal. Assessment bonds,
wherein a specially created district or project area levies a tax (generally on
its taxable property) to pay for an improvement or project may be considered a
variant of either category. There are, of course, other variations in the types
of municipal bonds, both within a particular classification and between
classifications, depending on numerous factors.

MUNICIPAL NOTES. The California Tax-Free Fund and the Municipal Bond Fund
may invest in municipal notes. Municipal notes include, but are not limited to,
tax anticipation notes ("Tans"), bond anticipation notes ("Bans"), revenue
anticipation notes ("Ran") and construction loan notes. Notes sold as interim
financing in anticipation of collection of taxes, a bond sale or receipt of
other revenues are usually general obligations of the issuer.

TANS. An uncertainty in a municipal issuer's capacity to raise taxes
as a result of such things as a decline in its tax base or a rise in
delinquencies could adversely affect the issuer's ability to meet its
obligations on outstanding Tans. Furthermore, some municipal issuers mix
various tax proceeds into a general fund that is used to meet obligations other
than those of the outstanding TANs. Use of such a general fund to meet various
obligations could affect the likelihood of making payments on TANs.

BANS. The ability of a municipal issuer to meet its obligations on
its BANs is primarily dependent on the issuer's adequate access to the longer
term municipal bond market and the likelihood that the proceeds of such bond
sales will be used to pay the principal of, and interest on, BANs.

RANS. A decline in the receipt of certain revenues, such as
anticipated revenues from another level of government, could adversely affect an
issuer's ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.

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<PAGE>

The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values will also change in
- -
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
- -
outstanding securities, including those held in the Fund's portfolio, will
decline and (if purchased at par value) they would sell at a discount. If
interests rates fall, the values of outstanding securities will generally
increase and (if purchased at par value) they would sell at a premium. Changes
in the value of municipal securities held in the Fund's portfolio arising from
these or other factors will cause changes in the net asset value ("NAV") per
share of the Fund.

The California Tax-Free Fund and the Municipal Bond Fund may also invest in
municipal commercial paper.

MUNICIPAL LEASE OBLIGATIONS AND CERTIFICATES OF PARTICIPATION. The
Municipal Bond Fund and the California Tax-Free Fund may invest a portion of
their assets in municipal leases and participation interests therein. These
obligations, which may take the form of a lease, an installment purchase, or a
conditional sales contract, are issued by state and local governments and
authorities in order to acquire land and a wide variety of equipment and
facilities. Generally, the Funds will not hold such obligations directly as a
lessor of the property, but will purchase a participation interest in a
municipal obligation from a bank or other third party. A participation interest
gives the Funds a specified, undivided interest in the obligation in proportion
to its purchased interest in the total amount of the obligation.

Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchases or conditional sales contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses"
providing that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Non-
appropriation clauses free the issuer from debt issuance limitations.

DERIVATIVE MUNICIPAL OBLIGATIONS. The Municipal Bond Fund and the
California Tax-Free Fund may also invest in more recently developed municipal
financing instruments, including custodial receipts or certificates evidencing
ownership of future interest payments, principal payments or both on underlying
municipal securities and municipal securities that contain embedded interest
rate derivative products. These types of obligations are referred to herein as
"Derivative Municipal Obligations." The Municipal Bond Fund and the California
Tax-Free Fund will not invest more than 20% of their respective total assets in
Derivative Municipal Obligations.

Derivative Municipal Obligations in which a Fund may invest include
municipal securities that contain embedded interest rate derivative products
such as interest rate swaps or caps ("Embedded Derivative Municipal
Obligations"). A discussion of interest rate derivative products is set forth
below.

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<PAGE>

Embedded Derivative Municipal Obligations in essence consist of a fixed-rate,
long-term bond and a derivative contract, such as an interest rate cap
agreement. By combining these two types of securities, a municipal issuer is
able to issue a tax-exempt bond, typically with a long maturity, the coupon
payments on which vary according to a formula based on an interest rate index.
For example, in an Embedded Derivative Municipal Obligation containing an
interest rate cap, during the term of the embedded cap the investor receives the
coupon rate on the underlying long-term bond less the cost of the cap for so
long as interest rates remain below the level of the cap. When interest rates
rise above that level, the investor receives the long-term bond coupon less the
cost of the cap plus the amount by which an index specified in the cap agreement
exceeds the cap level. This type of instrument would allow a Fund to hedge
against a rise in short-term interest rates.

Embedded Derivative Municipal Obligations offer advantages over investing
separately in a traditional municipal security and an interest rate derivative
contract. In an Embedded Derivative Municipal Obligation, because the municipal
issuer is the issuer of the interest rate derivative contract, the entire amount
of interest payable on the obligation is expected to be tax-exempt. Any income
from an interest rate derivative contract purchased separately would be taxable
to a Fund. An Embedded Derivative Municipal Obligation purchased by a Fund
would be accompanied by a tax opinion stating that the entire amount of interest
payable on the obligation is tax-exempt. Because final regulations have not
been adopted by the U.S. Department of the Treasury with respect to these types
of hybrid obligations, however, it is possible that the Internal Revenue Service
might find a portion of the interest to be taxable. In addition, Embedded
Derivative Municipal Obligations may not be readily marketable. All bonds
underlying Embedded Derivative Municipal Obligations will be rated, at the time
of purchase, A or better by Standard & Poor's Corporation or Moody's Investors
Services, Inc., or comparably rated by any other nationally recognized
statistical rating organization or, if unrated, of comparable quality as
determined by Griffin Advisers.

Derivative Municipal Obligations also include custodial receipts or
certificates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments or both on certain municipal
securities (such receipts or certificates are referred to herein as "Custodial
Receipts"). The underwriter of Custodial Receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a Custodial
Receipt a Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, it would be subject to state income tax (but not
federal income tax) on the income it earned on the underlying security, and the
yield on the security paid to the Fund and its shareholders would be reduced by
the amount of taxes paid. Furthermore, amounts paid by the trust or custodial
account to the Fund would lose their tax-exempt character and become taxable,
for federal and state purposes, in the hands of the Fund and its shareholders.
However, Custodial Receipts in which a Fund will invest will be accompanied by a
tax

34
<PAGE>

opinion stating that interest payable on the receipts is tax exempt. If a Fund
invests in Custodial Receipts, it is possible that a portion of the discount at
which the Fund purchases the receipts might have to be accrued as taxable income
during the period that a Fund holds the receipts.

With respect to certain types of Custodial Receipts, the interest on the
underlying municipal securities is divided into two or more different
components. Typically, one component (the "Auction Component") pays an interest
rate that is reset periodically through an auction process or by reference to an
interest rate index and is essentially a variable or floating-rate obligation.
A second component (the "Inverse Component") pays a residual interest rate based
on the difference between the total interest paid by the issuer on the municipal
securities and the rate paid on the Auction Component. Inverse Components may
also pay a rate of interest determined by subtracting a multiple of a variable
or floating rate from the total amount paid by the issuer of the municipal
securities. Because the interest rate paid to holders of Inverse Components is
generally determined by subtracting a variable or floating rate from a
predetermined amount, the interest rate paid to Inverse Component holders will
decrease as such variable or floating rate increases and increase as such
variable or floating rate decreases. Moreover, the extent of the increases and
decreases in the value of an Inverse Component in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity. Investments in Inverse
Components may therefore increase the volatility of the NAV and market value of
a Fund's shares.

HEDGING AND ADDITIONAL INCOME STRATEGIES. The Municipal Bond Fund and
California Tax-Free Fund may utilize various other investment strategies to
hedge against market risk, facilitate portfolio management and increase income.
These consist of interest rate swaps; caps and floors; futures; and put and call
transactions (collectively, "Hedging Transactions"). Hedging Transactions may
be used to attempt to protect against possible declines in the market value of a
Fund's portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), to protect a Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of a Fund's portfolio, to establish a position in the securities markets as a
temporary substitute for purchasing particular securities or to increase income.
For example, in order to decrease the duration (a measure of price volatility in
response to interest rate changes) of a Fund's portfolio, rather than sell
longer-term portfolio securities and purchase shorter-term securities, the Fund
might enter into futures contracts for the sale of debt securities or enter into
an interest rate swap where the Fund receives floating-rate payments in exchange
for making fixed-rate payments. Any or all of these techniques may be used at
any time. There is no particular strategy that requires use of one technique
rather than another. The use of any Hedging Transaction is a function of market
conditions. The Hedging Transactions that a Fund may use are described below.
Further, Hedging Transactions may be used by the Municipal Bond Fund and the
California Tax-Free Fund in the future as they are developed to the extent
deemed appropriate by the Board of Directors.

35
<PAGE>

INTEREST RATE TRANSACTIONS. The Short-Term Bond Fund, Municipal Bond Fund
and California Tax-Free Fund may enter into interest rate swaps and may purchase
and sell interest rate caps and floors. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest, e.g., an
- -
exchange of floating rate payments for fixed rate payments. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling such interest rate floor.

The Short-Term Bond Fund, Municipal Bond Fund and California Tax-Free Fund
may enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending upon whether a Fund is hedging its assets or
its liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with a Fund receiving or paying,
- - -
as the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of a Fund's obligations over its entitlements with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or high-quality liquid debt securities having an aggregate NAV at least
equal to the accrued excess will be maintained in a segregated account by a
Fund's custodian. If a Fund enters into an interest rate swap on other than a
net basis, the Fund will maintain a segregated account in the full amount
accrued on a daily basis of the Fund's obligations with respect to the swap. To
the extent a Fund sells (i.e., writes) caps and floors, it will maintain in a
- -
segregated account cash or high-quality liquid debt securities having an
aggregate NAV at least equal to the full amount, accrued on a daily basis, of
the Fund's obligations with respect to any caps or floors. A Fund will not
enter into any interest rate swap, cap or floor transaction unless the contra-
party has either long-term unsecured debt rated at least A- by Standard & Poor's
Corporation or Moody's Investors Services, Inc. or comparably rated by any
nationally recognized statistical rating organization. Griffin Advisers will
monitor the creditworthiness of contra-parties on an ongoing basis. If there is
a default by the other party to such a transaction, a Fund will have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. Griffin Advisers has determined that, as a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not yet been
developed and, accordingly, they are less liquid than swaps.

Interest rate transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payments
that a Fund is contractually obligated to make. If the other party to an
interest rate swap defaults, a Fund's risk of loss consists of the net amount of
interest payments that the Fund contractually is entitled to receive.
Therefore, there is no specific limit on the amount of interest rate swap
transactions that may be entered into by a Fund. The aggregate purchase price
of caps and floors held by a Fund may not exceed 5% of a Fund's assets. A Fund
may sell (i.e., write) caps and floors
- -

36
<PAGE>

without limitation, subject to the segregated account requirement described
above. However, because interest rate swaps and the purchase and sale of
interest rate caps and floors as currently constructed may generate taxable
income, the Municipal Bond Fund and California Tax-Free Fund do not expect
currently to engage in such transactions to any significant degree.

LETTERS OF CREDIT. The Municipal Bond Fund may purchase debt obligations,
including municipal securities, certificates of participation, commercial paper
and other short-term obligations, backed by an irrevocable letter of credit of a
bank, savings and loan association or insurance company which assumes the
obligation for payment of principal and interest in the event of default by the
issuer. Only banks, savings and loan associations and insurance companies
which, in the opinion of Griffin Advisers, are of investment quality comparable
to other permitted investments of such Fund may be used for letter of credit-
backed investments.

CERTAIN TAXABLE OBLIGATIONS. The California Tax-Free Fund may invest up to
20% of its total assets in fixed-income obligations whose interest is subject to
federal income tax or the federal alternative minimum tax. In addition, the
California Tax-Free Fund may invest a portion of its assets in obligations whose
interest is subject to California income tax. The California Tax-Free Fund will
purchase taxable obligations only if they meet its quality requirements as set
forth in its Prospectus.

Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the California Tax-Free Fund's distributions.
If such proposals were enacted, the availability of municipal obligations and
the value of the California Tax-Free Fund's holdings would be affected and the
Directors would reevaluate the Fund's investment objective and policies.

The California Tax-Free Fund anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as a
result of maturities of portfolio securities, sales of fund shares, or in order
to meet redemption requests, the California Tax-Free Fund may hold cash that is
not earning income. In addition, there may be occasions when, in order to raise
cash to meet redemptions, the California Tax-Free Fund may be required to sell
securities at a loss.

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES
----------------------------------------------
OF THE TAX-FREE MONEY MARKET FUND ONLY
--------------------------------------

FEDERALLY TAXABLE OBLIGATIONS. The Tax-Free Money Market Fund may invest
up to 20% of its total assets in fixed-income obligations whose interest is
subject to federal income tax or the federal alternative minimum tax. Taxable
obligations purchased by the Tax-Free Money Market Fund will meet the quality
requirements as set forth in its Prospectus.

Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the Tax-Free Money Market Fund's
distributions. If such proposals were enacted, the availability of municipal
obligations and the value of

37
<PAGE>

the Tax-Free Money Market Fund's holdings would be affected and the Directors
would reevaluate the fund's investment objective and policies.

The Tax-Free Money Market Fund anticipates being as fully invested as
practicable in municipal securities; however, there may be occasions when as a
result of maturities of portfolio securities, sales of fund shares, or in order
to meet redemption requests, the Tax-Free Money Market Fund may hold cash that
is not earning income. In addition, there may be occasions when, in order to
raise cash to meet redemptions, the Tax-Free Money Market Fund may be required
to sell securities at a loss.

LETTERS OF CREDIT. The Tax-Free Money Market Fund may purchase debt
obligations, including municipal securities, certificates of participation,
commercial paper and other short-term obligations, backed by an irrevocable
letter of credit of a bank, savings and loan association or insurance company
which assumes the obligation for payment of principal and interest in the event
of default by the issuer. Only banks, savings and loan associations and
insurance companies which, in the opinion of Griffin Advisers, are of investment
quality comparable to other permitted investments of the Fund may be used for
letter of credit-backed investments.

MUNICIPAL NOTES. The Tax-Free Money Market Fund may invest in municipal
notes. Municipal notes include, but are not limited to, tax anticipation notes
("TANs"), bond anticipation notes ("BANs"), revenue anticipation notes ("RANs")
and construction loan notes. Notes sold as interim financing in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.

TANS. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such things as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.

BANS. The ability of a municipal issuer to meet its obligations on its
BANs is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.

RANS. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.

MUNICIPAL SECURITIES. The two principal classifications of municipal
securities are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit

38
<PAGE>

quality of private activity bonds is usually directly related to the credit
standing of the corporate user of the facility involved.

Municipal securities may include variable or floating rate instruments
issued by industrial development authorities and other governmental entities.
While there may not be an active secondary market with respect to a particular
instrument purchased by the Fund, the Fund may demand payment of the principal
and accrued interest on the instrument or may resell it to a third party as
specified in the instruments. The absence of an active secondary market,
however, could make it difficult for the Fund to dispose of the instrument if
the issuer defaulted on its payment obligation or during periods the Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.

Some of these instruments may be unrated, but unrated instruments purchased
by the Fund will be determined by Griffin Advisers to be of comparable quality
at the time of purchase to instruments rated "high quality" by any major rating
service. Where necessary to ensure that an instrument is of comparable "high
quality," the Fund will require that an issuer's obligation to pay the principal
of the note may be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend.

Municipal securities may include participations in privately arranged loans
to municipal borrowers, some of which may be referred to as "municipal leases."
Generally such loans are unrated, in which case they will be determined by
Griffin Advisers, under the supervision of the Board of Directors, to be of
comparable quality at the time of purchase to rated instruments that may be
acquired by the Fund. In determining whether an unrated municipal lease
satisfies these quality requirements, Griffin Advisers will consider, among
other factors, the likelihood that the lease will be canceled. Frequently,
privately arranged loans have variable interest rates and may be backed by a
bank letter of credit. In other cases, they may be unsecured or may be secured
by assets not easily liquidated. Moreover, such loans in most cases are not
backed by the taxing authority of the issuers and may have limited marketability
or may be marketable only by virtue of a provision requiring repayment following
demand by the lender. Such loans made by the Fund may have a demand provision
permitting the Fund to require payment within seven days. Participations in
such loans, however, may not have such a demand provision and may not be
otherwise marketable. To the extent these securities are illiquid, they will be
subject to the Fund's limitation on investments in illiquid securities.
Recovery of an investment in any such loan that is illiquid and payable on
demand may depend on the ability of the municipal borrower to meet an obligation
for full repayment of principal and payment of accrued interest within the
demand period, normally seven days or less (unless the Fund determines that a
particular loan issue, unlike most such loans, has a readily available market).
As it deems appropriate, Griffin Advisers will establish procedures to monitor
the credit standing of each such municipal borrower, including its ability to
meet contractual payment obligations.

39
<PAGE>

Municipal securities may include units of participation in trusts holding
pools of tax-exempt leases. Municipal participation interests may be purchased
from financial institutions, and give the purchaser an undivided interest in one
or more underlying municipal security. To the extent that municipal
participation interests are considered to be "illiquid securities," such
instruments are subject to the Fund's limitation on the purchase of illiquid
securities. Municipal leases and participation interests therein which may take
the form of a lease or an installment sales contract, are issued by state and
local governments and authorities to acquire a wide variety of equipment and
facilities. Interest payments on qualifying leases are exempt from Federal
income taxes.

In addition, the Fund may acquire "stand-by commitments" from banks or
broker/dealers with respect to municipal securities held in its portfolio.
Under a stand-by commitment, a dealer would agree to purchase at the Fund's
option specified Municipal Securities at a specified price. The Funds will
acquire stand-by commitments solely to facilitate portfolio liquidity and do not
intend to exercise their rights thereunder for trading purposes.

STANDBY COMMITMENTS. The Tax-Free Money Market Fund may invest in Standby
Commitments which are puts that entitle holders to same day settlement at an
exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. The Tax-Free Money Market
Fund may acquire standby commitments to enhance the liquidity of portfolio
securities, but only when the issuers of the commitments are deemed to present
minimal risk of default.

Ordinarily the Tax-Free Money Market Fund may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. The Tax-Free Money Market Fund may
purchase standby commitments separate from or in conjunction with the purchase
of securities subject to such commitments. In the latter case, the Tax-Free
Money Market Fund would pay a higher price for the securities acquired, thus
reducing their yield to maturity. Standby commitments will not affect the
dollar-weighted average maturity of the Tax-Free Money Market Fund, or the
valuation of the securities underlying the commitments.

Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the Tax-
Free Money Market Fund; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.

VARIABLE OR FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS). The Tax-Free
Money Market Fund may invest in VRDOs/FRDOs which are tax-exempt obligations
that bear variable or floating interest rates and carry rights that permit
holders to demand payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating rate securities
have interest rates that change whenever there is a change in a designated base
rate while variable rate instruments provide for a specified periodic adjustment
in the interest rate. These formulas are designed to result in a market value
for the VRDO or FRDO that approximates its par value.

A demand instrument with a conditional demand feature must have received
both a short-term and a long-term high quality rating or, if unrated, have been
determined to be of comparable quality pursuant to procedures adopted by the
Board of Directors. A demand instrument with an

40
<PAGE>

unconditional demand feature may be acquired solely in reliance upon a short-
term high quality rating or, if unrated, upon a finding of comparable short-term
quality pursuant to procedures adopted by the Board of Directors.

The Tax-Free Money Market Fund may invest in fixed-rate bonds subject to
third party puts and in participation interests in such bonds held by a bank in
trust or otherwise. These bonds and participation interests have tender options
or demand features that permit the Tax-Free Money Market Fund to tender (or put)
its bonds to an institution at periodic intervals and to receive the principal
amount thereof. The Tax-Free Money Market Fund considers variable rate
instruments structured in this way (Participating VRDOs) to be essentially
equivalent to other VRDOs that it purchases. The Internal Revenue Service has
not ruled whether the interest on Participating VRDOs is tax-exempt, and,
accordingly the Tax-Free Money Market Fund intends to purchase these instruments
based on opinions of bond counsel.

A variable rate instrument that matures in 397 days or less may be deemed
to have a maturity equal to the period remaining until the next readjustment of
the interest rate. A variable rate instrument that matures in greater than 397
days but that is subject to a demand feature that is 397 days or less may be
deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand. A floating rate instrument
that is subject to a demand feature may be deemed to have a maturity equal to
the period remaining until the principal amount may be recovered through demand.
The Tax-Free Money Market Fund may purchase a demand instrument with a remaining
final maturity in excess of 397 days only if the demand feature can be exercised
on no more than 30 days' notice (a) at any time or (b) at specific intervals not
exceeding 397 days.

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES OF THE BOND FUND ONLY
--------------------------------------------------------------------

COMMODITY-LINKED BONDS. As a hedging strategy, the Bond Fund may invest in
commodity-indexed bonds involving gold, silver, other precious metals, oil, coal
and other commodities meeting certain internationally recognized specifications.
Commodity-indexed bonds, unlike futures contracts, can be of medium or long
duration and are usually interest bearing. Settlement prices can reflect
average, median or peak commodity prices over a reasonable period preceding
redemption, unlike futures contracts, which are settled on the basis of the
price prevailing at closeout. Commodity-indexed bonds are primarily issued by
corporations (for example, an oil or pipeline company might issue oil-indexed
bonds to hedge their exposure to oil price fluctuations) and investment banking
firms. These securities are typically privately placed, but some are publicly
offered and traded on the stock exchanges. Purchases of commodity-linked bonds
will be limited to less than 5% of Fund assets.

CORPORATE BONDS AND NOTES include debt securities issued by domestic
corporations, U.S. dollar-denominated debt securities issued by foreign
corporations, Yankee bonds and supranational obligations. Yankee bonds are U.S.
dollar-denominated obligations issued by foreign governments or companies.
Supranational obligations are U.S. dollar-denominated obligations issued by
international entities such as The World Bank and the Inter-American Development
Bank.

41
<PAGE>

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES
----------------------------------------------
OF THE GROWTH & INCOME FUND ONLY
--------------------------------

COMMON STOCKS. The Fund's investments in common stocks will be diversified
among industries and companies. Emphasis will be placed on common stocks which
are trading at low valuation levels relative to their fundamentals such as price
to current earnings either relative to the market or to the security's historic
price-to-earnings relationship, in common stocks which are trading at low prices
in relation to their prospects for long term growth in dividends and earnings,
and in common stocks of issuers that have historically paid above-average or
growing dividends.

Under normal market conditions, at least 90% of the Fund's equity
securities, including, for this purpose, the convertible securities described
below, will be issued by large companies (i.e., companies with a market
capitalization of more than $1 billion). Some investments (not to exceed 10% of
the Fund's equity securities) also may be made in equity securities of medium
and smaller sized companies (i.e., those companies with at least $250 million
but less than $1 billion in capitalization) which may have the potential to
generate high levels of future revenue and earnings growth and where the
investment opportunity may not be fully reflected in the price of the securities
but which may involve greater risks than investments in larger companies. There
may be some additional risks associated with investments in smaller companies
because their shares tend to be less liquid than securities of larger companies.
Further, shares of small companies are generally more sensitive to purchase and
sale transactions and changes in the issuer's financial condition and,
therefore, the prices of such stocks may be more volatile than those of larger
company stocks.

CONVERTIBLE SECURITIES. The Fund will seek to invest in convertible
securities that provide current income and are issued by companies that have a
strong earnings and credit record. The Fund may purchase convertible securities
that are fixed-income debt securities or preferred stocks, and which may be
converted at a stated price within a specified period of time into a certain
quantity of the common stock of the same issuer. Convertible securities, while
usually are subordinate to similar non-convertible securities, are senior to
common stocks in an issuer's capital structure. Convertible securities offer
flexibility by providing the investor with a steady income stream (generally
yielding a lower amount than similar non-convertible securities and a higher
amount than common stocks) as well as the opportunity to take advantage of
increases in the price of the issuer's common stock through the conversion
feature. Fluctuations in the convertible security's price can reflect changes
in the market value of the common stock or changes in market interest rates.

SPECIAL FACTORS AFFECTING THE CALIFORNIA TAX-FREE FUND
------------------------------------------------------

Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives, as
discussed below, could adversely affect the market values and marketability of,
or result in default of, existing obligations, including obligations that may be
held by the California Tax-Free Fund. Obligations of the state or local
governments may also be affected by budgetary pressures affecting the State and
economic conditions in the State. Interest income to the Fund could also be
adversely affected. The following highlights only some of the more significant
financial trends and problems, and is based on information drawn from official
statements and prospectuses relating to securities offerings of the State of
California, its agencies or

42
<PAGE>

instrumentalities, as available on the date of this Statement of Additional
Information. Griffin Advisers has not independently verified any of the
information contained in such official statements and other publicly available
documents, but is not aware of any fact which would render such information
inaccurate.

CONSTITUTIONAL LIMITATIONS ON TAXES AND APPROPRIATIONS:

LIMITATION ON TAXES. The ability of California state and municipal issuers to
obtain revenue sufficient to pay owed obligations is limited by California
Constitutional and other laws. Certain obligations held by the California Tax-
Free Fund may be obligations of issuers that rely in whole or in part, directly
or indirectly, on ad valorem property taxes as a source of revenue. The taxing
-- -------
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts the
-- -------
assessed valuation of property to increases of up to two percent per year,
except upon new construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem taxes above the 1%
-- -------
limit to pay debt service on voter-approved bonded indebtedness.

Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
-- -------
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975 if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits were filed challenging the acquisition-based assessment system
of Proposition 13, but on June 18, 1992, the U.S. Supreme Court announced a
decision upholding Proposition 13.

Article XIIIA prohibits local governments from raising revenues through ad
--
valorem property taxes above the 1%, and requires voters of any government unit
- -------
to give 2/3 approval to levy any "special tax." However, court decisions have
allowed a non-voter-approved levy of "general taxes" that was not dedicated to a
specific use. In response to those decisions, the voters of the State in 1986
adopted an initiative statute which imposed significant new limits on the
ability of local entities to raise or levy general taxes, except by receiving
majority local voter approval. Significant elements of this initiative,
"Proposition 62," have been overturned in recent court cases, but efforts may
continue to further restrict the ability of local government agencies to levy or
raise taxes.

APPROPRIATIONS LIMITS. The State is subject to an annual appropriations
limit imposed by Article XIII B of the State Constitution (the "Appropriations
Limit"). Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. Article XIII B,
originally adopted in 1979, was modified substantially by Propositions 98 and
111 in 1988 and 1990, respectively. "Appropriations subject to limitation,"
with respect to the State, are authorizations to spend "proceeds of taxes,"
which consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most State subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees, and certain other
non-tax funds.

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Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government and, pursuant to Proposition 111,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels. In addition, a number of recent initiatives
were structured or proposed to create new tax revenues dedicated to certain
specific uses, with such new taxes expressly exempted from the Article XIII B
limits (e.g., increased cigarette and tobacco taxes enacted by Proposition 99 in
1988). The Appropriations Limit may also be exceeded in cases of emergency.
However, unless the emergency arises from civil disturbance or natural disaster
declared by the Governor, and the appropriations are approved by two-thirds of
the Legislature, the Appropriations Limit for the next three years must be
reduced by the amount of excess.

The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. The measurement of change in population is a blended average of
statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. As amended by Proposition 111, the
Appropriations Limit is tested over consecutive two-year periods. Any excess of
the aggregate "proceeds of taxes" received over such two-year period above the
combined Appropriations Limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.

As originally enacted in 1979, the State's Appropriations Limit was based
on 1978-79 Fiscal Year authorizations to expend proceeds of taxes and was
adjusted annually to reflect changes in cost-of-living and population (using
different definitions, which were modified by Proposition 111). Starting in the
1991-92 Fiscal Year, the State's Appropriations Limit was recalculated by taking
the actual 1986-87 Fiscal Year limit, and applying the annual adjustments as if
Proposition 111 had been in effect. This recalculation resulted in an increase
of $1 billion to the State's Appropriations Limit in the 1990-91 Fiscal Year.
The Legislature has enacted legislation to implement Article XIII B which
defines certain terms used in Article XIII B and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.

Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit, primarily
by guaranteeing K-14 schools (kindergarten through twelfth plus two-year
community colleges) a minimum share of General Fund Revenues. Proposition 98,
as modified by Proposition 111, guarantees K-14 schools a certain amount of
funds, which is determined by taking the greater of amounts calculated under
three different tests. This guaranteed amount can be suspended for a one-year
period through a two-thirds vote of both houses of the State Legislature, with
the Governor's concurrence. In the fall of 1989, such a suspension was enacted
to avoid having the minimum guaranteed share of revenues generated by a special
supplemental sales tax enacted for earthquake relief go to K-14 schools.
Proposition 98 also contains provisions

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transferring certain State tax revenues in excess of the Article XIIIB limit to
K-14 schools.

During the recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from Fiscal Year 1991-
92 to Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. As part of the
negotiations leading to the 1995-96 Budget Act, an oral agreement was reached to
settle this case. It is expected that a formal settlement reflecting these
conditions will be entered into in the near future.

The oral agreement provides that both the State and K-14 schools share in
the repayment of prior years' emergency loans to schools. Of the total $1.76
billion in loans, the State will repay $935 million, while schools will repay
$825 million. The State share of the repayment will be reflected as
expenditures above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriation that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact. Once a court settlement is reached, and the Director of
Finance certifies that such a settlement has occurred, $360 million in
appropriations from the 1995-96 Fiscal Year to schools will be disbursed in
August 1996.

OBLIGATIONS OF THE STATE OF CALIFORNIA. As of October 1, 1995, the State
had approximately $18.4 billion of general obligation bonds outstanding and $3.3
billion remained authorized but unissued.

ECONOMY. California's economy is the largest among the 50 states and one
of the largest in the world. The State's population of over 32 million,
represents over 12% of the total United States population. Total employment is
about 14 million, the majority of which is in the service, trade, and
manufacturing sectors.

Since the start of the 1990-91 Fiscal Year, the State entered a sustained
economic recession, the most severe in the State since the 1930s. Construction,
manufacturing (especially aerospace), exports and financial services, among
others, have all been severely affected. Job losses have been the worst of any
post-war recession and have continued through the end of 1993. The trough of
the recession is estimated to have occurred in late 1993, later than for the
nation as a whole. Although a steady recovery has been underway since 1994,
pre-recession job levels are not expected to be reached for several more years.
The Department of Finance foresees slow recovery from the recession in
California beginning in 1994. Both the California and national economic
recoveries are much weaker than in previous business cycles, and could be harmed
by several factors, including rising interest rates.

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The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget, and
reduction of available internal borrowable funds, have combined to significantly
deplete the State's cash resources to pay its ongoing expenses. In order to
meet its cash needs, the State has issued over the past five fiscal years short
term obligations, such as revenue anticipation warrants, and depended upon
external borrowings, including borrowings extending into the subsequent fiscal
year, to repay such obligations. The State anticipates that it will not have to
resort to cross-year borrowing during the 1995-96 Fiscal Year.

The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State has also been facing a structural
imbalance in its budget with the largest programs supported by the General Fund
- -- K-12 schools and community colleges, health and welfare, and corrections --
which have grown at rates higher than the growth rates for the principal revenue
sources of the General Fund. As a result, the State has experienced recurring
budget deficits. However, due to an improving economy, the State had the
smallest nominal "budget gap" in many years in the 1995-96 Budget. The 1995-96
Budget Act projected revenues and transfer of $44.1 billion, and expenditures of
$43.4 billion. The Department of Finance projects that after repaying the last
carryover budget deficit, there will be a positive balance of $28 million in the
budget reserve, the Special Fund for Economic Uncertainties, at June 30, 1996.
The Department of Finance also projects cash flow borrowings in the 1995-96
Fiscal Year will be the smallest in many years, comprising about $2 billion of
notes to be issued in April 1996, maturing by June 30, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the Department
does not project further borrowing over the end of the fiscal year. The
available internal borrowable cash resources for the General Fund are projected
at almost $2 billion.

In July of 1994, all three of the rating agencies rating the State's long-
term debt lowered their ratings of the State's general obligation bonds.
Moody's Investor Service lowered its rating from "Aa" to "A1," Standard & Poor's
Ratings Group lowered its rating from "A+" to "A" and termed its outlook as
"stable," and Fitch Investors Service lowered its rating from "AA" to "A." The
rating agencies stated that the revisions were justified by the State's
continuing deferral of substantial portions of its estimated $3.8 billion
accumulated deficit, continuing structural budgeting constraints including a
funding guarantee for K-111 education, overly optimistic expectation of federal
aid to balance fiscal year 1995's budget and fiscal year 1996's cash flow
projecting, and reliance upon a trigger mechanism to reduce spending if the
plan's assumptions prove incorrect.

On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck the Los Angeles metropolitan area. Significant property
damage to private and public facilities occurred in a four-county area including
northern Los Angeles County, Ventura County, and parts of Orange and San
Bernardino Counties, which were declared as State and federal disaster areas by
January 18. Current estimates of total property damage (private and public) are
in the range of $15-$20 billion. The effects of earthquake are not expected to
have a material impact on the State's overall economic performance.

Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings survived the
earthquake with minimal or no damage, validating the cumulative effect of strict
building codes and thorough preparation for such an

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emergency by the State and local agencies. Damage to State facilities included
transportation corridors and facilities such as certain highways, which have
reopened and the campus of California State University at Northridge which has
also reopened.

On December 6, 1994, Orange County, California and the Orange County
Investment Pools (the "Pooled Funds") filed for federal bankruptcy protection
under chapter 9 of the U.S. Bankruptcy Code following reports that the Pooled
Funds had suffered significant investment losses, causing a liquidity crisis for
such Pooled Funds and Orange County. Following such filing, the outstanding
debt securities of Orange County were downgraded by the major rating agencies to
below investment grade. More than 180 other public entities, most of which, but
not all, are located in Orange County were also depositors in the Pooled Funds.
Orange County has reported the Pooled Funds lost approximately $1.69 billion, or
23 percent of their initial deposits of approximately $7.5 billion. Many of the
entities which deposited money in the Pooled Funds, including Orange County,
face interim and extended cash flow difficulties due to the bankruptcy filing
and may be required to reduce programs or capital projects. The California Tax-
Free Fund had none of its aggregate assets invested in direct unenhanced Orange
County obligations. It remains unclear what long-term effect such action by
Orange County and the Pooled Funds may have on the market for California
municipal securities in general and the market for the obligations of Orange
County and its related entities.

RECENT STATE FINANCIAL RESULTS. The principal sources of State General
Fund revenues in 1993-94 were the California personal income tax (44% of General
Fund revenues), the sales tax (35%), bank and corporation taxes (12%), and the
gross premium tax on insurance (3%). The State maintains a Special Fund for
Economic Uncertainties (the SFEU), derived from General Fund revenues, as a
reserve to meet cash needs of the General Fund, but which is required to be
replenished as soon as sufficient revenues are available. Year-end balances in
the SFEU are included for financial reporting purposes in the General Fund
balance.

FISCAL YEARS PRIOR TO 1994-95. In the years following enactment of the
federal Tax Reform Act of 1986, and conforming changes to the State's tax laws,
taxpayer behavior became much more difficult to predict, and the State
experienced a series of fiscal years in which revenue came in significantly
higher or lower than original estimates. The 1989-90 Fiscal Year ended with
revenues below estimates, so that the State's budget reserve (the Special Fund
for Economic Uncertainties or "SFEU") was fully depleted by June 30, 1990. This
date essentially coincided with the start of the recent recession, which
severely affected State General Fund revenues, and increased expenditures above
initial budget appropriations due to greater health and welfare costs. The
State's budget problems in recent years have also been caused by a structural
imbalance in that the largest General Fund Programs - K-14 education, health,
welfare and corrections -- were increasing faster than the revenue base, driven
by the State's rapid population growth. These pressures will continue as
population trends maintain strong demand for health and welfare services, as the
school age population continues to grow, and as the State's corrections program
responds to a "Three Strikes" law enacted in 1994, which requires mandatory life
prison terms for certain third-time felony offenders.

As a result of these factors and others, from the late 1980's until 1992-
93, the State had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the SFEU approaching $2.8 billion
at

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its peak at June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
fiscal year thereafter, each budget required multibillion dollar actions to
bring projected revenues and expenditures into balance and to close large
"budget gaps" which were identified. The Legislature and Governor eventually
agreed on a number of different steps to produce Budget Acts in the years 1991-
92 to 1993-94, including:

. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and funding from the State to
reduction in mandates on local government;
. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to
local school districts, thereby reducing State funding for schools under
Proposition 98;
. reduction in growth of support for higher education programs,
coupled with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to illegal immigrants; and
. various one-time adjustments and accounting changes.

Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one year,
so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95.

Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller was forced to issue registered warrants to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and warrants. Between July 1 and
September 4, 1992 the State Controller issued a total of approximately $3.8
billion of registered warrants. After that date, all remaining outstanding
registered warrants (about $2.9 billion) were called for redemption from
proceeds of the issuance of 1992 Interim Notes after the budget was adopted.

The State's cash condition became so serious in late spring of 1992 that
the State Controller was required to issue revenue anticipation warrants
maturing in the following fiscal year in order to pay the State's continuing
obligations. The State was forced to rely increasingly on external debt markets

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to meet its cash needs, as a succession of notes and warrants were issued in the
period from June 1992 to July 1994, often needed to pay previously maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of a fiscal year, as
noted earlier.

1994-95 FISCAL YEAR

The 1994-95 Fiscal Year represented the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment to
produce a balanced budget. The Governor's Budget Proposal, as updated in May
and June 1994, recognized that the accumulated deficit could not be repaid in
one year, and proposed a two-year solution designed to eliminate the accumulated
budget deficit, estimated at about $1.8 billion at June 30, 1994, by June 30,
1996.

The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected
General Fund revenues and transfers of $41.9 billion, $2.1 billion more than
actual revenues received in 1993-94, and expenditures of $40.9 billion, an
increase of $1.6 billion from the prior year. The revenue estimates partly
reflected the Administration's forecast of an improving economy. The principal
features of the 1994-95 Budget Act were the following:

1. Receipt of additional federal aid of about $760 million for costs of
refugee assistance and costs of incarceration and medical care for
illegal immigrants. Analysis of the federal Fiscal Year 1995 budget by
the Department of Finance indicates that about $98 million was
appropriated for California to offset costs of incarceration of illegal
immigrants, less than the $356 million which was assumed in the State's
1994-95 Budget Act. Because of timing considerations in applying for
these federal funds, the Department of Finance estimates that about $33
million of these funds will be received during the State's 1994-95
Fiscal Year, with the balance received in the following fiscal year. It
does not appear that the federal budget contains any of the additional
$400 million in funding for refugee assistance and health costs which
were also assumed in the 1994-95 Budget Act.

2. Reductions of approximately $1.1 billion in health and welfare costs.
Certain of these actions have been blocked so far by legal challenges;
see "LITIGATION" below.

3. A General Fund increase of approximately $38 million in support for the
University of California and $65 million for California State
University, accompanied by student fee increases for both the
University of California and California State University.

4. Proposition 98 funding for K-14 schools was increased by $526 million
from 1993-94 Fiscal Year levels, representing an increase for
enrollment growth and inflation. Consistent with previous budget
agreements, Proposition 98 funding provided approximately $4,217 per
student for K-12 schools, equal to the level in the prior three years.

5. Additional miscellaneous cuts ($500 million), fund transfers ($255
million), and adjustment to prior years' legislation concerning
property tax shifts for local government ($300 million).

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The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget Act, the renters' tax credit was suspended for
two years (1993 and 1994). A ballot proposition to permanently restore the
renters' tax credit after this year failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 Fiscal Year.

The 1994-95 Budget Act assumed that the State would use a cash flow
borrowing program in 1994-95 which combined one-year notes and two-year
warrants, which were issued in the summer of 1994. Issuance of the warrants
allowed the State to defer repayment of approximately $1.0 billion of its
accumulated budget deficit into the 1995-96 Fiscal year. No automatic spending
cuts were required under the Budget Adjustment Law.

Reports by the Department of Finance in May, 1995 indicate that, with
economic recovery well underway in the State, General Fund revenues for the
entire 1994-95 Fiscal Year were above projections, and expenditures were below
projections because of slower than anticipated health/welfare caseload growth
and school enrollments. The aggregate effect improved the budget picture by
about $500 million, leaving an estimated budget deficit of about $630 million at
June 30, 1995.

1995-96 FISCAL YEAR

1995-96 Budget Act - For the first time in four years, the State entered
the upcoming fiscal year with strengthening revenues and reduced caseload growth
based on an improving economy. The State entered the 1995-96 Budget
negotiations with the smallest nominal "budget gap" to be closed in many years.
Nonetheless, serious policy differences between the Governor and Legislature
prevented timely enactment of the budget. The 1995-96 Budget Act was signed by
the Governor on August 3, 1995, 34 days after the start of the fiscal year. The
Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase from the prior year. Expenditures are budgeted at $43.4
billion, a 4 percent increase. The Department of Finance projects that, after
repaying the last of the carryover budget deficit, there will be a positive
balance of $28 million in the budget reserve, the Special Fund for Economic
Uncertainties, at June 30, 1996. The Budget Act also projects Special Fund
revenues of $12.7 billion and appropriates Special Fund expenditures of $13.0
billion.

The Department of Finance projects cash flow borrowings in the 1995-96
Fiscal Year will be the smallest in many years, comprising about $2 billion of
notes to be issued in April, 1996, and maturing by June 30, 1996. With full
payment of $4 billion of revenue anticipation warrants on April 25, 1996, the
Department sees no further need for borrowing over the end of the fiscal year.
The available internal borrowable cash resources of the General Fund at June 30,
1996 are projected at almost $2 billion, which estimate is subject to comment by
the State Controller.

The following are the principal features of the Budget Act:

1. Proposition 98 funding for schools and community colleges will increase
by about $1.0 billion (General Fund) and $1.2 billion total above
revised 1994-95 levels. Because of higher than projected revenues in
1994-95, an additional $543 million ($91 per K-12 ADA)

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is appropriated to the 1994-95 Proposition 98 entitlement. A large part
of this is a block grant of about $54 per pupil for any one-time
purpose. Per-pupil expenditures are projected to increase by another
$126 in 1995-96 to $4,435. For the first time in several years, a full
2.7 percent cost of living allowance is funded. The budget compromise
anticipates a settlement of the CTA v. Gould litigation. See "STATE
FINANCES--Proposition 98."

2. Cuts in health and welfare costs totaling about $0.9 billion. Some of
these cuts (totaling about $500 million) would require federal
legislative approval.

3. A 3.5 percent increase in funding for the University of California ($90
million General Fund) and the California State University system ($24
million General Fund).

4. The Budget assumes receipt of $473 million in new federal aid for costs
of illegal immigrants, above commitments already made by the federal
government. This amount is much less than estimates made in the summer
of 1994 as part of the two-year budget proposal, and somewhat lower
than the estimates in the January 1995 Governor's Budget.

5. General Fund support for the Department of Corrections is increased by
about 8 percent over the prior year, reflecting estimates of increased
prison population, but funding is less than proposed in the Governor's
Budget.

DEFICIT RETIREMENT AND DEFICIT REDUCTION PLANS

A key feature of the 1993-94 Budget Act was a plan to retire by December
31, 1994 the $2.8 billion budget deficit which had been accumulated by June 30,
1993 (the "Deficit Retirement Plan"). This 18-month plan used existing
statutory authority to borrow $2.8 billion externally. The 1993-94 Budget Act
provided that $1.6 billion of the deficit elimination loan would be repaid by
December 23, 1993 from a portion of the proceeds of the $2.0 billion 1993
Revenue Anticipation Warrants issued on June 23, 1993. Legislation enacted with
the 1993-94 Budget Act (Chapter 63, Statutes of 1993) directed the State
Controller to issue $1.2 billion of registered reimbursement warrants in the
1993-94 Fiscal Year to fund the balance of the accumulated deficit. Pursuant to
this directive, the State issued $1.2 billion of 1994 Revenue Anticipation
Warrants, Series A (the "Series A Warrants") in February 1994, which matured on
December 21, 1994. The law also created in the State Treasury a Deficit
Retirement Fund. The State Controller transferred from the General Fund to the
Deficit Retirement Fund the sum of $1.2 billion in two equal installments on
September 15, 1994 and December 15, 1994, which moneys were used to retire the
Series A Warrants.

The Deficit Retirement Plan anticipated a combined program to balance the
budget over the 1993-94 and 1994-95 Fiscal Years, and projected a General Fund
balance of $260 million on June 30, 1995. Because fiscal conditions did not
improve as projected in the 1993-94 Fiscal Year, the revenue assumptions of the
Deficit Retirement Plan could not be met, and the Governor indicated in the June
1994 Revision that the General Fund condition would be about $1 billion worse at
June 30, 1994 than was projected at the start of the year. Accordingly, the
1994-95 Budget Act anticipates deferring retirement of about $1 billion of the
carryover budget deficit to the 1995-96 Fiscal Year, when it is intended to be
fully retired. This 22-month Deficit Reduction Plan uses existing statutory
authority to

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borrow $4 billion externally of which approximately $1 billion is the carryover
budget deficit. In addition, Chapter 136, Statutes of 1994, created in the State
Treasury the Warrant Payment Fund. The State Controller is directed to transfer
from the General Fund to the Warrant Payment Fund in September 1995, November
1995, January 1996 and April 1996 in four equal installments the amount
necessary to retire the $4.0 billion of revenue anticipation warrants maturing
on April 25, 1996. As set forth in the Department of Finance's May Revision to
the Governor's Budget, released on May 21, 1995, the Department projects that,
despite some slowdown in the national economy, California will continue steady
economic growth, as it recovers from the recent recession.

Reports issued by the Department of Finance through October, 1995 indicate
that the State economy continued solid growth through the first quarter, despite
continuing job losses in defense-related industries and restructuring in the
financial services sector. Employment and retail sales were both higher than
year-earlier figures, and unemployment was almost a full percentage point less
than the summer of 1994, although still above the national average. Residential
construction has been weak through the summer, although there were signs of
improvement in August, 1995. Nonresidential construction has been running
almost 7 percent above 1994 levels which were, however, depressed.

OBLIGATIONS OF OTHER ISSUERS.

STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies; the reallocation of certain
State revenues to local agencies; and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. It is not
known whether additional revenue redistribution legislation will be enacted in
the future and, if enacted, whether such legislation would provide adequate
revenue for such California issuers to pay their obligations. Total local
assistance from the State's General Fund totaled approximately $33.0 billion in
FY 1991-92 (about 75% of General Fund expenditures) and has been budgeted at
$31.1 billion for FY 1992-93, including the effect of implementing reductions in
certain aid programs. To reduce State General Fund support for school
districts, the 1992-93 Budget Act caused local governments to transfer $1.3
billion of property tax revenues to school districts, representing loss of
almost half the post-Proposition 13 "bailout" aid. The Governor has proposed in
his 1993-94 Budget that local governments transfer a further $2.5 billion of
property taxes to school districts, with the possibility that they could raise
taxes at the local level to make up some of the shortfall.

To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
considerations, the absolute level, or the rate of growth, of State assistance
to local governments may continue to be reduced. Any such reductions in State
aid could compound the serious fiscal constraints already experienced by many
local governments, particularly counties. At least one rural county (Butte)
publicly announced that it might enter bankruptcy proceedings in August 1990,
although such plans were put off after the Governor approved legislation to
provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. A school district (Richmond
Unified) recently filed for protection under bankruptcy laws, but the petition
was later dismissed; other school districts have indicated financial stress,
although none has threatened bankruptcy.

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ASSESSMENT BONDS. Municipal obligations which are assessment bonds or
Mello-Roos bonds may be adversely affected by a general decline in real estate
values or a slow-down in real estate sales activity. In many cases, such bonds
are secured by land which is undeveloped at the time of issuance but anticipated
to be developed within a few years after issuance. In the event of such
reduction or slowdown, such development may not occur or may be delayed, thereby
increasing the risk of a default on the bonds. Because the special assessments
or taxes securing these bonds are not the personal liability of the owners of
the property assessed, the lien on the property is the only security for the
bonds. Moreover, in most cases the issuer of these bonds is not required to
make payments on the bonds in the event of delinquency in the payment of
assessments or taxes, except for amounts, if any, in a reserve fund established
for the bonds.

CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term lease
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common causes of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g., due to earthquake). In the event abatement occurs with respect to a
----
lease obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.

Several years ago, the Richmond Unified School District ("RUSD") entered
into a lease transaction in which certain existing properties of the RUSD were
sold and leased back in order to obtain funds to cover operating deficits.
Following a fiscal crisis in which the RUSD's finances were taken over by a
State receiver (including a brief period under bankruptcy court protection), the
RUSD failed to make rental payments on this lease, resulting in a lawsuit by the
Trustee for the Certificate of Participation holder, in which the State was
named defendant (on the grounds that it controlled the RUSD's finances). One of
the defenses raised in answer to this lawsuit was the invalidity of the original
lease transaction. The trial court has upheld the validity of the RUSD's lease
but an appeal has been filed by the State. Any ultimate judgment against the
Trustee may have implications for lease transactions of a similar nature by
other California entities.

OTHER CONSIDERATIONS. The repayment of Industrial Development Securities
secured by real property may be affected by California laws limiting foreclosure
rights of creditors. Health Care and Hospital Securities may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.

Limitations on ad valorem property taxes may particularly affect "tax
-- -------
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (for example, because of major
natural disaster such as an earthquake), the tax increment revenue may be
insufficient to make principal and interest

53
<PAGE>

payments on those bonds. Both Moody's Investors Services, Inc. and Standard &
Poor's Corporation suspended ratings on California tax allocation bonds after
the enactment of Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.

Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax to repay that entity's general obligation indebtedness. As a
result, redevelopment agencies (which, typically, are the Issuers of Tax
Allocation Securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.

Substantially all of California is within an active geologic region subject
to major seismic activity. Any California Municipal Obligation in the
California Tax-Free Fund could be affected by an interruption of revenues
because of damaged facilities or, consequently, income tax deductions for
casualty losses or property tax assessment reductions. Compensatory financial
assistance could be constrained by the inability of (i) an issuer to have
obtained earthquake insurance coverage at reasonable rates; (ii) an insurer to
perform on its contracts of insurance in the event of widespread losses; or
(iii) the federal or State government to appropriate sufficient funds within
their respective budget limitations.

The October 1989 Northern California earthquake is estimated to have
resulted in a $2 billion (0.3%) reduction in personal income statewide, but wage
effects were minor and largely offset by reconstruction activity. The federal
government committed approximately $3.5 billion to earthquake relief, and,
shortly after the event, the California Legislature enacted, in special session,
a temporary increase in the sales tax rate to finance relief efforts. The
earthquake was not expected to materially affect California's economy.

Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution (described briefly above), the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting future
appropriations or changes in population and the cost of living, and the
probability of continuing legal challenges, it is not currently possible to
determine fully the impact of Article XIIIA or Article XIIIB, or the outcome of
any pending litigation with respect to those provisions on California
obligations in the California Tax-Free Fund or on the ability of the State or
local governments to pay debt service on such obligations. Legislation has been
or may be introduced (either in the Legislature or by initiative) which would
modify existing taxes or other revenue-raising measures or which either would
further limit or, alternatively would increase the abilities of state and local
governments to impose new taxes or increase existing taxes. It is not presently
possible to predict the extent to which any such legislation will be enacted, or
if enacted, how it would affect California municipal obligations. It is also
not presently possible to predict the extent of future allocations of state
revenues to local governments or the abilities of state or local governments to
pay the interest on, or repay the principal of, such California municipal
obligations in light of future fiscal circumstances.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities are placed on
behalf of the Funds by Griffin Advisers (either directly or through the sub-
advisers) pursuant to authority under the Advisory

54
<PAGE>

Contract. Other than listed securities, securities purchased and sold by the
Funds generally will be traded on a net basis (i.e., without commission).
Subject to applicable limitations of the federal securities laws, Griffin
Advisers will consider, in selecting broker-dealers, various relevant factors,
including, but not limited to, the size and type of the transaction; the nature
and character of the markets for the security to be purchased or sold; the
execution efficiency, settlement capability and financial condition of the
broker-dealer firm; the broker-dealer's execution services rendered on a
continuing basis; and the reasonableness of any commissions.

The Funds may execute portfolio transactions with broker-dealers who
provide research and execution services to The Griffin Funds and other accounts
over which Griffin Advisers or a sub-adviser or their affiliates exercise
investment discretion. Such services may include advice concerning the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of accounts; and
effecting securities transactions and performing functions incidental thereto
(such as clearance and settlement). Griffin Advisers maintains a listing of
broker-dealers who provide such services on a regular basis. However, as many
transactions on behalf of the Funds are placed with broker-dealers (including
broker-dealers on the list) without regard to the furnishing of such services,
it is not possible to estimate the proportion of such transactions directed to
such broker-dealers solely because such services were provided. The selection
of such broker-dealers is generally made by Griffin Advisers (to the extent
possible consistent with execution considerations) based upon the quality of
research and execution services provided.

The receipt of research from broker-dealers that execute transactions on
behalf of the Funds may be useful to Griffin Advisers or a sub-adviser in
rendering investment management services to the Funds and/or their other
clients, and conversely, such research provided by broker-dealers who have
executed transaction orders on behalf of other clients of Griffin Advisers or
the sub-advisers may be useful to Griffin Advisers or the sub-advisers in
carrying out their obligations to the Funds. The receipt of such research
enables Griffin Advisers or the sub-advisers to avoid the additional expenses
that could be incurred if Griffin Advisers or the sub-advisers tried to develop
comparable information through their own efforts.

Subject to applicable limitations of the federal securities laws, broker-
dealers may receive commissions for agency transactions that are in excess of
the amount of commissions charged by other broker-dealers in recognition of
their research and execution services. In order to cause the Funds to pay such
higher commissions, Griffin Advisers (or a sub-adviser) must determine in good
faith that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers viewed
in terms of a particular transaction or the overall responsibilities of Griffin
Advisers (or the sub-adviser) to the Funds and their other clients. In reaching
this determination, Griffin Advisers (or the sub-adviser) will not attempt to
place a specific dollar value on the brokerage and research services provided or
to determine what portion of the compensation should be related to those
services.

The Directors periodically review the performance of Griffin Advisers (or
the sub-adviser) regarding their responsibilities in connection with the
placement of portfolio transactions on behalf of

55
<PAGE>

each Fund and review the commissions paid by each Fund over representative
periods of time to determine if they are reasonable in relation to the benefits
of each Fund.

From time to time the Directors will review whether the recapture for the
benefit of the Funds of some portion of the brokerage commission or similar fees
paid by each Fund on portfolio transactions is legally permissible and
advisable. The Funds seek to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Directors intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to
determine, in the exercise of their business judgment, whether it would be
advisable to seek such recapture.

During the fiscal year ended September 30, 1995, Griffin Growth & Income
Fund paid $70,409 in brokerage commissions, and during the period from
commencement of operations on June 12, 1995 to September 30, 1995 Griffin Growth
Fund paid $3,621 in brokerage commissions. In addition, as of the close of The
Griffin Funds' fiscal year on September 30, 1995, the Bond Fund and the Growth &
Income Fund held securities of their regular broker-dealers with a market value
as follows: Bond Fund: Smith Barney Holding Corporation ($149,477); Merrill
Lynch ($216,888); and PaineWebber Group ($304,500); Growth & Income Fund:
BankAmerica Corporation ($413,138).

VALUATION OF PORTFOLIO SECURITIES

MONEY MARKET FUNDS. Each Money Market Fund values its investments on the
basis of amortized cost. This technique involves valuing an instrument at its
cost as adjusted for amortization of premium or accretion of discount rather
than its value based on current market quotations or appropriate substitutes
which reflect current market conditions. The amortized cost value of an
instrument may be higher or lower than the price the Fund would receive if it
sold the instrument.

Valuing each Fund's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7 under the 1940 Act. The
Funds must adhere to certain conditions under Rule 2a-7; these conditions are
summarized in the Prospectus.

The Board of Directors of The Griffin Funds oversees Griffin Advisers'
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Fund's net asset value ("NAV") at $1.00
per share. At such intervals as they deem appropriate, the Directors consider
the extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. In the event such deviation from the Fund's amortized cost per
share exceeds 1/2 of 1 percent, the Board of Directors will promptly consider
what corrective action, if any, should be initiated. If the Directors believe
that a deviation from the Fund's amortized cost per share may result in material
dilution or other unfair results to shareholders, the Directors have agreed to
take such corrective action, if any, as they deem appropriate to eliminate or
reduce, to the extent reasonably practicable, the dilution or unfair results.
Such corrective action could include selling portfolio instruments prior to
maturity to realize capital gain or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; establishing NAV by
using available market quotations; and such other measures as the Directors may
deem appropriate.

56
<PAGE>

During periods of declining interest rates, a Fund's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these circumstances, a shareholder in a Fund may be able to obtain a somewhat
higher yield than would result if the Fund utilized market valuations to
determine its NAV. The converse would apply in a period of rising interest
rates.

NON-MONEY MARKET FUNDS. Securities owned by each Fund are appraised by
various methods depending on the market or exchange on which they trade.
Securities traded on the New York Stock Exchange or the American Stock Exchange
are appraised at the last sale price, or if no sale has occurred, at the closing
bid price. Securities traded on other exchanges are appraised as nearly as
possible in the same manner. Securities and other assets for which exchange
quotations are not readily available are valued on the basis of closing over-
the-counter bid prices, if available, or at their fair value as determined in
good faith under consistently applied procedures under the general supervision
of the Board of Directors. Debt obligations with remaining maturities of 60
days or less are valued either at amortized cost (unless the Board of Directors
determines that amortized cost does not reflect the securities' fair value) or
at original cost plus accrued interest.

Foreign securities are valued at the last sale price in the principal
market where they are traded, or, if last sale prices are unavailable, at the
last bid price available prior to the time a Fund's NAV is determined. Foreign
security prices are furnished by quotation services who express the value of
securities in their local currency and are then translated from the local
currency into U.S. dollars at current exchange rates. Any changes in the value
of forward contracts due to exchange rate fluctuations are included in the
determination of NAV.

PERFORMANCE

The Funds may quote performance in various ways. All performance
information supplied by the Funds in advertising is historical and is not
intended to indicate future returns. A Fund's yield and total return fluctuate
in response to market conditions and other factors.

YIELD CALCULATIONS
------------------

MONEY MARKET FUNDS. To compute a Fund's yield for a period, the net change
in value of a hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the original share and dividends
declared on both the original share and any additional shares. The net change
is then divided by the value of the account at the beginning of the period to
obtain a base period return. This base period return is annualized to obtain a
current annualized yield. A Fund may also calculate a compound effective yield
by compounding the base period return over a one year period. In addition to
the current yield, a Fund may quote yields based on any historical seven-day
period. Each Fund's yields are calculated on the same basis as other money
market funds, as required by applicable regulations.

For the 7-day period ending September 30, 1995, the yield and effective
yield were 5.32% and 5.46%, respectively, for the Money Market Fund and 3.99%
and 4.07%, respectively, for the Tax-Free Money Market Fund.

57
<PAGE>

The Tax-Free Money Market Fund's tax-equivalent yield is the rate an
investor would have to earn from a fully taxable investment to equal the Tax-
Free Money Market Fund's tax-free yield. Tax-equivalent yields are calculated
by dividing the Tax-Free Money Market Fund's yield by the result of one minus a
stated federal or combined federal and state tax rate. (If only a portion of
the Tax-Free Money Market Fund's yield is tax-exempt, only that portion is
adjusted in the calculation.) For the 7-day period ending September 30, 1995,
the tax-equivalent yield of the Tax-Free Money Market Fund (assuming a 31%
federal tax rate) was 5.78%.

The table below shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1995. It shows the approximate
yield a taxable security must earn at various income brackets to produce after-
tax yields equivalent to those of tax-exempt obligations, yielding from 2.5% to
6.5%. Of course, no assurance can be given that the Tax-Free Money Market Fund
will achieve any specific tax-exempt yield. While the Tax-Free Money Market
Fund invests principally in obligations whose interest is exempt from federal
income tax, other income received by the Tax-Free Money Market Fund may be
taxable.

1995 FEDERAL TAX RATES AND TAX-EQUIVALENT YIELDS
------------------------------------------------

<TABLE>
<CAPTION>
IF INDIVIDUAL TAX-EXEMPT YIELD IS:
FEDERAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
TAXABLE INCOME* BRACKET
--------------- -------
SINGLE RETURN JOINT RETURN THEN TAXABLE EQUIVALENT YIELD IS:**
- ------------------------------------------------------------------------------------------------------------------------------------

OVER BUT NOT OVER OVER BUT NOT OVER
$ 0 $ 23,350 $0 $ 39,000 15.0% 2.94% 3..53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 23,350 $ 56,550 $39,000 $ 94,250 28.0% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 56,550 $117,950 $94,250 $143,600 31.0% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$117,950 $256,500 $143,600 $256,500 36.0% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
OVER $256,500 OVER $256,500 39.6% 4.14% 4.97% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%

- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Net taxable income after all exemptions, adjustments and deductions.
** Based on 1995 tax rates (effective rates may be higher for some individuals
due to phase out of exemptions and elimination of deductions).

The Tax-Free Money Market Fund may invest a portion of its assets in
obligations that are subject to federal income tax. When the Tax-Free Money
Market Fund invests in these obligations, its tax-equivalent yield may be lower.
In the table above, tax-equivalent yields are calculated assuming investments
are 100% federally tax-free.

Yield information may be useful in reviewing a Fund's performance and in
providing a basis for comparison with other investment alternatives. However, a
Fund's yield fluctuates, unlike investments that pay a fixed interest rate over
a stated period of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio securities of the
respective investment companies they have chosen to consider.

58
<PAGE>

Investors should recognize that in periods of declining interest rates each
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates each Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
each Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of the Fund's holdings,
thereby reducing such Fund's current yield. In periods of rising interest
rates, the opposite can be expected to occur.

NON-MONEY MARKET FUNDS. Yields for the Funds used in advertising are
computed by dividing the Funds' interest and dividend income for a given 30-day
or one month period, net of expenses, by the average number of shares entitled
to receive distributions during the period, dividing this figure by the Funds'
maximum offering price per share at the end of the period, and annualizing the
result (assuming compounding of income) in order to arrive at an annual
percentage rate. Income is calculated for purposes of yield quotations in
accordance with standardized methods applicable to all stock and bond yield
calculations. Dividends from equity investments are treated as if they were
accrued on a daily basis, solely for the purposes of yield calculations. In
general, interest income is reduced with respect to bonds trading at a premium
over their par value by subtracting a portion of the premium from income on a
daily basis, and is increased with respect to bonds trading at a discount by
adding a portion of the discount to daily income. Capital gains and losses
generally are excluded from the calculation.

Income calculated for the purposes of determining a Fund's yield differs
from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, a Fund's yield may not equal its distribution rate, the
income paid to your account, or the rate of income reported in the Fund's
financial statements.

Yield information may be useful in reviewing the Funds' performance and in
providing a basis for comparison with other investment alternatives. However,
each Fund's yield fluctuates, unlike investments that pay a fixed interest rate
over a stated period of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio securities of the
respective investment companies they have chosen to consider.

For the 30-day period ending September 30, 1995, the Class A Shares of the
U.S. Government Income Fund, Municipal Bond Fund, California Tax-Free Fund and
Bond Fund had yields of 6.40%, 4.88%, 5.05% and 6.01%, respectively. And, for
the 30-day period ending September 30, 1995, the Class B Shares of the U.S.
Government Income Fund, Municipal Bond Fund, California Tax-Free Fund and Bond
Fund had yields of 6.19%, 4.61%, 4.76% and 5.77%, respectively. For the 30-day
period ended September 30, 1995, the yields of Class A Shares and Class B Shares
of the Growth & Income Fund were 1.68% and 1.27%, respectively. For the 30-day
period ended September 30, 1995, the yields of the Class A Shares and Class B
Shares of the Short-Term Bond Fund were 5.71% and 5.91%, respectively.

Investors should recognize that in periods of declining interest rates the
Funds' yields will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to a Fund from the continuous sale of its
shares will likely be invested in instruments producing lower yields than

59
<PAGE>

the balance of the Funds' holdings, thereby reducing the Funds' current yields.
In periods of rising interest rates, the opposite can be expected to occur.

CALIFORNIA TAX-FREE FUND. The California Tax-Free Fund's tax-equivalent
yield is the rate an investor would have to earn from a fully taxable investment
after taxes to equal the Fund's tax-free yield. Tax-equivalent yields are
calculated by dividing a fund's yield by the result of one minus a stated
federal or combined federal and state tax rate. (If only a portion of the
fund's yield is tax-exempt, only that portion is adjusted in the calculation.)

For the 30-day period ending September 30, 1995, the Class A Shares of the
Municipal Bond Fund and the California Tax-Free Fund produced a tax-equivalent
yield of 7.07% and 7.32%, respectively, based on an assumed federal tax rate of
31%. And, for the 30-day period ending September 30, 1995, the Class B Shares
of the Municipal Bond Fund and the California Tax-Free Fund produced a tax-
equivalent yield of 6.68% and 6.90%, respectively, based on an assumed federal
tax rate of 31%.

The tables below show the effect of a shareholder's tax status on the
effective yield under federal and state income tax laws for 1995. They show the
approximate yield a taxable security must provide at various income brackets to
produce after-tax yields equivalent to those of tax-exempt obligations yielding
from 2.0% to 7.0%. Of course, no assurance can be given that the California Tax-
Free Fund will achieve any specific tax-exempt yield. While the Fund invests
principally in obligations whose interest is exempt from federal and state
income tax, other income received by the Fund may be taxable. The Fund does not
take into account local taxes, if any, payable on fund distributions.

<TABLE>
<CAPTION>
1995 Combined
California and
1995 Federal Federal Effective
Single Return Joint Return Marginal Tax Marginal Tax
Taxable Income* Taxable Income* Bracket Bracket**
--------------- --------------- ------- ---------
<S> <C> <C> <C>
$18,068 - $23,350 $36,136 - $39,000 15% 20.1%
$23,351 - $31,700 $39,001 - $63,400 28% 33.76%
$31,701 - $56,550 $63401 - $94,250 28% 34.70%
$56,551 - $109,936 $94,251 - $143,600 31% 37.42%
$109,937 - $117,950 31% 37.9%
$143,601 - $219,872 36% 41.95%
$117,951 - 219,872 $219,873 - $256,500 36% 42.4%
$219,873 - $256,000 36% 43.04%
$256,501 - $439,744 39.6% 45.64%
over $256,000 over $439,744 39.6% 46.24%
</TABLE>

* Net taxable income after all exemptions, adjustments and deductions.

** Based on rates applicable in 1995 and assuming one exemption for single
filers and two exemptions for married couples filing jointly (except that
effective rates may be higher for some individuals due to phase out of
exemptions and elimination of deductions).

60
<PAGE>

Having determined your combined effective tax bracket above, use the
table below to determine the tax equivalent yield for a given tax-free yield.

<TABLE>
<CAPTION>
If your effective combined federal and California income tax rate in 1995 is:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20.10% 33.76% 34.70% 37.42% 37.90% 41.95% 42.40% 43.04% 45.64% 46.24%

To match Your taxable investment would have to earn the following yield
these tax-
free rates:
2% 2.50% 3.02% 3.06% 3.20% 3.22% 3.45% 3.47% 3.51% 3.68% 3.72%
3% 3.75% 4.53% 4.59% 4.79% 4.83% 5.17% 5.21% 5.27% 5.52% 5.58%
4% 5.01% 6.04% 6.13% 6.39% 6.44% 6.89% 6.94% 7.02% 7.36% 7.44%
5% 6.26% 7.55% 7.66% 7.99% 8.05% 8.61% 8.68% 8.78% 0.20% 9.30%
6% 7.51% 9.06% 9.19% 9.59% 9.66% 10.34% 10.42% 10.53% 11.04% 11.16%
7% 8.76% 10.57% 10.72% 11.19% 11.27% 12.06% 12.15% 12.29% 12.88% 13.02%
</TABLE>

The California income tax rates are those in effect for 1995. The rates
listed reflect the 1995 inflation adjusted tax brackets. The Fund may invest a
portion of its assets in obligations that are subject to state or federal income
taxes. When the Fund invests in these obligations, its tax-equivalent yields
will be lower. In the table above, tax-equivalent yields are calculated
assuming investments are 100% federally and state tax-free.

TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of each of the Fund's returns, including the effect of reinvesting
dividends and capital gain distributions (if any), and any change in a Fund's
NAV over the period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in the value had been constant over the period. For example, a cumulative total
return of 100% over ten years would produce an average annual return of 7.18%,
which is the steady annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are a convenient means
of comparing investment alternatives, investors should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of a Fund.

In addition to average total annual returns, the Funds may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price, if any) in
order to illustrate the relationship of these factors and their contributions to
total return. Total returns, yields, and other performance information may be
quoted numerically or in a table, graph, or similar illustration.

61
<PAGE>

For the periods ended September 30, 1995, the average annual total returns
of the Class A and Class B Shares of the Non-Money Market Funds, before
deducting applicable sales charges, were as follows:

<TABLE>
<CAPTION>
Class A Class B
Year Ended Since Inception Since Inception
Fund 9/30/95 (10/13/93)(1) (11/1/94)(2)
---- ---------- ------------- ------------
<S> <C> <C> <C>
U.S. Government Income Fund 13.00% 5.46% 13.08%
Bond Fund 13.53% 3.68% 13.58%
California Tax-Free Fund 10.13% 1.48% 12.60%
Municipal Bond Fund 10.18% 2.28% 12.86%
Growth & Income Fund 31.93% 17.19% 29.53%
</TABLE>

<TABLE>
<CAPTION>
Class A Class B
Since Inception Since Inception
Fund (6/12/95)(2) (6/12/95)(2)
---- ------------ ------------
<S> <C> <C>
Short-Term Bond Fund 2.32% 2.51%
Growth Fund 16.60% 16.50%
</TABLE>

_____________________
(1) These figures have been annualized.
(2) These figures have not been annualized.

For the periods ended September 30, 1995, the average annual total returns
of the Class A and Class B Shares of the Non-Money Market Funds, after deducting
applicable sales charges, were as follows:

<TABLE>
<CAPTION>
Class A(3) Class B(3)
Year Ended Since Inception Since Inception
Fund 9/30/95 (10/13/93)(1) (11/1/94)(2)
---- ---------- ------------- ------------
<S> <C> <C> <C>
U.S. Government Income Fund 7.95% 2.99% 8.08%
Bond Fund 8.41% 1.25% 8.58%
California Tax-Free Fund 5.15% -0.88% 7.60%
Municipal Bond Fund 5.16% -0.12% 7.86%
Growth & Income Fund 26.05% 14.45% 24.54%
</TABLE>

<TABLE>
<CAPTION>
Class A Class B
Since Inception Since Inception
Fund (6/12/95)(2) (6/12/95)(2)
---- ------------- ----------------
<S> <C> <C>
Short-Term Bond Fund -1.24%(4) -1.49%(4)
Growth Fund 11.37%(3) 11.50%(3)
</TABLE>

___________________
(1) These figures have been annualized.
(2) These figures have not been annualized.
(3) Total return figures reflect the deduction of the maximum initial sales
charge with respect to Class A Shares (4.50%) and the maximum deferred
sales charge with respect to Class B Shares (5.00%).
(4) Total return figures reflect the deduction of the maximum initial sales
charge with respect to Class A Shares (3.50%) and the maximum deferred
sales charge with respect to Class B Shares (4.00%).

62
<PAGE>

A Fund's performance may be compared in advertising to the performance of
other mutual funds in general or to the performance of particular types of
mutual funds, especially those with similar objectives. Such comparisons may be
expressed as mutual fund rankings prepared by Lipper Analytical Services, Inc.
("Lipper," sometimes also referred to as "Lipper Analytical Services"), an
independent service located in Summit, New Jersey that monitors the performance
of mutual funds. The Lipper performance analysis ranks funds on the basis of
total return, assuming reinvestment of distributions, but does not take sales
charges or redemptions fees into consideration, and is prepared without regard
to tax consequences.

The Funds may reference and discuss their Fund number, Quotron(TM) number,
CUSIP number and current portfolio manager in advertising.

From time to time, in reports and promotional literature, a Fund's
performance also may be compared to other mutual funds tracked by financial or
business publications and periodicals. For example, each Fund may quote
Morningstar, Inc. in its advertising materials. Morningstar, Inc. is a mutual
fund rating service that rates mutual funds on the basis of risk-adjusted
performance. In addition, each Fund may quote financial or business
publications and periodicals as they relate to fund management, investment
philosophy, and investment techniques.

Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index ("CPI")) and a combination of
various capital markets. The Funds may use the long-term performance of these
capital markets in order to demonstrate general long-term risk-versus-reward
investment scenarios. The performance of these capital markets is based on the
returns of several different indices and their respective returns. Ibbotson
calculates total returns in the same method as the funds. Performance
comparisons could also include the value of a hypothetical investment in any of
the capital markets.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

If the Directors determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing a
Fund's NAV. Shareholders receiving securities or other property on redemption
may realize a gain or loss for tax purposes, and will incur any costs of sale,
as well as the associated inconveniences.

Pursuant to Rule 11a-3 under the 1940 Act, each Fund is required to give
shareholders at least 60 days' written notice prior to terminating or modifying
its exchange privilege. Under the Rule, the 60 day notification requirement may
be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee, or deferred sales charge
ordinarily payable at the time of exchange, or (ii) if a Fund temporarily
suspends the redemption of the shares to be exchanged as permitted under the
1940 Act or by the SEC, or the fund to be acquired suspends the sale

63
<PAGE>

of its shares because it is unable to invest amounts effectively in accordance
with its investment objective and policies.

DISTRIBUTIONS AND TAXES

DISTRIBUTIONS. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, Griffin Advisers may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested until
you provide Griffin Advisers with alternative instructions.

TAXES. Qualification of each Fund as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), requires, among
other things, that (a) at least 90% of the Fund's annual gross income be derived
from payments with respect to securities loans, dividends, interest and gains
from the sale or other disposition of securities or options thereon; (b) the
Fund derive less than 30% of its gross income from gains from the sale or other
disposition of securities or options thereon held for less than three months;
and (c) the Fund diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% 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 and the securities of other
regulated investment companies), or of two or more issuers which the Fund
controls and which are determined to be engaged in the same, similar or related
trades or businesses. As a regulated investment company, the Funds will not be
subject to federal income tax on net investment income or net capital gains
distributed to shareholders, provided they distribute to shareholders at least
90% of their respective net investment income (and tax-exempt income in the case
of the Tax-Free Money Market Fund, the Municipal Bond Fund and the California
Tax-Free Fund) earned in each year.

A 4% nondeductible federal excise tax will be imposed on each Fund (other
than to the extent of a Fund's tax-exempt income) to the extent it does not meet
certain minimum distribution requirements by the end of each calendar year.
Each Fund intends to distribute substantially all of its net investment income
and net capital gains and, thus, does not expect to be subject to the excise
tax. Dividends and distributions declared payable as of a date in October,
November or December of any calendar year are deemed under the Code to have been
received by shareholders on December 31 of that year if the dividend is actually
paid in the following January. Such dividends will, accordingly, be subject to
income tax for the taxable year in which December 31 falls.

Corporate shareholders of the Growth & Income Fund or the Growth Fund may
be eligible for the dividends-received deduction on the dividends (excluding the
net capital gains dividends) paid by a Fund to the extent that the Fund's income
is derived from dividends (which, if received directly, would qualify for such
deduction) received from domestic corporations. In order to qualify for the
dividends-received deduction, a corporate shareholder must hold the Fund shares
paying the dividends upon which the deduction is based for at least 46 days.

64
<PAGE>

In general, gain or loss recognized by a Fund on the disposition of a
capital asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation (including, with respect to obligations
purchased after April 30, 1993, tax-exempt obligations) purchased by a Fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount,
not previously included in taxable income, which accrued during the period of
time the Fund held the debt obligation.

Depending upon state law, a portion of a Fund's dividends attributable to
interest income derived from U.S. Government securities may be exempt from state
and local taxation. The Funds will provide information on the portion of the
Funds' dividends, if any, that qualify for this exemption.

Any loss realized on a redemption or exchange of shares of the Fund will be
disallowed to the extent shares are reacquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.
In addition, if a shareholder exchanges or otherwise disposes of shares of a
Fund within 90 days of having acquired such shares, and if, as a result of
having acquired those shares, the shareholder subsequently pays a reduced sales
charge for shares of the Fund, or of a different Fund, the sales charge
previously incurred acquiring the Fund's shares shall not be taken into account
(to the extent such previous sales charges do not exceed the reduction in sales
charges) for the purpose of determining the amount of gain or loss on the
exchange, but will be treated as having been incurred in the acquisition of such
other shares.

As of the date of this statement of additional information, the maximum
marginal federal individual stated tax rate applicable to ordinary income is
39.6% (effective rates may be higher for some individuals due to phase out of
exemptions and elimination of deductions), the maximum individual tax rate
applicable to net capital gains is 28%; and the maximum corporate tax rate
applicable to ordinary income and net capital gains is 35%. However, to
eliminate the benefit of lower marginal corporate income tax rates, corporations
which have taxable income in excess of $100,000 for a taxable year will be
required to pay an additional amount of income tax of up to $11,750 and
corporations which have taxable income in excess of $15,000,000 for a taxable
year will be required to pay an additional amount of income tax of up to
$100,000.

In addition, the alternative minimum tax rate for noncorporate taxpayers is
26% on taxable excess (alternative minimum taxable income, less the applicable
exemption amount) up to $175,000. The alternative minimum tax rate on taxable
excess exceeding $175,000 is 28%. The corporate alternative minimum tax rate is
20%.

Income and dividends received by each of the Short-Term Bond Fund, the Bond
Fund, the Growth & Income Fund and the Growth Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. Because not more than 50% of the value of the
total assets of the each of the Short-Term Bond Fund, the Bond Fund, the Growth
& Income Fund and the Growth Fund is expected to consist of securities of
foreign issuers, a Fund will not be eligible to elect to "pass through" foreign
tax credits to shareholders.

65
<PAGE>

If for any taxable year a Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions would
be taxable to shareholders to the extent of earnings and profits.

Investors who fail to furnish a valid Taxpayer Identification Number
("TIN") to a Fund, or for whom a Fund receives an IRS notice that the TIN which
has been supplied is incorrect or that the investor is subject to withholding,
are subject to withholding on dividend distributions (other than exempt-interest
dividends) and redemption proceeds (including proceeds from exchanges).

MONEY MARKET FUND. The Funds may distribute short-term capital gains once
a year or more often as necessary to maintain their NAVs at $1.00 per share or
to comply with distribution requirements under federal tax law. The Funds do
not anticipate earning long-term capital gains on securities held by a Fund.

TAX-FREE MONEY MARKET FUND, MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE
FUND. To the extent that the Tax-Free Money Market, Municipal Bond and
California Tax-Free Fund's income is derived from federally tax-exempt interest,
provided certain conditions are met, the dividends declared by these Funds are
also federally tax-exempt. Shareholders are required to report tax-exempt
income on their federal tax returns. Shareholders who earn other income, such
as social security benefits, may be subject to federal income tax on up to 85%
of such benefits to the extent that their income, including tax-exempt income,
exceeds certain base amounts. Shares of the Tax-Free Money Market Fund, the
Municipal Bond Fund and the California Tax-Free Fund would generally not be
suitable for tax-exempt institutions or tax-deferred retirement plans (e.g.
plans qualified under Section 401 of the Internal Revenue Code, Keogh-type plans
and individual retirement accounts.) Such retirement plans would not gain any
benefit from the tax-exempt nature of those Funds' dividends because such
dividends would be ultimately taxable to the beneficiaries when distributed to
them.

Any loss realized by a shareholder upon the sale or redemption of shares of
a Fund held less than six months is disallowed to the extent of any exempt-
interest dividends received by the shareholder. In addition, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a Fund is
not deductible for federal income tax purposes if the Fund distributes exempt-
interest dividends during the shareholder's taxable year.

These Funds purchase municipal obligations based on opinions of bond
counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance with federal tax requirements. If the issuer of an
obligation fails to comply with its covenants at any time, interest on the
obligation could become federally taxable retroactive to the date the obligation
was issued.

Shareholders who may be "substantial users" (or related persons of
substantial users) with respect to municipal securities held by the Tax-Free
Money Market Fund, the Municipal Bond Fund or the California Tax-Free Fund or
who may be subject to the alternative minimum tax should consult their tax
advisers to determine whether exempt-interest dividends paid by the Funds with
respect to such obligations retain their federal tax exclusions.

66
<PAGE>

Interest on certain "private activity" bonds is subject to the federal
Alternative Minimum Tax ("AMT"). Interest from private activity bonds is a tax
preference item for the purposes of determining whether a taxpayer is subject to
the AMT and the Amount of AMT to be paid, if any. Private activity securities
issued after August 7, 1986 to benefit a private or industrial user or to
finance a private facility are affected by this rule. Shareholders will not be
permitted to deduct any of their share of Fund expenses in computing alternative
minimum taxable income. Further, under the Code federal exempt-interest
dividends are includable in adjusted current earnings in calculating corporate
alternative minimum taxable income.

It is the current position of the Staff of the Securities and Exchange
Commission that a fund which uses the word "tax-free" in its name must have a
fundamental policy requiring that during periods of normal market conditions
either (i) 80% of the fund's total assets will be invested in securities that
pay interest which is exempt from federal income taxes and which is not subject
to the federal alternative minimum tax, or (ii) 80% of the fund's income
distributions will be exempt from federal income taxes and not subject to the
federal alternative minimum tax.

CALIFORNIA TAX-FREE FUND -- CALIFORNIA TAXES. As long as the California
Tax-Free Fund continues to qualify as a regulated investment company as
described above, it will incur no California income or franchise tax liability
on income and capital gains distributed to shareholders. California personal
income tax law provides that exempt-interest dividends paid by a regulated
investment company, or series thereof, from interest on obligations which are
exempt from California personal income tax are excludable from gross income.
For the Fund to qualify to pay exempt-interest dividends, at least 50% of the
value of the Fund's total assets must consist of such obligations at the close
of each quarter of its fiscal year. The Fund intends to qualify to pay exempt-
interest dividends; if, however, it does not, no part of its dividends will be
exempt from California corporate or personal income tax.

Distributions to shareholders derived from interest on other types of
obligations and short-term capital gains will be taxed as dividends, and long-
term capital gain distributions will be taxed as long-term capital gains.

California has an alternative minimum tax (AMT) similar to the federal AMT.
The California AMT, however, does not include interest from private activity
municipal obligations as an item of tax preference.

Interest on indebtedness incurred by a shareholder to purchase or carry
Fund shares is not deductible for California corporate or personal income tax
purposes if the Fund distributes California exempt-interest dividends during the
shareholder's taxable year.

FOREIGN SHAREHOLDERS. Under the Code, distributions of net investment
income by the Funds to a nonresident alien individual, nonresident alien
fiduciary of a trust or estate, foreign corporation, or foreign partnership (a
"foreign shareholder") will be subject to U.S. withholding tax (at a rate of 31%
or a lower treaty rate). Withholding will not apply if a dividend paid by one
of the Funds to a foreign

67
<PAGE>

shareholder is "effectively connected" with a U.S. trade or business, in which
case the reporting and withholding requirement applicable to U.S. citizens or
domestic corporations will apply.

OTHER CONSIDERATIONS. The foregoing summarizes some of the important tax
considerations generally affecting a Fund and its shareholders as of the date of
this Statement of Additional Information. Each year, shareholders will be
notified as to the amount and federal tax status of all dividends and capital
gains paid during the prior year. Such distributions may be subject to state
and local taxes. Shareholders are encouraged to consult their own tax advisors
for information concerning their particular tax situation.

SERVICE PROVIDERS

Management. Subject to the general supervision of the Board of Directors
----------
of The Griffin Funds and in accordance with each Fund's investment policies,
Griffin Advisers serves as adviser to the Funds. Payden & Rygel serves as sub-
adviser to the Money Market Fund, the Tax-Free Money Market Fund, the U.S.
Government Income Fund, the Municipal Bond Fund and the California Tax-Free
Fund. T. Rowe Price serves as sub-adviser to the Growth Fund and the Short-Term
Bond Fund. TBCAM serves as sub-adviser to the Bond Fund and the Growth & Income
Fund.

Griffin Advisers, a subsidiary of H.F. Ahmanson & Company, a savings and
loan holding company, and an affiliate of Home Savings of America and Savings of
America, is located at 5000 Rivergrade Road, Irwindale, California 91706.
Griffin Advisers, a California corporation, was organized in July, 1993 and had
no prior experience advising investment companies.

Payden & Rygel, which is located at 333 South Grand, 32nd Floor, Los
Angeles, California 90071, was founded in 1983 and as of December 31, 1995
managed assets of approximately $20 billion.

T. Rowe Price, which is located at 100 East Pratt Street, Baltimore,
Maryland 21202, was established in 1937 and, together with its affiliates,
managed assets of approximately $70 billion as of December 31, 1995.

TBCAM, which is located at One Boston Place, Boston, Massachusetts 02108,
was established in 1970 and as of December 31, 1995 managed assets of
approximately $14 billion.

Prior to December 1, 1994, Piper Capital Management Inc., located at Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, MN 55402, served as sub-
advisor to the Growth & Income Fund, the Municipal Bond Fund and the Bond Fund.

Sponsor and Distributor: Griffin Financial, a registered broker-dealer, is
-----------------------
the sponsor and distributor of the Funds. In this capacity, Griffin Financial
has the exclusive right to distribute shares of the Funds. Griffin Financial is
a subsidiary of H.F. Ahmanson & Company and an affiliate of Griffin Advisers,
Home Savings of America and Savings of America.

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<PAGE>

Transfer Agent: IFTC is the Funds' transfer, shareholder service, and
---------------
dividend-paying agent. IFTC is located at 127 West 10th Street, Kansas City,
Missouri 64105.

Administrator and Sub-Administrator: Griffin Financial Administrators
-----------------------------------
serves as the administrator of the Funds pursuant to an Administration Agreement
and provides various administrative and accounting services to the Funds. IFTC
also provides certain sub-administrative services to the Funds.

DIRECTORS AND OFFICERS

The Directors and Executive Officers of The Griffin Funds are listed below.
Except as indicated, each individual has held the office shown or other office
in the same company for the last five years. Unless otherwise noted, the
business address of each Director and Officer is 5000 Rivergrade Road,
Irwindale, California 91706, which is also the address of Griffin Advisers.
Those Directors who are "interested persons" (as defined in the 1940 Act) by
virtue of their affiliation with either The Griffin Funds or Griffin Advisers,
are indicated by an asterisk (*).

HERSCHEL CARDIN, Director. Age: 69; Retired; Former Director of
--------
Investments, Home Savings of America.

VINCENT F. COVIELLO, Director. Age: 56; Turnberry Capital Corporation, c/o
--------
Bogle & Gates, Two Union Square, Suite 5100, Seattle, Washington 98101.
President, Turnberry Capital since 1993. Prior thereto, Chairman & CEO, GNA
Corp. from January 1980 to March 1993.

*WILLIAM A. HAWKINS, Director, President and Chief Executive Officer. Age:
-----------------------------------------------
53; President and CEO, Griffin Financial Services. President & CEO, Griffin
Financial Administrators. President & CEO, Griffin Financial Investment
Advisers.

CARROL R. MCGINNIS, Director. Age: 52; 9225 Katy Freeway, Suite 205,
--------
Houston, Texas 77024. Founder, McGinnis Investments, since 1994. Prior thereto,
various positions with Transamerica Fund Management Company and its predecessor
companies during 1969-1993, including President and Chief Operating Officer.

MORTON O. SCHAPIRO, Director. Age: 42; 4535 Lennox Avenue, Sherman Oaks,
--------
California 91423. Dean of the College of Letters, Arts and Sciences, University
of Southern California since 1991. Prior thereto, Associate Professor of
Economics, Williams College, 1980-1991.

RICHIE D. ROWSEY, Senior Vice President. Age: 41; Senior Vice President,
---------------------
Griffin Financial Services. Senior Vice President, Griffin Financial
Administrators. Senior Vice President, Griffin Financial Investment Advisers.

JULIA D. WHITCUP, Senior Vice President & Treasurer. Age: 34; Senior Vice
---------------------------------
President & Treasurer, Griffin Financial Services. Senior Vice President &
Treasurer, Griffin Financial Administrators. Senior Vice President & Treasurer,
Griffin Financial Investment Advisers.

TIM S. GLASSETT, Secretary. Age: 39; Senior Vice President & Assistant
---------
General Counsel, H.F. Ahmanson & Company. Secretary, Griffin Financial
Administrators. Secretary, Griffin Financial Investment Advisors.

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<PAGE>

ANNE P. BANDUCCI, Assistant Secretary. Age: 36; Assistant Secretary, H.F.
-------------------
Ahmanson & Company.

HERBERT L. BOTTS, Assistant Secretary. Age: 38; Vice President & Assistant
-------------------
Secretary, Griffin Financial Services.

CHERYL A. RIVERA, Assistant Secretary. Age: 28; Assistant Secretary, H.F.
-------------------
Ahmanson & Company.

HENRY M. PENA, Assistant Secretary. Age: 32; Assistant Vice President,
-------------------
Griffin Financial Services.

STEVEN P. MUSON, Assistant Treasurer. Age: 29; Assistant Vice President,
-------------------
Griffin Financial Services.

Directors who are not affiliated with The Griffin Funds or Griffin Advisers
are entitled to receive from The Griffin Funds an annual retainer of $5,000 and,
generally, a fee of $2,500 for each Board of Directors and Board Committee
meeting attended, Directors are reimbursed for all out-of-pocket expenses
relating to attendance at Board of Directors' and Board Committee meetings.
Directors who are affiliated with The Griffin Funds or Griffin Advisers do not
receive compensation from The Griffin Funds, but are reimbursed for all out-of-
pocket expenses relating to attendance at meetings. The table below indicates
the total compensation received by the following Directors from The Griffin
Funds during the fiscal year ended September 30, 1995.

COMPENSATION TABLE
------------------

<TABLE>
<CAPTION>
Aggregate Total
Compensation Compensation
Director from The Griffin Funds from The Griffin Funds
- -------- ---------------------- ----------------------
<S> <C> <C>
Herschel Cardin $17,500 $17,500

Vincent F. Coviello $15,000 $15,000

William A. Hawkins $ 0 $ 0

William R. Pierskalla* $12,500 $12,500

Morton O. Schapiro $17,500 $17,500
</TABLE>

______________________
*Mr. Pierskalla resigned his position as a Director of The Griffin Funds in 1995
in order to accept a position as a Director of a holding company of a
commercial bank.

70
<PAGE>

As of January 10, 1996, the Directors and Officers of The Griffin Funds as
a group, owned less than 1% of the outstanding shares of The Griffin Funds.

The Griffin Funds has adopted a Code of Ethics which, among other things,
prohibits each access person of The Griffin Funds from purchasing or selling
securities when such person knows or should have known that, at the time of the
transaction, the security (i) was being considered for purchase or sale by a
Fund, or (ii) was being purchased or sold by a Fund. For purposes of the Code
of Ethics, an access person means (i) a Director or officer of The Griffin
Funds, (ii) any employee of The Griffin Funds (or any company in a control
relationship with The Griffin Funds) who, in the course of his/her regular
duties, obtains information about, or makes recommendations with respect to, the
purchase or sale of securities by The Griffin Funds, and (iii) any natural
person in a control relationship with The Griffin Funds who obtains information
concerning recommendations made to The Griffin Funds regarding the purchase or
sale of securities. Portfolio managers and other persons who assist in the
investment process are subject to additional restrictions, including a
requirement that they disgorge to The Griffin Funds any profits realized on
short-term trading (i.e., the purchase/sale or sale/purchase of securities
- -
within any 60-day period). The above restrictions do not apply to purchases or
sales of certain types of securities, including money market instruments and
certain U.S. Government securities. To facilitate enforcement, the Code of
Ethics generally requires that the access persons of The Griffin Funds, other
than the "disinterested" Directors, submit reports to the designated compliance
person of The Griffin Funds regarding transactions involving securities which
are eligible for purchase by a Fund.

MANAGEMENT CONTRACTS

INVESTMENT ADVISER. The Griffin Funds employs Griffin Advisers to furnish
investment advisory and other services to each Fund. The Advisory Contract
provides that Griffin Advisers shall manage the investing and reinvesting of the
assets of each Fund, subject to the overall supervision of the Board of
Directors of The Griffin Funds, in accordance with its investment objective,
policies and limitations. Griffin Advisers provides to The Griffin Funds
investment guidance and policy direction in connection with its management of
each Fund's portfolio. It also furnishes The Griffin Funds with periodic
reports on the investment strategy and performance of each Fund and additional
reports and information as the Board of Directors and officers of The Griffin
Funds reasonably request.

Griffin Advisers or its affiliates pay certain expenses of The Griffin
Funds, including the costs of printing and distributing all materials relating
to each Fund prepared by it, or at its request, other than such costs relating
to proxy statements, prospectuses, shareholder reports and other materials
distributed to existing or prospective shareholders on behalf of each Fund.

For these services and the payment by Griffin Advisers of The Griffin
Funds' expenses, each Fund, other than the Growth & Income Fund and the Growth
Fund, pays a monthly management fee to Griffin Advisers at the annual rate of
0.50% of the average net assets of the Fund throughout the month pursuant to an
Investment Advisory Contract approved by the initial shareholder of the Funds on
October 7, 1993. The Growth & Income Fund and the Growth Fund each pay a
monthly management fee to Griffin Advisers at the annual rate of 0.60% of the
average net assets of each Fund.

71
<PAGE>

The following chart indicates the amount of advisory fees paid by the Funds
to Griffin Advisers and the amount of advisory fees voluntarily waived by
Griffin Advisers for the fiscal years ended September 30, 1995 and September 30,
1994.

ADVISORY FEES PAID ADVISORY FEES WAIVED
FUND 1995 1994 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Money Market Fund $22,121 $2,186 $307,185 $78,124
Tax-Free Money Market Fund $3,384 $1,811 $43,485 $25,936
Short-Term Bond Fund $0* N/A $3,479* N/A
U.S. Government Income Fund $2,164 $0 $116,136 $61,121
Bond Fund $704 $0 $42,621 $21,374
Municipal Bond Fund $1,201 $0 $18,955 $9,355
California Tax-Free Fund $4,509 $0 $77,876 $40,186
Growth & Income Fund $8,818 $401 $132,670 $45,968
Growth Fund $0* N/A $4,793* N/A
</TABLE>

_________________________

* The Short-Term Bond Fund and the Growth Fund each commenced operations on
June 12, 1995.

ADMINISTRATOR AND DISTRIBUTOR. Each Fund employs Griffin Financial
Administrators to provide, at its expense, certain administrative services in
connection with the operation of the Funds. Under the Administration Agreement
with The Griffin Funds, Griffin Financial Administrators furnishes office space
and certain facilities required for conducting the business for each Fund.
Griffin Financial Administrators also exercises general supervision over the
operation of the Fund, including coordination of the services performed by
Griffin Advisers, transfer and dividend disbursing agents, custodians,
independent accountants and legal counsel. Griffin Financial Administrators
supervises all regulatory compliance, including compilation of information for
documents such as reports to, and filings with, the SEC and state securities
commissions.

Griffin Financial Administrators also supervises the preparation of
periodic reports on the performance of its obligations under the administration
agreement and statements of each Fund that are distributed to each of the
Griffin Funds' officers and to the Board of Directors. It also supervises the
preparation of additional reports and proxy statements. Griffin Financial
Administrators handles all administrative services reasonably necessary for the
operation of each Fund, other than those services that are to be provided by
Griffin Advisers pursuant to the Advisory Agreement and by the transfer and
dividend disbursing agent.

For these services and the payment by Griffin Financial Administrators of
certain of The Griffin Funds' expenses, each Fund pays a monthly administrative
fee to Griffin Financial Administrators at the annual rate of 0.20% of the
average daily value of the Fund's net assets during the preceding month.

The following chart indicates, for the fiscal years ended September 30,
1995 and September 30, 1994, the amount of administration fees paid by the Funds
to Griffin Financial Administrators, the amount of administration fees waived by
Griffin Financial Administrators, and the amount of expenses reimbursed by
Griffin Financial Administrators:

72
<PAGE>

<TABLE>
<CAPTION>
ADMINISTRATION ADMINISTRATION EXPENSES REIMBURSED
FEES PAID FEES WAIVED BY ADMINISTRATOR
FUND 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $104,782 $0 $26,940 $32,124 $190,837 $121,963
Tax-Free Money Market Fund $16,148 $0 $2,600 $11,099 $ 84,781 $ 77,096
Short-Term Bond Fund $0* N/A $1,392* N/A $ 12,879* N/A
U.S. Government Income Fund $17,960 $0 $29,360 $24,448 $144,944 $109,136
Bond Fund $6,153 $0 $11,177 $8,550 $101,890 $ 68,947
Municipal Bond Fund $3,319 $0 $4,743 $3,742 $ 88,657 $ 57,155
California Tax-Free Fund $12,431 $0 $20,523 $16,074 $102,916 $ 86,348
Growth & Income Fund $26,855 $0 $20,308 $15,456 $147,855 $ 87,476
Growth Fund $0* N/A $1,598* N/A $ 19,668* N/A
</TABLE>

___________________

* The Short-Term Bond Fund and the Growth Fund each commenced operations on
June 12, 1995.

IFTC provides certain subadministrative services to the Funds pursuant to
its Custody Agreement and Transfer Agency Agreement, including performing
transfer agency, dividend disbursing and shareholder servicing functions for
each Fund, calculating each Fund's NAV and dividends, maintaining The Griffin
Funds' general accounting records and administering The Griffin Funds'
securities lending program.

Griffin Financial Services, located at 5000 Rivergrade Road, Irwindale,
California 91706, serves as the distributor ("Distributor") of shares of the
Funds pursuant to a Distribution Agreement between The Griffin Funds and the
Distributor dated September 30, 1993. Under the Distribution Agreement, the
Distributor may offer and sell shares of the Funds to or through securities
dealers, banks and other depository institutions that have entered into sales
support agreements with the Distributor.

During the fiscal year ended September 30, 1994, the Distributor received
$2,194,512 in net underwriting discounts and commissions in connection with
sales of shares of The Griffin Funds. No portion of this amount was retained by
the Distributor, but was paid out to sales representatives. And, during the
fiscal year ended September 30, 1995, the Distributor received $232,710 in net
underwriting discounts and commissions on sales of Class A Shares, and $1,016 in
contingent deferred sales changes on redemptions of Class B Shares. All
underwriting discounts and commissions and contingent deferred sales charges
received by the Distributor during the fiscal year ended September 30, 1995 were
retained by the Distributor.

SUB-ADVISERS. On behalf of the Money Market Fund, the Tax-Free Money
Market Fund, the U.S. Government Income Fund, the Municipal Bond Fund and the
California Tax-Free Fund, Griffin Advisers has entered into sub-advisory
agreements with Payden & Rygel, pursuant to which Payden & Rygel has primary
responsibility for providing portfolio investment management services to each of
those Funds. On behalf of the Short-Term Bond Fund and the Growth Fund, Griffin
Advisers has entered into sub-advisory agreements with T. Rowe Price, pursuant
to which T. Rowe Price has primary responsibility for providing portfolio
investment management services to each of those Funds. And, on behalf of the
Bond Fund and the Growth & Income Fund, Griffin Advisers has entered into

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<PAGE>

sub-advisory agreements with TBCAM, pursuant to which TBCAM has primary
responsibility for providing portfolio investment management services to each of
those Funds.

A management fee is calculated and paid by each Fund to Griffin Advisers
every month. The fee is calculated by multiplying the average net assets of
each Fund (other than the Growth & Income Fund and the Growth Fund) by 0.50% on
an annualized basis. The management fee for the Growth & Income Fund and the
Growth Fund is calculated by multiplying each Fund's average daily net assets by
0.60% on an annualized basis. Griffin Advisers, in turn, pays Payden & Rygel,
T. Rowe Price and TBCAM for the respective sub-advisory services they provide to
their respective funds. The fees paid to the sub-advisers are not reduced by
any voluntary or mandatory expense reimbursements that may be effected by
Griffin Advisers from time to time. The sub-advisory agreements for the Money
Market Fund, the Tax-Free Money Market Fund, U.S. Government Income Fund and the
California Tax-Free Fund were approved by the sole shareholder of the Funds on
October 7, 1993. The sub-advisory agreement for the Bond Fund and the Municipal
Bond Fund were approved by the shareholders of such Funds at special meetings
held on December 27, 1994. The sub-advisory agreement for the Growth & Income
Fund was approved by shareholders of the Fund at a special meeting held on
January 23, 1995. The sub-advisory agreements for the Short-Term Bond Fund and
the Growth Fund were approved by the sole shareholder of the Funds on June 12,
1995.

To comply with the California Code of Regulations, Griffin Advisers will
reimburse a Fund if and to the extent that a Fund's aggregate annual operating
expenses exceed specified percentages of its average net assets. The applicable
percentages are 2-1/2% of the first $30 million, 2% of the next $70 million, and
1-1/2% of average net assets in excess of $100 million. When calculating a
Fund's expenses for purposes of this regulation, a Fund may exclude interest,
taxes, brokerage commissions, and extraordinary expenses, as well as a portion
of its distribution plan expenses.

DISTRIBUTION AND SERVICE PLANS

As indicated in the Prospectus, each Fund has adopted one or more Plans
under Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the "Rule"). The
Plans for the Money Market Fund and the Tax-Free Money Market Fund, and the
Class A Shares of the U.S. Government Income Fund, the Municipal Bond Fund, the
California Tax-Free Fund, the Bond Fund and the Growth & Income Fund were
adopted on September 30, 1993 by the Board of Directors, including a majority of
the Directors who were not "interested persons" (as defined in the 1940 Act) of
the Funds and who had no direct or indirect financial interest in the operation
of the Plans or in any agreement related to the Plan (the "Qualified
Directors"), and were approved by the sole shareholder of each Fund on October
7, 1993. The Plans for the Class B Shares of the U.S. Government Income Fund,
the Municipal Bond Fund, the California Tax-Free Fund, the Bond Fund and the
Growth & Income Fund were adopted by the Board of Directors of the Company,
including a majority of the Qualified Directors, on September 30, 1993 and were
approved by the sole shareholder of the Class B Shares of each Fund on November
1, 1994. The Plans for the Class A and Class B Shares of the Growth Fund and
the Short-Term Bond Fund were adopted by the Board of Directors of The Griffin
Funds on May 11, 1995, and by the sole shareholder of each Fund on June 12,
1995.

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<PAGE>

MONEY MARKET FUNDS. Under the Plans adopted by the Money Market Funds, the
Distributor may receive compensatory payments and/or reimbursements to defray
all or part of the cost of preparing, printing and delivering prospectuses to
prospective shareholders of each Fund or for other distribution-related or sales
support services. Payments under the Plans may not exceed, on an annual basis,
0.20% of each Fund's average daily net assets. The fees paid under the Plans
can be used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their investments.

During the fiscal year ended September 30, 1995, the Money Market Fund
incurred $131,722 in distribution and service fees under its Plan, of which
amount $49,061 was waived by the Distributor. Of the $82,661 in distribution
and service fees paid by the Money Market Fund during the fiscal year ended
September 30, 1995, $73,568 was spent in connection with advertising the Fund
and $9,093 was spent in connection with printing and mailing prospectuses. And,
during the fiscal year ended September 30, 1995, the Tax Free Money Market Fund
incurred $18,748 in distribution and service fees under its Plan, of which
amount $5,984 was waived by the Distributor. Of the $12,764 in distribution and
service fees paid by the Tax-Free Money Market Fund during the fiscal year ended
September 30, 1995, $11,360 was spent in connection with advertising the Fund
and $1,404 was spent in connection with printing and mailing prospectuses.

NON-MONEY MARKET FUNDS. Under the Plans adopted by the Non-Money Market
Funds, the Distributor may receive compensatory payments and/or reimbursements
to defray all or part of the cost of preparing, printing, and delivering
prospectuses to prospective shareholders of each Fund or for other distribution-
related or sales support services. Payments under the Plans may not exceed, on
an annual basis, 0.25% of each Fund's average daily net assets of the Class A
Shares and 0.75% of each Fund's average daily net assets of the Class B Shares.
The fee paid under the Plans for the Class A Shares of each Fund also can be
used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their investments.
A separate fee of up to 0.25% of the average daily net assets of the Class B
Shares of the Fund represented by Class B Shares owned by investors with whom
the servicing agent maintains a servicing relationship is imposed on the Class B
Shares of the Funds.

The following table indicates the fees incurred by the Class A Shares of
the Non-Money Market Funds under the Plans, the purposes for which such amounts
were spent and the amount of such fees that was voluntarily waived by the
Distributor during the fiscal year ended September 30, 1995:

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<PAGE>

Distribution
and
Funds Service Fees Paid Waived Fees
----- ----------------- -----------
Printing and
Advertising Mailing Prospectuses
----------- --------------------
<S> <C> <C> <C>
Short-Term Bond Fund $0 $0 $1,735
U.S. Government Income Fund $10,703 $1,323 $46,378
Bond Fund $4,046 $500 $17,024
Municipal Bond Fund $4,446 $550 $5,066
California Tax-Free Fund $19,618 $2,425 $18,539
Growth & Income Fund $28,476 $3,520 $25,084
Growth Fund $0 $0 $1,951
</TABLE>

The following table indicates the fees incurred by the Class B Shares of
the Non-Money Market Funds under the Plans, the purposes for which such amounts
were expended and the amount of such fees that was voluntarily waived by the
Distributor during the fiscal year ended September 30, 1995:
<TABLE>
<CAPTION>
Distribution
and
Funds Service Fees Paid Waived Fees
----- ----------------- -----------
Printing and
Advertising Mailing Prospectuses
----------- --------------------
<S> <C> <C> <C>
Short-Term Bond Fund $0 $0 $19
U.S. Government Income Fund $1,380 $171 $1,434
Bond Fund $172 $21 $175
Municipal Bond Fund $28 $3 $35
California Tax-Free Fund $1,232 $152 $1,061
Growth & Income Fund $4,017 $497 $2,980
Growth Fund $0 $0 $184
</TABLE>

GENERAL INFORMATION. The Funds may participate in joint distribution
activities with any of the other funds of The Griffin Funds, in which event
expenses reimbursed out of the assets of the Funds may be attributable, in part,
to the distribution-related activities of another Griffin Fund. Generally, the
expenses attributable to joint distribution activities will be allocated among
each Fund and other Griffin Funds in proportion to their relative net asset
sizes, although The Griffin Funds' Board of Directors may allocate such expenses
in any other manner that it deems fair and equitable.

The Plans will continue in effect from year to year if such continuance is
approved by a majority vote of both the Directors of The Griffin Funds and the
Qualified Directors. Any distribution agreement related to the Plan also must
be approved by such vote of the Directors and the Qualified Directors.
Distribution agreements will terminate automatically if assigned, and may be
terminated at any time, without payment of any penalty, by a vote of a majority
of the outstanding voting securities of the Fund involved. The Plans may not be
amended to increase materially the amounts payable thereunder without the
approval of a majority of the outstanding voting securities of the applicable
Fund, and no material amendment to a Plan may be made except by a majority of
both the Directors of The Griffin Funds and the Qualified Directors.

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<PAGE>

The Plans require that the Treasurer of The Griffin Funds shall provide to
the Directors, and the Directors shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under the Plan. The Rule
also requires that the selection and nomination of Directors who are not
"interested persons" of The Griffin Funds be made by such disinterested
Directors.

DESCRIPTION OF THE GRIFFIN FUNDS

Each Fund is a portfolio of The Griffin Funds, Inc., an open-end management
investment company organized as a Maryland corporation on August 5, 1993. The
Griffin Funds' Articles of Incorporation permit the Directors to create
additional series. Currently there are nine portfolios of The Griffin Funds:
the Money Market Fund, Tax-Free Money Market Fund, Growth & Income Fund, U.S.
Government Income Fund, Municipal Bond Fund, California Tax-Free Fund, Bond
Fund, Short-Term Bond Fund and Growth Fund.

In the event that Griffin Advisers ceases to be the investment adviser to
The Griffin Funds or a Fund, the right of The Griffin Funds or Fund to use the
identifying name "Griffin" may be withdrawn.

The assets of The Griffin Funds received for the issue or sale of shares of
each Fund and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are especially allocated to such Fund, and
constitute the underlying assets of such Fund. The underlying assets of each
Fund are segregated on the books of account, and are to be charged with the
liabilities with respect to such Fund and with a share of the general expenses
of The Griffin Funds. Expenses with respect to The Griffin Funds are to be
allocated in proportion to the asset value of the respective Funds, except where
allocations of direct expense can otherwise be fairly made. The officers of The
Griffin Funds, subject to the general supervision of the Board of Directors,
have the power to determine which expenses are allocable to a given Fund, or
which are general or allocable to all of the Funds. In the event of the
dissolution or liquidation of The Griffin Funds, shareholders of each Fund are
entitled to receive as a class the underlying assets of such Fund available for
distribution.

The Money Market Funds offer only one class of shares. Each of the Non-
Money Market Funds is comprised of two classes of shares, Class A Shares and
Class B Shares. With respect to matters that affect one class of a Non-Money
Market Fund but not another, the shareholders vote as a class; for example, the
approval of a Plan. Subject to the foregoing, all shares of a Fund have equal
voting rights and will be voted in the aggregate, and not by series, except
where voting by a series is required by law or where the matter involved only
affects one series. For example, a change in a Fund's fundamental investment
policies would be voted upon only by shareholders of that Fund and not
shareholders of The Griffin Funds' other investment portfolios. Additionally,
approval of an advisory contract is a matter to be determined separately by
portfolio. Approval by the shareholders of one portfolio is effective as to
that portfolio whether or not sufficient votes are received from the
shareholders of the other portfolios to approve the proposal as to those
portfolios. As used in the Prospectus and in this Statement of Additional
Information, the term "majority," when referring to approvals to be obtained
from shareholders of a 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

77
<PAGE>

Griffin Funds as a whole, means the vote of the lesser of (i) 67% of The Griffin
Funds' shares represented at a meeting if the holders of more than 50% of The
Griffin Funds' outstanding shares are present in person or by proxy, or (ii)
more than 50% of The Griffin Funds' outstanding shares. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.

The Funds may dispense with annual meetings of shareholders in any year in
which it is not required to elect Directors under the 1940 Act. However, The
Griffin Funds has undertaken to hold a special meeting of its shareholders for
the purpose of voting on the question of removal of a Director or Directors if
requested in writing by the holders of at least 10% of The Griffin Funds'
outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.

Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by The Griffin Funds.

As of January 10, 1996, the following persons were known by The Griffin
Funds to own of record the indicated percentage of the shares of the Funds:
MONEY MARKET FUND: Bankers Trust Company, Trustee, Ahmanson Advantage Account,
P.O. Box 712039, Los Angeles, CA 90071 -- 37.33%; H.F. Ahmanson & Co. Inc., C/O
Home Savings of America FSB, Attn: Magy Hanna, 4900 Rivergrade Road, Irwindale,
CA 91706 -- 5.75%; TAX-FREE MONEY MARKET FUND: Mark Schankerman, 6062 Charae
Street, San Diego, CA 92122 -- 5.15%; U.S. GOVERNMENT INCOME FUND - CLASS A
SHARES: Bankers Trust Company, N.A., Trustee, Ahmanson Advantage Account, P.O.
Box 712039, Los Angeles, CA 90071 -- 14.64%; MUNICIPAL BOND FUND - CLASS A
SHARES: Griffin Financial Services, Attn: Finance (Seed Account), P.O. Box
60070, City Industry, CA 91716 -- 19.74%; Leah S. Glickfield, Lynne D. Arbaugh,
JTWROS, 3750 Galt Ocean Drive. #606, Ft. Lauderdale, FL 33308 --- 10.06%;
MUNICIPAL BOND FUND - CLASS B SHARES: Caroline Prager, Joan Rachlin JTWROS, 251
Berkley Road #212, Hollywood, FL 33024 --- 14.63%; Denny D. Aracilla, Jr., 5630
Auden Street, Houston, TX 77005 --- 5.46%; John A. Nelson TTEE, U/A 04/06/95,
John A Nelson Living Trust, 1126 Caballo Court, San Jose, CA 95132 ---76.58%;
CALIFORNIA TAX-FREE FUND - CLASS A SHARES: Griffin Financial Services, Attn:
Finance (Seed Account), P.O. Box 60070, City Industry, CA 91716 -- 5.71%;
CALIFORNIA TAX-FREE FUND - CLASS B SHARES: James L. McFarland Trustee, U/A
1/18/91, The James McFarland Trust, 1705 North Naomi Street, Burbank, CA 91505 -
- - 6.58%; Roger M. and Rosella McCray TT U/A DTT 01091987, The McCray Family
Trust, 9949 Potter Street, Bellflower, CA 90706 --- 5.69%; BOND FUND - CLASS A
SHARES: Bankers Trust Company, N.A., Trustee, Ahmanson Advantage Account, P.O.
Box 712039, Los Angeles, CA 90071 -- 18.13%; Griffin Financial Services, Attn:
Finance (Seed Account), P.O. Box 60070, City Industry, CA 91716 -- 13.20%; BOND
FUND - CLASS B SHARES: Home Savings of America, Trustee, IRA of John G. Verina,
271 E. Gainsborough Road, Thousand Oaks, CA 91360 -- 9.51%; Josephine Marre
TTEE, U/A 10/17/95, The Josephine Marie Marre Revocable Trust, P.O. Box 295,
Santa Ynez, CA 93460 --- 7.10%; Karen E. Wilkie, 8203 Dillon, Houston, TX 77061
- --- 7.95%; Robert G. Linnbary, 3116 Gingerwood Lane, Lancaster, CA 93536 ---
15.35%; Wilbur A Bradenand, Ruth Bradenand JTWROS, 1054 Savannah Drive, San
Jose, CA 95117 --- 10.23%; Inez M. Walton, 18002 E Aberdeen Lane, Villa Park, CA
92667 --- 7.74%; William Rupert, Janice Zara Rupert TTEES, U/A 00/00/00, William
and Janice Zara Rupert Family Trust, 25212 Rotella Avenue, Valencia, CA 91355 --
- - 10.15%;

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<PAGE>

Home Savings of America TTEE, IRA of Betty J. McFarland, 510 North
Jackson Street, Apt. 305, Glendale, CA 91206 --- 5.05%; GRIFFIN SHORT-TERM BOND
FUND - CLASS A SHARES: Griffin Financial Services, P.O. Box 60070, City of
Industry, CA 91716 --- 20.52%; GRIFFIN SHORT-TERM BOND FUND - CLASS B SHARES:
Home Savings of America TTEE, IRA of Richard A. Leach, 21855 Herencia, Mission
Viejo, CA 92692 --- 61.10%; Home Savings of America TTEE, IRA of Paul M. Hook,
14484 Harmony Lane, Victorville, CA 92392 --- 11.01%; Home Savings of America
TTEE, IRA of Lyn G. Willoughby, 995 Pamona Road, Apt. 74, Corona, CA 91720 ---
27.28%; GRIFFIN GROWTH FUND - CLASS A SHARES: Griffin Financial Services, P.O.
Box 60070, City of Industry, CA 91716 ---22.42%; GRIFFIN GROWTH & INCOME FUND -
CLASS A SHARES: Bankers Trust Company, Trustee, Ahmanson Advantage Account, P.O.
Box 712039, Los Angeles, CA 90071 --- 8.44%.

CUSTODIAN. IFTC, located at 127 West 10th Street, Kansas City, Missouri
64105 is custodian of the assets of The Griffin Funds. The custodian is
responsible for safekeeping of The Griffin Funds' assets and the appointment of
subcustodian banks and clearing agencies. The custodian takes no part in
determining the investment policies of The Griffin Funds or in deciding which
securities are purchased or sold by The Griffin Funds. The Company may,
however, invest in obligations of the custodian and may purchase securities from
or sell securities to the custodian.

INDEPENDENT AUDITOR. KPMG Peat Marwick LLP, located at 725 South Figueroa
Street, Los Angeles, California 90017, serves as The Griffin Funds' independent
auditor.

LEGAL COUNSEL. Morrison & Foerster LLP, located at 2000 Pennsylvania
Avenue, N.W., Suite 5500, Washington, D.C. 20006, serves as legal counsel to The
Griffin Funds.

FINANCIAL STATEMENTS. The Annual Report for the fiscal year ended
September 30, 1995, and the report thereon of KPMG Peat Marwick LLP are
incorporated by reference in this Statement of Additional Information. The
Letter to Shareholders contained in such Annual Report is not incorporated by
reference and is not a part of the registration statement or this Statement of
Additional Information.

79
<PAGE>

APPENDIX

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:

PRIME-1 -- issuers (or related institutions) have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:

. Leading market positions in well established industries.

. High rates of return on funds employed.

. Conservative capitalization structures with moderate reliance on debt and
ample asset protection.

. Broad margins in earnings coverage of fixed financial charges with high
internal cash generation.

. Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2 -- issuers (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE AND MUNICIPAL BOND
RATINGS:

AAA -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

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

A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered 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.

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<PAGE>

BAA -- Bonds that are rated Baa 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.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S COMMERCIAL PAPER RATINGS:

A-1 -- This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.

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

Description of Standard & Poor's Corporation's corporate and municipal bond
RATINGS:

AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.

AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt issues only in small degree.

A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for those in higher-rated categories.

DESCRIPTIONS OF FITCH INVESTORS SERVICE, INC.'S COMMERCIAL PAPER RATINGS:

FITCH-1 -- (Highest Grade) Commercial paper assigned this rating is
regarded as having the strongest degree of assurance for timely payment.

FITCH-2 -- (Very Good Grade) Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than the strongest
issues.

Description of Fitch Investors Service, Inc.'s corporate and municipal bond
RATINGS:

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<PAGE>

AAA -- rated bonds are considered to be investment grade and are of the
highest quality. The obligor has an extraordinary ability to pay interest and
repay principal, which is unlikely to be affected by foreseeable events.

AA -- rated bonds are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than AAA rated securities or more subject to change
over the term of the issue.

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

DESCRIPTION OF DUFF AND PHELPS' COMMERCIAL PAPER RATINGS:

DUFF 1 -- Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors. Risk factors
are minor.

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

DESCRIPTION OF DUFF AND PHELPS' CORPORATE AND MUNICIPAL BOND RATINGS:

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

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

A -- Bonds that are rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.