GRIFFIN FUNDS INC, 497, 1998-12-31

GRIFFIN FUNDS INC
497, 1998-12-31

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<PAGE>

PROSPECTUS DECEMBER 16, 1998
THE GRIFFIN FUNDS This Prospectus sets forth concisely the informa-
-------------------- tion about the nine funds (each a "Fund", collec-
Money Market Fund tively, the "Funds") currently offered by The Grif-
-------------------- fin Funds, Inc. ("The Griffin Funds") that a pro-
Tax-Free Money Mar- spective investor ought to know before investing in
ket Fund the Funds. The Short-Term Bond Fund, U.S. Govern-
-------------------- ment Income Fund, Municipal Bond Fund, California
Short-Term Bond Tax-Free Fund, Bond Fund, Growth & Income Fund and
Fund Growth Fund (collectively, the "Non-Money Market
-------------------- Funds") offer two classes of shares--Class A Shares
U.S. Government In- and Class B Shares. The Money Market Fund and Tax-
come Fund Free Money Market Fund (collectively, the "Money
-------------------- Market Funds") offer only one class of shares.
Municipal Bond Fund Subject to shareholder approval, it is expected
-------------------- that the Funds will be merged into corresponding
California Tax-Free funds in the WM Group of Funds on or about March
Fund 1999. If approved, the effect of this reorganiza-
-------------------- tion will be that shareholders of the Funds would
Bond Fund become shareholders in such corresponding mutual
-------------------- funds in the WM Group of Funds with similar invest-
Growth & Income ment objectives and policies. For more
Fund
information on this transaction, see "The Funds In Brief--Management" in this
Prospectus.
--------------------
Growth Fund
INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT. THERE CAN BE NO ASSURANCE THAT EITHER OF THE MONEY MARKET FUNDS WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. PLEASE READ
THIS PROSPECTUS CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE.
A Statement of Additional Information dated December 16, 1998 "SAI") con-
taining additional information (about the Funds has been filed with the Secu-
rities and Exchange Commission ("SEC") and is incorporated herein by refer-
ence. The SAI is available free upon request by calling The Griffin Funds at
1-800-676-4450.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, WASHINGTON MUTUAL, INC. ("WASHINGTON MUTUAL") OR
ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN ANY OF THE FUNDS INVOLVES CERTAIN RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
GRIFFIN FINANCIAL INVESTMENT ADVISERS ("GRIFFIN ADVISERS") IS THE INVESTMENT
ADVISER AND, TOGETHER WITH ITS AFFILIATES, PROVIDES CERTAIN OTHER SERVICES TO
THE FUNDS, FOR WHICH THEY ARE COMPENSATED. WM FUNDS DISTRIBUTOR, INC. ("WM
DISTRIBUTORS") IS THE DISTRIBUTOR FOR THE FUNDS. GRIFFIN ADVISERS AND WM DIS-
TRIBUTORS ARE AFFILIATED WITH WASHINGTON MUTUAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>

<TABLE>
<S> <C>
Key Fund Facts
THE FUNDS IN BRIEF 3
WHO MAY WANT TO INVEST 7
Fund Expenses 10
Financial Highlights 17
Investment Policies and Procedures 27
Your Fund Account
TYPES OF ACCOUNTS 37
Different ways to set up an account.
HOW TO PURCHASE SHARES 38
Opening an account and making additional Fund purchases.
HOW TO REDEEM SHARES 40
Redeeming shares and closing your account.
SHAREHOLDER SERVICES 44
DIVIDENDS, CAPITAL GAINS AND TAXES 47
Fund Account Policies
TRANSACTION POLICIES 48
Share price calculations and purchase and redemption policies.
SALES LOAD REDUCTIONS AND WAIVERS 51
CONTINGENT DEFERRED SALES CHARGE 53
The Funds in Detail
STRUCTURE 55
How the Funds are structured.
SERVICE PROVIDERS 55
SUMMARY OF FUND EXPENSES 57
Fund operating costs and how they are calculated.
PERFORMANCE 59
DESCRIPTION OF INVESTMENTS 61
INVESTMENT LIMITATIONS 75
</TABLE>

No person has been authorized to give any information or to make any repre-
sentations not contained in this Prospectus in connection with the offering
made by the Prospectus, and if given or made, such information or representa-
tions must not be relied upon as having been authorized by The Griffin Funds,
Inc. or WM Distributors. This Prospectus does not constitute an offering by The
Griffin Funds, Inc. in any jurisdiction in which such offering may not lawfully
be made.
2
<PAGE>

Key Fund Facts
THE FUNDS IN BRIEF
INVESTMENT OBJECTIVES AND POLICIES: The Money Market Fund, a diversified fund,
seeks to provide investors with as high a level of current income as is consis-
tent with the preservation of principal and liquidity.
The Tax-Free Money Market Fund, a diversified fund, seeks to provide invest-
ors with as high a level of current income, exempt from federal income taxes,
as is consistent with a portfolio of high quality short-term municipal obliga-
tions selected on the basis of liquidity and stability of capital. As a matter
of fundamental policy, under normal market conditions, the Tax-Free Money Mar-
ket Fund will invest its assets so that at least 80% of its income distribu-
tions are exempt from federal income tax and the federal alternative minimum
tax.
The Money Market Funds may purchase only high quality securities that Griffin
Advisers believes present minimal risks. To be considered high quality, a secu-
rity generally must be rated in accordance with applicable rules in one of the
two highest categories for short-term securities by at least two nationally
recognized statistical rating services (or by one, if only one rating service
has rated the security) or, if unrated, be judged to be of equivalent quality
by Griffin Advisers.
The Money Market Fund and Tax-Free Money Market Fund must limit their invest-
ments to securities with remaining maturities of 397 days or less and must
maintain a dollar-weighted average maturity of 90 days or less. As with any mu-
tual fund, there can be no assurance that the Money Market Funds will achieve
their investment objectives. The ability of the Money Market Funds to achieve a
high level of income is circumscribed by their investment exclusively in high
quality, short-term instruments.
The Short-Term Bond Fund, a diversified fund, seeks to provide investors with
the highest level of current income consistent with minimal fluctuation of
principal value and liquidity. Under normal market conditions, at least 65% of
the Short-Term Bond Fund's total assets will be invested in bonds. The Fund's
dollar-weighted average effective maturity will not exceed three years. The
Fund also may invest in other types of securities, including bank obligations,
mortgage-backed securities, collateralized mortgage obligations ("CMOs"), for-
eign securities, futures and options.
The U.S. Government Income Fund, a diversified fund, seeks to provide invest-
ors with current income, while preserving capital. Under normal market condi-
tions, at least 65% of the U.S. Government Income Fund's total assets are in-
vested in U.S. Government Obligations (as defined below). Depending on market
conditions, the Fund may invest in U.S. Government Obligations of varying matu-
rities, which may range up to 40 years.
The Municipal Bond Fund, a diversified fund, seeks to provide investors with
a high level of income exempt from federal income taxes, while preserving capi-
tal. It invests primarily in intermediate to long-term investment grade munici-
pal securities. As a matter of fundamental policy, under normal market condi-
tions, at least 80% of the Municipal Bond Fund's total assets will consist of
securities the interest on which is exempt from federal income taxes and which
is not subject to the federal alternative minimum tax.
3
<PAGE>

The California Tax-Free Fund, a non-diversified fund, seeks to provide in-
vestors with a high level of income exempt from federal income taxes and Cali-
fornia personal income taxes, while preserving capital. It invests primarily
in intermediate to long-term, investment grade California municipal securi-
ties. As a matter of fundamental policy, under normal market conditions, at
least 80% of the California Tax-Free Fund's total assets are invested in mu-
nicipal securities that pay interest which is exempt from federal income taxes
and which is not subject to the federal alternative minimum tax. In addition,
under normal market conditions, at least 65% of the California Tax-Free Fund's
total assets are invested in municipal securities that pay interest which is
exempt from California personal income taxes.
Because the California Tax-Free Fund "concentrates," i.e., invests at least
25% of its total assets, in securities issued by or on behalf of the State of
California, its cities, municipalities and other public authorities, the Fund
is particularly dependent on, and may be adversely affected by, the general
economic conditions in California. From time to time, the California Tax-Free
Fund also may concentrate its investments in municipal securities that are re-
lated in a way that economic, business or political developments or changes
affecting one such security would also affect the other securities. For exam-
ple, the Fund may invest in municipal securities the interest on which is paid
from revenues on similar projects. See "Special Factors Affecting the Califor-
nia Tax-Free Fund" in the SAI.
The Bond Fund, a diversified fund, seeks to provide investors with as high a
level of current income as is consistent with prudent investment management,
preservation of capital and liquidity. It invests in a variety of debt securi-
ties. Under normal market conditions, at least 65% of this Fund's total assets
are invested in bonds, as contrasted with debt instruments with shorter ini-
tial maturities.
The Growth & Income Fund, a diversified fund, seeks to provide investors
with capital growth and current income. The Growth & Income Fund seeks to
achieve its objective by investing primarily in common stocks that offer po-
tential for capital growth, current income or both. Under normal market condi-
tions, at least 65% of the Growth & Income Fund's total assets is invested in
such common stocks. The Fund may also purchase corporate bonds, notes and de-
bentures, preferred stocks or convertible securities (both debt securities and
preferred stocks) or U.S. Government securities, if Griffin Advisers deter-
mines that their purchase would help further the Fund's investment objective.
The Growth Fund, a diversified fund, seeks to provide investors with long-
term growth of capital. Under normal market conditions, at least 65% of the
Growth Fund's total assets will be invested in the common stock of mid-cap
companies considered to have above-average growth potential. A mid-cap company
is defined as one whose market capitalization, at the time of purchase, falls
within the capitalization range of companies included in the S&P 400 Mid-Cap
Index. The Fund also may invest in foreign securities, convertible securities
and warrants, if Griffin Advisers determines that their purchase would be con-
sistent with the Fund's investment objective and program.
4
<PAGE>

As with any mutual fund, there can be no assurance that a Fund will achieve
its investment objective. An investment in a Fund is not insured against loss
of principal. When prices of the securities that a Fund owns decline, so does
the value of that Fund's shares. Therefore, investors should be prepared to
accept the risks associated with their investment in a Fund.
For more detailed information about the portfolio practices of the Funds,
see "Investment Policies and Procedures" and "The Funds in Detail--Description
of Investments" and "--Investment Limitations."

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, as investment adviser, Payden & Rygel Investment Counsel
("Payden & Rygel"), 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 Associates, Inc. ("T. Rowe
Price"), as sub-adviser to the Short-Term Bond Fund and Growth Fund, and The
Boston Company Asset Management, Inc. ("TBCAM"), as sub-adviser to the Bond
Fund and Growth & Income Fund, manage investments for the Funds.
Griffin Advisers, an indirect subsidiary of Washington Mutual, a publicly
owned financial services company, located at 5000 Rivergrade Road, Irwindale,
California 91706. Griffin Advisers, a California corporation, was organized on
July 22, 1993.
Payden & Rygel, which is located at 333 South Grand Avenue, 32nd Floor, Los
Angeles, California 90071, was established in 1983 and as of September 30,
1998 managed assets of approximately $27 billion.
T. Rowe Price, which is located at 100 East Pratt Street, Baltimore, Mary-
land 21202, was established in 1937 and, together with its affiliates, managed
assets of approximately $132 billion as of September 30, 1998.
TBCAM, which is located at One Boston Place, Boston, Massachusetts 02108,
was established in 1970 and as of September 30, 1998 managed assets of approx-
imately $22.1 billion.
As used herein, the "Adviser" shall mean Griffin Advisers, Payden & Rygel,
T. Rowe Price and/or TBCAM as the context may require.
On September 30, 1998, H.F. Ahmanson & Company, the indirect parent to Grif-
fin Advisers, was merged into a wholly owned subsidiary of Washington Mutual
(the "Holding Company Merger"). As a result of the Holding Company Merger,
Griffin Advisers became a wholly-owned subsidiary of Washington Mutual. On De-
cember 14, 1998, the Board of Directors of The Griffin Funds approved Agree-
ments and Plans of Reorganization between The Griffin Funds, on behalf of each
Fund, and WM Trust I and/or WM Trust II, as the case may be, on behalf of each
corresponding WM portfolio, which provide for the reorganization of each Fund
into corresponding funds of the WM Group of Funds--the proprietary fund com-
plex advised by WM Advisors, Inc. (which is a wholly owned subsidiary of Wash-
ington Mutual), and also the reorganization of The Griffin Funds. The Agree-
ments and Plans of Reorganization will be submitted to shareholders of The
Griffin Funds at a meeting to be held on February 26, 1999. If the Agreements
and Plans of
5
<PAGE>

Reorganization are approved by shareholders, and certain other conditions are
satisfied, the assets and liabilities of each of the Funds will be transferred
to corresponding portfolios in the WM Group of Funds. Pursuant to the terms of
the Agreements and Plans of Reorganization, if approved, the Funds would be re-
organized into the WM Group of Funds as follows:
<TABLE>
<CAPTION>
GRIFFIN FUND/CLASS CORRESPONDING WM FUND/CLASS
- ------------------ ---------------------------
<S> <C>
Griffin Money Market Fund WM Money Market Fund
Griffin Tax-Free Money Market
Fund WM Tax-Exempt Money Market Fund
WM Short Term High Quality Bond
Griffin Short-Term Bond Fund Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin U.S. Government Income WM U.S. Government Securities
Fund Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin Municipal Bond Fund WM Tax-Exempt Bond Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin California Tax-Free Fund WM California Municipal Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin Bond Fund WM Income Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin Growth & Income Fund WM Growth & Income Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
Griffin Growth Fund WM Growth Fund
Class A Shares Class A Shares
Class B Shares Class B Shares
</TABLE>
It is expected that the WM Growth Fund will sell a substantial portion of the
Griffin Growth Fund's portfolio securities after the reorganization of the
Fund, if such reorganization is approved and consummated. WM Avisors, Inc.
and/or Janus Capital Corporation (the investment sub-adviser to the WM Growth
Fund) will bear any brokerage expenses associated with the sale of such securi-
ties. However, as more fully described herein, the sale of these securities is
expected to result in the realization of the capital gains, which will be tax-
able to most shareholders who hold shares in the corresponding WM Growth Fund
after the reorganization on the distribution record date. Investors should con-
tact their tax advisers before investing. For more information regarding this
aspect of the reorganization, see "Who May Want to Invest--Special Considera-
tions Relating to the Griffin Growth Fund."
DISTRIBUTOR: WM Distributors, a registered broker-dealer, is the distributor of
the Funds. In this capacity, WM Distributors has the exclusive right to dis-
tribute shares of the Funds. WM Distributors is a subsidiary of Washington Mu-
tual.
ADMINISTRATOR: Griffin Financial Administrators ("Griffin Administrators")
serves as the administrator of the Funds and provides various administration
and accounting services to the Funds. Investors Fiduciary Trust Company
("IFTC") provides certain sub-administration services to the Funds.
6
<PAGE>

HOW TO PURCHASE AND REDEEM SHARES: For a description of how to purchase and
redeem shares, see "Your Fund Account--How to Purchase Shares," and "--How to
Redeem Shares" in this Prospectus.
Customers of WM Distributors may invest in the Money Market Funds or Class A
Shares of the Non-Money Market Funds through a Griffin Financial Services
Portfolio Builder Account ("Portfolio Builder Account"). Investments through a
Portfolio Builder Account are governed by the terms and conditions of the
Portfolio Builder Account, which are set forth in a separate Portfolio Builder
Account Client Agreement provided by WM Distributors to each Portfolio Builder
Account holder. In light of the discretionary asset allocation structure of
investments through the Portfolio Builder Account, certain of the features de-
scribed in this Prospectus are not available to investors purchasing shares of
the Funds through a Portfolio Builder Account. Specifically, shares of a Fund
purchased through a Portfolio Builder Account may be redeemed only through the
Portfolio Builder Account, and the dividend and distribution options and ex-
change privileges described in this Prospectus are not available with respect
to shares purchased through a Portfolio Builder Account. Potential Portfolio
Builder Account holders should refer to the Client Agreement for more informa-
tion regarding the Portfolio Builder Account, including information about fees
and expenses.
WHO MAY WANT TO INVEST
The Money Market Fund is designed as a convenient vehicle for those invest-
ors seeking to obtain the yields available from money market instruments while
maintaining liquidity. The Money Market Fund makes it possible for investors
to participate in a more diversified portfolio of money market instruments
than the amount of their investments might otherwise permit.
The Tax-Free Money Market Fund offers investors a convenient way to invest
in a professionally managed portfolio of short-term municipal obligations. In-
vestments in the Tax-Free Money Market Fund earn federally tax-exempt income
while remaining liquid and diversified.
Each Money Market Fund's ability to achieve its respective investment objec-
tive depends on the successful implementation of its investment strategies.
The Money Market Funds' policies are intended to help maintain a stable $1.00
share price. However, the value of the instruments which the Money Market
Funds may purchase can change under certain circumstances, such as when inter-
est rates or issuers' creditworthiness change, or if an issuer or guarantor of
a security fails to pay interest or principal when due. If these changes in
value are material, a Money Market Fund's share price could deviate (posi-
tively or negatively) from $1.00. Securities with longer maturities generally
are more susceptible to price changes, although they may provide higher
yields.
The Short-Term Bond Fund is designed for investors who are seeking higher
income than money market funds or similar investment vehicles generally pro-
vide and who can accept moderate share-price fluctuations. The Short-Term Bond
Fund is designed to provide higher yields than are usually available from
money market funds which have more stable prices.
7
<PAGE>

The U.S. Government Income Fund is designed for investors seeking income and
preservation of capital rather than capital growth. The U.S. Government Income
Fund is designed to provide higher yields than are usually available from
shorter-term investments having more stable prices.
The Municipal Bond Fund is designed for investors who are interested in re-
ducing the effect of federal income taxes on their investment income. Such in-
vestors may find that the Municipal Bond Fund produces higher after-tax re-
turns than comparable taxable investments.
The California Tax-Free Fund is designed for investors seeking income free
from federal and California state personal income taxes.
The Bond Fund is designed as an investment vehicle for the long-term invest-
or. The Bond Fund seeks current income and does not seek the higher returns
that lower-quality investments may provide. The Bond Fund is intended to pro-
vide higher yields than money market funds and many other fixed-price invest-
ments, but will not provide the same stability of principal as money market
funds. The Bond Fund is designed for investors who are seeking higher yields
than those generally available from short-term investments and who can toler-
ate a higher level of share price fluctuation.
The Growth & Income Fund is designed for investors seeking a diversified
portfolio offering the opportunity for capital growth while also providing
current income.
The Growth Fund is designed for investors seeking a diversified portfolio
offering the opportunity for capital growth. Over the long-term, investments
in mid-cap growth companies generally offer greater potential for capital ap-
preciation than investments in larger-capitalization companies. However, in-
vestments in mid-cap growth companies generally entail greater risk and vola-
tility than investing in larger, more established companies.
Special Considerations Relating to the Griffin Growth Fund. Although the in-
vestment objectives and policies of the WM Growth Fund and the Griffin Growth
Fund are comparable, there are some differences in the types of companies in
which each Fund invests. In particular, the Griffin Fund invests in mid-capi-
talization stocks and the WM Fund invests in large-capitalization stocks.
Partly as a result of these differences, WM Advisors, Inc., as investment ad-
viser to the WM Funds after the reorganization of the two funds, believes that
it is appropriate to sell, after the reorganization of the two funds, a sub-
stantial portion of the portfolio securities currently held by the Griffin
Fund in order to conform the holdings of the Griffin Fund to that of its cor-
responding WM Fund.
The sale of these securities is expected to result in the realization of
capital gains, which will be distributed to the WM Fund shareholders after the
reorganization (a group that would include, if the reorganization is consum-
mated, current Griffin Growth Fund shareholders). The amount of these capital
gains, which will be taxable to the persons who hold shares of the WM Growth
Fund on the distribution record date (with the exception of those investors
who hold shares through tax-deferred accounts), will depend, in part, on the
price at which the securities are sold and cannot be determined in advance.
8
<PAGE>

Important Risk Factors
None of the Funds on an individual basis constitutes a complete investment
plan. Each Non-Money Market Fund's share price, yield and total return will
fluctuate, and when you redeem your shares your investment may be worth more
or less than your original cost. The equity securities held by a Fund are sub-
ject to equity market risk (i.e., the possibility that common stock prices
will decline over short or even extended periods). The value of fixed income
securities held by a Fund will, generally, tend to decrease when interest
rates rise, and increase when interest rates fall. Accordingly, in periods of
rising interest rates, the yields of investment portfolios comprised primarily
of fixed income securities will, generally, tend to be lower than prevailing
market rates and, in periods of declining interest rates will, generally, tend
to be somewhat higher. Shorter-term fixed income securities generally offer
greater stability. Longer-term securities are more sensitive to interest rate
changes but generally offer higher yields. In addition, fixed income securi-
ties that are not backed by the United States Government are subject to credit
risk, which is the risk that the issuer may not be able to pay principal
and/or interest when due.
When considering whether to invest in a Fund, you should consider, among
other things, your investment goals, the Fund's investment objectives and your
tolerance for share price volatility.
9
<PAGE>

Fund Expenses

MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
<TABLE>
- -------------------------------------------------------------------
<CAPTION>
Tax-Free
Money Money
Market Market
Fund Fund
- -------------------------------------------------------------------
<S> <C> <C>
Maximum sales load imposed on purchases None None
Maximum sales load imposed on reinvested dividends None None
Maximum deferred sales load None None
Redemption fees None None
Exchange fees None None
- -------------------------------------------------------------------
Annual Fund Operating Expenses *
(as a percentage of average net assets)
- -------------------------------------------------------------------
<CAPTION>
Tax-Free
Money Money
Market Market
Fund Fund
- -------------------------------------------------------------------
<S> <C> <C>
Management fees (after waivers)* 0.20% 0.00%
12b-1 fees 0.20% 0.20%
Other expenses (after waivers and reimbursements)* 0.32% 0.31%
Total Fund operating expenses (after waivers and
reimbursements)* 0.72% 0.81%
- -------------------------------------------------------------------
</TABLE>
*Griffin Advisers and Griffin Administrators currently intend to voluntarily
waive a portion of their respective fees and reimburse the Funds for certain
expenses. The percentages shown above under "Management fees (after waivers),"
"Other expenses (after waivers and reimbursements)" and "Total Fund operating
expenses (after waivers and reimbursements)" are based on amounts incurred dur-
ing the most recent fiscal year, restated to reflect voluntary fee waivers and
expense reimbursements that are expected to continue during the current fiscal
year. Absent such voluntary waivers and reimbursements, these percentages are
expected to be 0.50%, 0.32% and 1.02%, respectively, for the Money Market Fund
and 0.50%, 0.56% and 1.26%, respectively, for the Tax-Free Money Market Fund.
There can be no assurance that the foregoing voluntary fee waivers and expense
reimbursements will continue. Effective April 1999, it is anticipated that cer-
tain voluntary fee waivers and expense reimbursements will be discontinued. Ac-
cordingly as of such date "Management Fees", "Other Expenses" and "Total Oper-
ating Expenses" for the indicated Fund will be as follows: Griffin Money Market
Fund--0.23% 0.32% and 0.75% respectively; and the Griffin Tax-Free Money Market
Fund--0.18%, 0.34% and 0.72% respectively.
10
<PAGE>

NON-MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses for Class A Shares
<TABLE>
- ----------------------------------------------------------------------------------
<CAPTION>
U.S.
Short- Govern-
Term Ment Municipal California Growth
Bond Income Bond Tax-Free Bond & Income Growth
Fund Fund Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum sales load
imposed on purchases
(as a percentage of
offering price): 3.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Maximum sales load
imposed on reinvested
dividends: None None None None None None None
Maximum deferred sales
load:* None None None None None None None
Redemption fees: None None None None None None None
Exchange fees: None None None None None None None
- ----------------------------------------------------------------------------------
Annual Fund Operating Expenses For Class A Shares
(as a percentage of average net assets) **
- ----------------------------------------------------------------------------------
<CAPTION>
U.S.
Short- Govern-
Term Ment Municipal California Growth
Bond Income Bond Tax-Free Bond & Income Growth
Fund Fund Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees (after
waivers)** 0.01% 0.09% 0.00% 0.01% 0.01% 0.25% 0.25%
12b-1 fees (including
service fees)*** 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other expenses (after
waivers and
reimbursements)** 0.34% 0.36% 0.43% 0.35% 0.37% 0.31% 0.42%
Total Fund operating
expenses (after
waivers and
reimbursements)** 0.75% 0.70% 0.68% 0.61% 0.63% 0.81% 0.92%
- ----------------------------------------------------------------------------------
</TABLE>
*A contingent deferred sales charge of 1.00% of the lesser of the net asset
value at purchase or net asset value at redemption is imposed on redemptions
requested within one year of purchases of $1,000,000 or more. The front-end
sales load is waived on purchases of $1,000,000 or more.
**Griffin Advisers and Griffin Administrators currently intend to voluntarily
waive a portion of their respective fees and reimburse the Funds for certain
expenses. The percentages shown above under "Management fees (after waivers),"
"Other expenses (after waivers and reimbursements)" and "Total Fund operating
expenses (after waivers and reimbursements)" are based on amounts incurred dur-
ing the most recent fiscal year, restated to reflect voluntary fee waivers and
expense reimbursements that are expected to continue during the current fiscal
year. Absent such voluntary waivers and reimbursements these percentages are
expected to be 0.50%, 0.44% and 1.19%, respectively, for the Short-Term Bond
Fund; 0.50%, 0.40% and 1.15%, respectively, for the U.S. Government Income
Fund; 0.50%, 0.76% and 1.51%, respectively, for the Municipal Bond Fund; 0.50%,
0.44% and 1.19%, respectively, for the California Tax-Free Fund; 0.50%, 0.45%
and 1.20%, respectively, for the Bond Fund; 0.60%, 0.33% and 1.18%, respective-
ly, for the Growth & Income Fund; and 0.60%, 0.45% and 1.30%, respectively, for
the Growth Fund. There can be no assurance that the foregoing voluntary fee
waivers and expense reimbursements will continue.
11
<PAGE>

Effective April 1999, it is anticipated that certain voluntary fee waivers
and expense reimbursements will be discontinued. Accordingly as of such date
"Management Fees", "Other Expenses" and "Total Operating Expenses" for the in-
dicated Funds will be as follows: Griffin Short-Term Bond Fund--0.31%, 0.44%
and 1.00%, respectively; Griffin U.S. Government Income Fund--0.35%, 0.40% and
1.00%, respectively; Griffin Municipal Bond Fund--0.00%, 0.69% and 0.94%, re-
spectively; Griffin California Tax-Free Fund--0.22%, 0.44% and 0.91%; Griffin
Bond Fund--0.36%, 0.45% and 1.06%, respectively; Griffin Growth & Income Fund--
0.44%, 0.32% and 1.01%, respectively. Griffin Growth Fund--0.60%, 0.45% and
1.30%, respectively.

12
<PAGE>

- --------------------------------------------------------------------------------
Shareholder Transaction Expenses for Class B Shares
<TABLE>
- -----------------------------------------------------------------------------------
<CAPTION>
U.S.
Short- Govern-
Term Ment Municipal California Growth
Bond Income Bond Tax-Free Bond & Income Growth
Fund Fund Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum sales load
imposed on purchases: None None None None None None None
Maximum sales load
imposed on reinvested
dividends: None None None None None None None
Maximum deferred sales
load* (as a percentage
of the lesser of net
asset value at
purchase or net asset
value at redemption):
Redemption during year
1: 4.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Redemption during year
2: 3.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Redemption during year
3: 2.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Redemption during year
4: 1.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Redemption during year
5: 0.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Redemption during year
6: 0.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Redemption after year 6: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Redemption Fees: None None None None None None None
Exchange Fees: None None None None None None None
- -----------------------------------------------------------------------------------
</TABLE>
*See "Contingent Deferred Sales Charge."
13
<PAGE>

- --------------------------------------------------------------------------------
Annual Fund Operating Expenses for Class B Shares*
(as a percentage of average net assets)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
U.S.
Short- Govern-
Term Ment Municipal California Growth
Bond Income Bond Tax-Free Bond & Income Growth
Fund Fund Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management fees
(after waivers)* 0.01% 0.09% 0.00% 0.01% 0.01% 0.25% 0.25%
12b-1 fees (including
service fees)** 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other expenses
(after waivers and
reimbursements)* 0.34% 0.36% 0.43% 0.35% 0.37% 0.26% 0.42%
Total Fund operating
expenses (after
waivers and
reimbursements)* 1.35% 1.45% 1.43% 1.36% 1.38% 1.56% 1.67%
- --------------------------------------------------------------------------------
</TABLE>
*Griffin Advisers and Griffin Administrators currently intend to voluntarily
waive a portion of their respective fees and reimburse the Funds for certain
expenses. The percentages shown above under "Management fees (after waivers),"
"Other expenses (after waivers and reimbursements)" and "Total Fund operating
expenses (after waivers and reimbursements)" are based on amounts incurred dur-
ing the most recent fiscal year, restated to reflect voluntary fee waivers and
expense reimbursements that are expected to continue during the current fiscal
year. Absent such voluntary waivers and reimbursements these percentages are
expected to be 0.50%, 0.44% and 2.05%, respectively, for the Short-Term Bond
Fund; 0.50%, 1.44% and 2.94%, respectively, for the U.S. Government Income
Fund; 0.50%, 0.75% and 2.26%, respectively, for the Municipal Bond Fund; 0.50%,
1.44% and 2.94%, respectively, for the California Tax-Free Fund; 0.50%, 0.37%
and 1.95%, respectively, for the Bond Fund; 0.60%, 0.32% and 1.92%, respective-
ly, for the Growth & Income Fund; and 0.60%, 0.45% and 2.05%, respectively, for
the Growth Fund. There can be no assurance that the foregoing voluntary fee
waivers and expense reimbursements will continue. Effective April 1999, it is
anticipated that certain voluntary fee waivers and expense reimbursements will
be discontinued. Accordingly as of such date "Management Fees", "Other Ex-
penses" and Total "Operating Expenses" for the indicated Fund will be as fol-
lows: Griffin Short-Term Bond Fund--0.31%, 0.44% and 1.75% respectively; Grif-
fin U.S. Government Income Fund--0.36%, 0.40% and 1.75% respectively; Griffin
Municipal Bond Fund 0.00%, 0.69% and 1.69% respectively; Griffin California
Tax-Free Fund - 0.22%, 0.44% and 1.66% respectively; Griffin Bond Fund--0.36%,
0.45% and 1.81% respectively; Griffin Growth & Income Fund--0.44%, 0.32% and
1.76% respectively; Griffin Growth Fund--0.60%, 0.45% and 2.05% respectively.
See "Summary of Fund Expenses--Distribution and Service Fees." Long-term
holders of Class B Shares could pay more in distribution-related charges than
the economic equivalent of the maximum front-end sales charge applicable to mu-
tual funds sold by members of the National Association of Securities Dealers,
Inc.
14
<PAGE>

EXAMPLE: Assume hypothetically that each Fund's annual return is 5% and that
its operating expenses are as described in the above table for the periods
shown below. For every $1,000 you invested, the following shows the amounts you
would have paid in total expenses (including sales charge) after the number of
years indicated:
<TABLE>
- -------------------------------------------------------
<CAPTION>
After After After After
One Three Five Ten
Year Years Years Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Money-Market $ 8 $24 $ 42 $ 93
Tax-Free Money Market $ 8 $24 $ 42 $ 93
Short-Term Bond Fund
Class A (1) $42 $58 $ 75 $125
Class B (2)
Assuming no redemption $15 $47 $ 82 $140
Assuming full redemption (3) $55 $67 $ 82 $140
U.S. Government Income Fund
Class A (4) $52 $68 $ 85 $134
Class B (2)
Assuming no redemption $15 $47 $ 82 $140
Assuming full redemption (3) $65 $77 $102 $140
Municipal Bond Fund
Class A (4) $52 $68 $ 85 $134
Class B (2)
Assuming no redemption $15 $47 $ 82 $140
Assuming full redemption (3) $65 $77 $102 $140
California Tax-Free Fund
Class A (4) $52 $68 $ 85 $134
Class B (2)
Assuming no redemption $15 $47 $ 82 $140
Assuming full redemption (3) $65 $77 $102 $140
- -------------------------------------------------------
</TABLE>
(1) Assumes deduction at the time of purchase of the maximum 3.50% initial
sales charge.
(2) Ten year figures assume conversion of Class B Shares to Class A Shares at
end of sixth year.
(3) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(4) Assumes deduction at the time of purchase of the maximum 4.50% initial
sales charge.
15
<PAGE>

<TABLE>
- -------------------------------------------------------
<CAPTION>
After After After After
One Three Five Ten
Year Years Years Years
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Bond Fund
Class A (4) $52 $68 $ 85 $134
Class B (2)
Assuming no redemption $15 $47 $ 82 $140
Assuming full redemption (3) $65 $77 $102 $140
Growth & Income Fund
Class A (4) $54 $72 $ 93 $151
Class B (2)
Assuming no redemption $17 $52 $ 90 $157
Assuming full redemption (3) $67 $82 $110 $157
Growth Fund
Class A (4) $54 $74 $ 95 $156
Class B (2)
Assuming no redemption $17 $54 $ 92 $163
Assuming full redemption (3) $67 $84 $112 $163
- -------------------------------------------------------
</TABLE>
(1) Assumes deduction at the time of purchase of the maximum 3.50% initial
sales charge.
(2) Ten year figures assume conversion of Class B Shares to Class A Shares at
end of sixth year.
(3) Assumes deduction at the time of redemption of the maximum applicable
contingent deferred sales charge.
(4) Assumes deduction at the time of purchase of the maximum 4.50% initial
sales charge.

THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing tables is to help you understand the various
costs and expenses that a shareholder in a Fund will bear directly or
indirectly. Operation of the Funds involves a variety of expenses for
shareholder statements, tax reporting, legal, accounting and other services.
These expenses are paid out of each Fund's assets and are illustrated by the
above tables.
16
<PAGE>

Financial Highlights
The following financial information relating to the Funds has been derived
from the financial statements of The Griffin Funds, and should be read in con-
junction with such financial statements and the related notes that appear in
the Funds' Annual Report, dated September 30, 1998, which is incorporated by
reference in the SAI. The financial statements of The Griffin Funds for the
periods presented have been audited by KPMG Peat Marwick LLP, the independent
auditors to The Griffin Funds, whose report thereon appears in the Annual Re-
port. Further information about, and management's discussion of, the Funds'
performance is contained in the Funds' Annual Report, which may be obtained
upon request and without charge. The Funds' SAI is incorporated by reference
into this Prospectus.

- -------------------------------------------------------------------------------
Financial Highlights
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Money Market
====================================================
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A)
-------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning
of period $1.00 $1.00 $1.00 $1.00 $1.00
-------- -------- -------- ------- -------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.05 0.05 0.05 0.05 0.03
Net realized and
unrealized gain (loss)
on
investments 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- ------- -------
Total from investment
operations 0.05 0.05 0.05 0.05 0.03
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.05) (0.05) (0.05) (0.05) (0.03)
Distributions from net
realized gain (loss) 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- ------- -------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.03)
-------- -------- -------- ------- -------
Net increase (decrease) in
net asset value 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- ------- -------
Net asset value--end of
period $1.00 $1.00 $1.00 $1.00 $1.00
======== ======== ======== ======= =======
Total return (not
annualized)(d) 5.02% 5.12% 5.05% 5.52% 3.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000) $237,590 $229,774 $184,648 $79,964 $49,988
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets (i) 0.72% 0.53% 0.58% 0.42% 0.15%
Ratio of net investment
income to average
net assets (ii) 4.90% 5.01% 4.92% 5.40% 4.25%
(i) Ratio of expenses to
average net
assets prior to
waivers and
reimbursements (g) 1.02% 1.02% 1.09% 1.29% 1.64%
(ii) Ratio of net
investment income
to
average net assets
prior to waivers
and reimbursements
(g) 4.60% 4.52% 4.41% 4.53% 2.76%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
(a)The Fund commenced operations on October 19, 1993.
(b)The Fund commenced operations on June 12, 1995.
(c)Class B shares were not offered until November 1, 1994.
(d) Total return represents aggregate total return for the period indicated
and does not reflect the deduction of any applicable sales charge.
(e) The Fund was managed by Piper Capital Management, Inc. until December 1,
1994 when The Boston Company Asset Management, Inc. assumed management
responsibilities.
(f) The Fund was managed by Piper Capital Management, Inc. until December 1,
1994 when Payden & Rygel Investment Counsel assumed management
responsibilities.
(g) Ratio reflects fees reduced in connection with specific agreements only
for periods ended after September 30, 1995.
17
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Tax-Free Money Market
==============================================
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A)
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------ -------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income 0.03 0.03 0.03 0.03 0.02
Net realized and unrealized
gain (loss) on
investments 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------ -------
Total from investment
operations 0.03 0.03 0.03 0.03 0.02
------- ------- ------- ------ -------
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.03) (0.03) (0.03) (0.03) (0.02)
Distributions from net
realized gain (loss) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------ -------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.02)
------- ------- ------- ------ -------
Net increase (decrease) in net
asset value 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------ -------
Net asset value--end of period $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ====== =======
Total return (not
annualized)(d) 2.92% 3.02% 3.00% 3.44% 2.22%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000) $23,078 $16,161 $11,652 $8,621 $10,633
Ratios to average net assets
(annualized):
Ratio of expenses to average
net assets (i) 0.73% 0.68% 0.62% 0.44% 0.17%
Ratio of net investment income
to average
net assets (ii) 2.83% 2.98% 2.93% 3.39% 2.56%
(i) Ratio of expenses to
average net
assets prior to waivers
and
reimbursements (g) 1.26% 1.42% 1.53% 1.90% 2.28%
(ii) Ratio of net investment
income to
average net assets
prior to waivers
and reimbursements (g) 2.30% 2.24% 2.02% 1.92% 0.45%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------
</TABLE>
(Footnotes to "Financial Highlights" appear on page 17)
18
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights (cont.)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
U.S. Government Income
===============================================
Class A
-----------------------------------------------
Year Year Year Year Period
Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A)
-------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of
period $9.19 $9.01 $9.24 $8.77 $9.50
-------- ------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income 0.54 0.57 0.57 0.63 0.56
Net realized and unrealized
gain (loss) on investments 0.55 0.18 (0.21) 0.47 (0.73)
-------- ------- ------- ------- -------
Total from investment
operations 1.09 0.75 0.36 1.10 (0.17)
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.54) (0.57) (0.57) (0.63) (0.56)
Distributions from net
realized gain (loss) 0.00 0.00 (0.02) 0.00 0.00
-------- ------- ------- ------- -------
Total distributions (0.54) (0.57) (0.59) (0.63) (0.56)
-------- ------- ------- ------- -------
Net increase (decrease) in
net asset value 0.55 0.18 (0.23) 0.47 (0.73)
-------- ------- ------- ------- -------
Net asset value--end of period $9.74 $9.19 $9.01 $9.24 $8.77
======== ======= ======= ======= =======
Total return (not
annualized)(d) 12.20% 8.62% 4.02% 13.00% (1.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000) $108,252 $76,605 $43,717 $29,308 $19,158
Ratios to average net assets
(annualized):
Ratio of expenses to average
net assets (i) 0.75% 0.54% 0.46% 0.21% 0.09%
Ratio of net investment
income to average net assets
(ii) 5.70% 6.38% 6.23% 6.93% 6.24%
(i) Ratio of expenses to
average netassets prior
to waivers and
reimbursements (g) 1.15% 1.22% 1.29% 1.63% 1.83%
(ii) Ratio of net investment
income to average net
assets prior to waivers
and reimbursements (g) 5.30% 5.71% 5.41% 5.51% 4.49%
Portfolio Turnover Rate 108.10% 303.81% 101.00% 46.96% 28.20%
- -------------------------------------------------------------------------------
</TABLE>
(Footnotes to "Financial Highlights" appear on page 17)
20

<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------
U.S. Government Income
===================================================================================================
Class B
---------------------------------------------------------------------------------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95(C)
------- ------- ------- ----------
<S> <C> <C> <C>
$9.20 $9.02 $9.25 $8.67
------ ------ ------ ------
0.47 0.53 0.53 0.52

0.55 0.18 (0.21) 0.58
------ ------ ------ ------
1.02 0.71 0.32 1.10
------ ------ ------ ------
(0.47) (0.53) (0.53) (0.52)
0.00 0.00 (0.02) 0.00
------ ------ ------ ------
(0.47) (0.53) (0.55) (0.52)
------ ------ ------ ------
0.55 0.18 (0.23) 0.58
------ ------ ------ ------
$9.75 $9.20 $9.02 $9.25
====== ====== ====== ======
11.35% 8.06% 3.51% 13.08%
$5,682 $3,946 $3,439 $1,564
1.52% 1.16% 0.96% 0.79%

5.01% 5.77% 5.67% 5.71%
2.94% 2.18% 2.02% 3.19%
3.58% 4.74% 4.61% 3.31%
108.10% 303.81% 101.00% 46.96%
---------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights (cont.)
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Bond
================================================
Class A
------------------------------------------------
Year Year Year Year 8 Period
Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95(E) 9/30/94(A)
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value--beginning
of period $8.95 $8.71 $8.99 $8.47 $9.50
------- ------- ------- ------- ------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.51 0.54 0.56 0.58 0.52
Net realized and unrealized
gain (loss) on
investments 0.40 0.24 (0.28) 0.52 (1.03)
------- ------- ------- ------- ------
Total from investment
operations 0.91 0.78 0.28 1.10 (0.51)
------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.51) (0.54) (0.56) (0.58) (0.52)
Distributions from net
realized gain (loss) 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------
Total distributions (0.51) (0.54) (0.56) (0.58) (0.52)
------- ------- ------- ------- ------
Net increase (decrease) in
net asset value 0.40 0.24 (0.28) 0.52 (1.03)
------- ------- ------- ------- ------
Net asset value--end of
period $9.35 $8.95 $8.71 $8.99 $8.47
======= ======= ======= ======= ======
Total return (not
annualized)(d) 10.50% 9.19% 3.12% 13.53% (5.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000) $95,794 $56,923 $27,761 $12,022 $7,539
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets (i) 0.71% 0.66% 0.47% 0.21% 0.09%
Ratio of net investment
income to average
net assets (ii) 5.60% 2.14% 6.25% 6.69% 6.29%
(i) Ratio of expenses to
average net
assets prior to
waivers and
reimbursements (g) 1.20% 1.33% 1.42% 2.20% 2.55%
(ii) Ratio of net
investment income to
average net assets
prior to waivers
and reimbursements
(g) 5.11% 1.47% 5.29% 4.70% 3.83%
Portfolio Turnover Rate 115.90% 117.41% 170.64% 327.31% 26.14%
- -----------------------------------------------------------------------------
</TABLE>
(Footnotes to "Financial Highlights" appear on page 17)
22
<PAGE>

- --------------------------------------------------------------------------------
<TABLE>
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Bond
==========================================
Class B
------------------------------------------
Year Year Year Period
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95(C)(E)
------- ------- ------- -------------
<S> <C> <C> <C>
$8.94 $8.70 $8.98 $8.36
------ ------ ------ ------
0.44 0.49 0.51 0.49
0.40 0.24 (0.28) 0.62
------ ------ ------ ------
0.84 0.73 0.23 1.11
------ ------ ------ ------
(0.44) (0.49) (0.51) (0.49)
0.00 0.00 0.00 0.00
------ ------ ------ ------
(0.44) (0.49) (0.51) (0.49)
------ ------ ------ ------
0.40 0.24 (0.28) 0.62
------ ------ ------ ------
$9.34 $8.94 $8.70 $8.98
====== ====== ====== ======
9.67% 8.63% 2.62% 13.58%
$655 $433 $412 $150
1.46% 1.13% 0.96% 0.78%
4.83% 2.24% 5.66% 5.56%
1.95% 2.08% 2.15% 4.00%
4.34% 1.33% 4.48% 2.34%
115.90% 117.41% 170.64% 327.31%
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
<CAPTION>
Bond Municipal Bond
=======================================================================================================
Class B Class A Class B
- --------------------------------------------------------------- ---------------------------------------
Year Year Year Year Year Period Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended
9/30/98 9/30/98 9/30/97 9/30/96 9/30/95(F) 9/30/94(A) 9/30/98 9/30/97 9/30/96 9/30/95(C)(F)
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$8.94 $9.29 $8.95 $8.98 $8.60 $9.50 $9.29 $8.96 $8.98 $8.31
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
0.44 0.39 0.42 0.44 0.47 0.42 0.32 0.37 0.40 0.38
0.40 0.35 0.34 (0.03) 0.38 (0.90) 0.35 0.33 (0.02) 0.67
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
0.84 0.74 0.76 0.41 0.85 (0.48) 0.67 0.70 0.38 1.05
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
(0.44) (0.39) (0.42) (0.44) (0.47) (0.42) (0.32) (0.37) (0.40) (0.38)
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
(0.44) (0.39) (0.42) (0.44) (0.47) (0.42) (0.32) (0.37) (0.40) (0.38)
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
0.40 0.35 0.34 (0.03) 0.38 (0.90) 0.35 0.33 (0.02) 0.67
- ---------- --------- --------- ---------- ---------- ---------- -------- -------- ------- -------------
$9.34 $9.64 $9.29 $8.95 $8.98 $8.60 $9.64 $9.29 $8.96 $8.98
========== ========= ========= ========== ========== ========== ======== ======== ======= =============
9.67% 8.13% 8.64% 4.64% 10.18% (5.15)% 7.36% 7.96% 4.22% 12.86 %
$655 $21,846 $9,612 $6,540 $5,512 $2,610 $568 $431 $425 $56
1.46% 0.70% 0.55% 0.41% 0.40% 0.25% 1.41% 1.07% 0.91% 0.90 %
4.83% 4.13% 4.56% 4.88% 5.26% 5.03% 3.40% 4.05% 4.27% 4.26 %
1.95% 1.51% 1.71% 1.95% 3.30% 3.99% 2.26% 2.47% 2.53% 5.56 %
4.34% 3.32% 3.40% 3.35% 2.36% 1.29% 2.55% 2.61% 2.64% (0.40)%
115.90% 23.00% 12.95% 9.82% 81.90% 81.42% 23.00% 12.95% 9.82% 81.90 %
- -------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights (cont.)
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
California Tax-Free
=====================================================================================
Class A Class B
---------------------------------------------- -------------------------------------
Year Year Year Year Period Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A) 9/30/98 9/30/97 9/30/96 9/30/95(C)
------- ------- ------- ------- ---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value--
beginning of period $ 8.26 $ 7.93 $7.92 $7.59 $8.50 $ 8.26 $ 7.93 $7.92 $7.35
------- ------- ------- ------- ------- ------ ------ ------ -----
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income 0.36 0.38 0.40 0.41 0.36 0.29 0.34 0.36 0.34
Net realized and
unrealized gain (loss)
oninvestments 0.32 0.33 0.01 0.33 (0.91) 0.32 0.33 0.01 0.57
------- ------- ------- ------- ------- ------ ------ ------ -----
Total from investment
operations 0.68 0.71 0.41 0.74 (0.55) 0.61 0.67 0.37 0.91
------- ------- ------- ------- ------- ------ ------ ------ -----
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.36) (0.38) (0.40) (0.41) (0.36) (0.29) (0.34) (0.36) (0.34)
Distributions from net
realized gain (loss) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------ ------ ------ -----
Total distributions (0.36) (0.38) (0.40) (0.41) (0.36) (0.29) (0.34) (0.36) (0.34)
------- ------- ------- ------- ------- ------ ------ ------ -----
Net increase (decrease)
in net asset value 0.32 0.33 0.01 0.33 (0.91) 0.32 0.33 0.01 0.57
------- ------- ------- ------- ------- ------ ------ ------ -----
Net asset value--end of
period $ 8.58 $ 8.26 $7.93 $7.92 $7.59 $ 8.58 $ 8.26 $7.93 $7.92
======= ======= ======= ======= ======= ====== ====== ====== =====
Total return (not
annualized)(d) 8.37% 9.19% 5.23% 10.13% (6.56)% 7.55% 8.63% 4.70% 12.60%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000) $41,723 $26,096 $20,876 $19,292 $13,815 $7,955 $4,725 $3,159 $966
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets (i) 0.70% 0.55% 0.38% 0.32% 0.25% 1.45% 1.08% 0.89% 0.84%
Ratio of net investment
income to average net
assets (ii) 4.23% 4.72% 4.98% 5.36% 4.70% 3.45% 4.18% 4.39% 4.47%
(i) Ratio of expenses to
average net assets
prior to waivers and
reimbursements (g) 1.19% 1.22% 1.29% 1.65% 2.01% 2.94% 2.01% 1.98% 2.97%
(ii) Ratio of net
investment income
to average net
assets prior to
waivers and
reimbursements (g) 3.74% 4.05% 4.06% 4.03% 2.94% 1.96% 3.25% 3.30% 2.35%
Portfolio Turnover Rate 24.09% 34.88% 31.78% 86.69% 73.88% 24.09% 34.88% 31.78% 86.69%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes to "Financial Highlights" appear on page 17)
24
<PAGE>

- --------------------------------------------------------------------------------
Financial Highlights (cont.)
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Growth
=================================================================================
Class A Class B
---------------------------------------- ----------------------------------------
Year Year Year Period Year Year Year Period
Ended Ended Ended Ended Ended Ended Ended Ended
9/30/98 9/30/97 9/30/96 9/30/95(B) 9/30/98 9/30/97 9/30/96 9/30/95(B)
------- ------- ------- ---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value--
beginning
of period $16.74 $13.76 $11.66 $10.00 $16.59 $13.70 $11.65 $10.00
------- ------- ------- ------ ------ ------ ------ ------
INCOME (LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment income
(loss) (0.07) (0.04) 0.01 0.03 (0.18) (0.10) (0.02) 0.03
Net realized and
unrealized
gain (loss) on
investments (1.89) 3.03 2.12 1.63 1.87 2.99 2.09 1.62
------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations (1.96) 2.98 2.13 1.66 (2.05) 2.89 2.07 1.65
------- ------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Distributions from net
investment income 0.00 0.00 (0.03) 0.00 0.00 0.00 (0.02) 0.00
Distributions from net
realized gain (loss) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------ ------ ------ ------ ------
Total distributions 0.00 0.00 (0.03) 0.00 0.00 0.00 (0.02) 0.00
------- ------- ------- ------ ------ ------ ------ ------
Net increase (decrease)
in
net asset value (1.96) 2.98 2.10 1.66 (2.05) 2.89 2.05 1.65
------- ------- ------- ------ ------ ------ ------ ------
Net asset value--end of
period $14.78 $16.74 $13.76 $11.66 $14.54 $16.59 $13.70 $11.65
======= ======= ======= ====== ====== ====== ====== ======
Total return (not
annualized)(d) (11.71)% 21.66% 18.35% 16.60% (12.36)% 21.09% 17.80% 16.50%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000) $84,020 $58,180 $21,027 $4,187 $5,290 $4,132 $2,170 $149
Ratios to average net
assets
(annualized):
Ratio of expenses to
average
net assets (i) 0.99% 0.90% 0.49% 0.00% 1.73% 1.40% 1.01% 0.00%
Ratio of net
investment income
to average net assets
(ii) (0.48)% (0.13)% 0.21% 1.20% (1.23)% (0.85)% (0.36)% 1.07%
(i) Ratio of expenses
to
average net
assets prior
to waivers and
reimbursements
(g) 1.30% 1.39% 1.68% 3.46% 2.05% 2.14% 2.43% 3.85%
(ii) Ratio of net
investment
income to
average net
assets prior to
waivers and
reimbursements
(g) (0.79)% (0.62)% (0.98)% (2.26)% (1.54)% (1.59)% (1.78)% (2.78)%
Portfolio Turnover
Rate 17.79% 22.37% 16.40% 0.06% 17.79% 22.37% 16.40% 0.06%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(Footnotes to "Financial Highlights" appear on page 17)
26
<PAGE>

Investment Policies and Procedures
The MONEY MARKET FUND invests in high quality U.S. dollar-denominated money
market instruments, including (i) bank obligations, consisting of certificates
of deposit and bankers' acceptances of U.S. and foreign banks; (ii) commercial
paper; (iii) U.S. Government obligations; and (iv) other debt obligations, con-
sisting of municipal obligations, corporate bonds, asset-backed securities and
securities issued by special purpose entities. The Money Market Fund also may
engage in repurchase and reverse repurchase transactions. In addition, the Fund
may buy or sell securities on a when-issued or delayed-delivery basis and may
purchase restricted and illiquid instruments.
The Fund will concentrate (i.e., invest more than 25% of its total assets) in
the financial services industry. Because the Fund concentrates its investments
in the financial services industry, its performance may be affected more sig-
nificantly by conditions affecting banks and other financial services companies
than the performance of funds that do not concentrate in the financial services
industry. See "The Funds in Detail--Investment Limitations."
The TAX-FREE MONEY MARKET FUND invests in high quality, short-term municipal
obligations selected on the basis of liquidity and stability of principal.
These include municipal obligations issued by states or their counties, munici-
palities, authorities or other political subdivisions, and municipal obliga-
tions issued by territories or possessions of the U.S., such as Puerto Rico.
As a matter of fundamental policy, under normal market conditions, the Fund
will invest its assets so that at least 80% of its income distributions are ex-
empt from federal income tax and the federal alternative minimum tax.
The Tax-Free Money Market Fund invests in high quality, short-term municipal
securities but it may also invest in high quality, long-term fixed, variable or
floating rate municipal instruments (including tender option bonds) and munici-
pal instruments with demand features and standby commitments whose features
give them interest rates, maturities and prices similar to short-term instru-
ments. See "Additional Securities and Investment Practices--Variable or Float-
ing Rate Demand Obligations," and "Additional Securities and Investment Prac-
tices--Standby Commitments" in the SAI. Generally, the Fund's investments in
municipal securities will consist of tax, revenue or bond anticipation notes;
tax- exempt commercial paper, general obligation or revenue bonds (including
municipal lease obligations and resource recovery bonds); and zero coupon
bonds. The Fund may buy or sell securities on a when-issued or delayed-delivery
basis, and may purchase restricted securities and illiquid instruments.
The Tax-Free Money Market Fund may temporarily change its investment focus
for defensive purposes. During periods when, in the Adviser's opinion, a tempo-
rary defensive posture in the market is appropriate, the Fund may hold cash
that is not earning interest or invest in obligations whose interest may be
federally taxable. Under such circumstances, the Fund may temporarily invest so
that less than 80% of its income distributions are federally tax-free. Feder-
ally taxable obligations in which the Fund may invest include obli-
27
<PAGE>

gations issued by the U.S. Government or any of its agencies or instrumentali-
ties, high quality commercial paper, certificates of deposit and repurchase
agreements.
Pursuant to procedures adopted by the Board of Directors, the Money Market
Funds may purchase only high-quality securities that the Adviser believes pres-
ent minimal credit risks. To be considered high quality, a security must be
rated in accordance with applicable rules in one of the two highest categories
for short-term securities by at least two nationally recognized statistical
rating services (or by one, if only one rating service has rated the security)
or, if unrated, must be judged to be of equivalent quality by the Adviser. For
more information concerning the instruments in which the Money Market Funds may
invest, see "The Funds in Detail--Description of Investments."
The SHORT-TERM BOND FUND invests primarily in short- and intermediate-term
corporate and government bonds and mortgage-related debt securities. Under nor-
mal market conditions, the Short-Term Bond Fund will invest at least 65% of its
total assets in bonds and will maintain an average dollar-weighted effective
maturity of three years or less. The Short-Term Bond Fund will not purchase any
security whose effective maturity, average life or tender date measured from
the date of settlement exceeds seven years. Securities purchased by the Fund
will be rated investment grade by a nationally recognized statistical rating
organization or, if unrated, will be of equivalent quality as determined by the
Adviser.
The Short-Term Bond Fund may, however, invest up to 5% of its net assets in
securities rated below investment grade by a nationally recognized statistical
rating organization (or, if not rated, of comparable quality).
Securities with the lowest investment grade rating (e.g., rated BBB by Stan-
dard & Poor's Corporation ("S&P") or Baa by Moody's Investors Service, Inc.
("Moody's")) have speculative characteristics and changes in economic condi-
tions are more likely to lead to a weakened capacity to make principal and in-
terest payments than is the case with higher grade debt obligations. These con-
cerns are heightened in the case of securities rated below investment grade.
See "Additional Securities and Investment Practices--High Yield, High Risk Se-
curities" in the SAI for additional information.
In addition to debt securities issued by corporate and government issuers,
the Short-Term Bond Fund may invest in a variety of mortgage-backed securities,
including securities issued by the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). In addition, the Short-Term Bond Fund
may invest in bank obligations, collateralized mortgage obligations ("CMOs"),
and dollar-denominated foreign securities. The Short-Term Bond Fund may pur-
chase securities on a when-issued or delayed-delivery basis and may purchase
restricted and illiquid securities. Furthermore, the Short-Term Bond Fund may
engage in repurchase and reverse repurchase transactions, may loan its portfo-
lio securities and may purchase securities issued by other investment compa-
nies. For more information concerning these and other investments that the Fund
may make, see "The Funds in Detail--Description of Investments" and the SAI.
28
<PAGE>

The U.S. GOVERNMENT INCOME FUND invests primarily in a portfolio consisting
of intermediate and long-term U.S. Government Obligations, including U.S. Trea-
sury bonds, notes and bills and other bonds and obligations issued or guaran-
teed by the U.S. Government, government-sponsored enterprises or federal agen-
cies such as the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage As-
sociation ("FNMA"). Under normal market conditions, at least 65% of the value
of the U.S. Government Income Fund's total assets will be invested in U.S. Gov-
ernment Obligations. U.S. Government Obligations have a low default risk be-
cause they are issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities, and relatively low purchase and
sale transaction costs. With respect to U.S. Government Obligations supported
only by the credit of the issuing agency, there is no guarantee that the U.S.
Government will provide support to such agencies.
The U.S. Government Income Fund may temporarily invest some of its assets in
cash reserves or certain high-quality, money market instruments or may engage
in other investment activities. Such temporary investments would more likely be
made by the Adviser when there is an unexpected or abnormal level of investor
purchases or redemptions of U.S. Government Income Fund shares or because of
unusual market conditions. Permitted investments and investment activities con-
sist of variable or floating rate or inverse floating rate instruments, asset-
backed securities, mortgage-backed securities, CMOs and custodial receipts,
zero coupon bonds, STRIPS, certificates of deposit, commercial paper, repur-
chase agreements, dollar-denominated foreign securities and loans of portfolio
securities. The U.S. Government Income Fund may buy and sell securities on a
when- issued or delayed-delivery basis and may purchase restricted and illiquid
securities. The U.S. Government Income Fund also may buy and sell options and
futures contracts to generate income for the Fund and for hedging purposes.
Sales of options contracts will be limited to covered options.
The U.S. Government Income Fund may invest in obligations of any maturity.
The annual portfolio turnover rate generally is not a factor in the management
of the U.S. Government Income Fund. The portfolio turnover rate for the most
recent fiscal year was 304%, although it generally is not expected to exceed
100% in any year. A high portfolio turnover rate should not result in the U.S.
Government Income Fund paying substantially more in brokerage commissions since
most transactions in U.S. Government securities are effected on a principal ba-
sis; such securities, however, are subject to a mark-up. For more information
concerning these and other investments that the Fund may make, see "The Funds
in Detail--Description of Investments" and the SAI.
The MUNICIPAL BOND FUND invests primarily in intermediate to long-term in-
vestment grade municipal securities that are rated at the date of purchase in
the top four rating groups by one of the nationally recognized statistical rat-
ing organizations, such as obligations rated AAA/Aaa, AA/Aa, A/A and BBB/Baa by
S&P or Moody's, respectively. The Municipal Bond Fund also may invest in
unrated municipal securities that are determined
29
<PAGE>

by the Adviser to be of comparable quality. Under normal market conditions, at
least 65% of the Municipal Bond Fund's total assets are invested in investment
grade municipal securities. Securities with the lowest investment grade rating
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade debt obligations.
These rating limitations apply at the time of acquisition of a security
based on the last previous determination of net asset value. Any subsequent
change in any rating by a rating service will not require elimination of any
security from the portfolio of the Fund.
As a matter of fundamental policy, at least 80% of the Municipal Bond Fund's
total assets are invested (under normal market conditions) in municipal secu-
rities that pay interest which is exempt from federal income taxes and which
is not subject to the federal alternative minimum tax. The Adviser will, under
normal market conditions, invest substantially all of the Municipal Bond
Fund's assets in the following types of municipal securities: fixed, variable
or floating rate general obligation and revenue bonds (including municipal
lease obligations and resource recovery bonds); zero coupon and asset-backed
securities; tax, revenue or bond anticipation notes; and tax-exempt commercial
paper. The Municipal Bond Fund has no restriction on portfolio maturity, but
the dollar-weighted average maturity of the portfolio is expected to be
greater than 10 years. The Municipal Bond Fund may buy or sell securities on a
when-issued or delayed-delivery basis, and may purchase restricted and illiq-
uid securities. The Municipal Bond Fund may also buy and sell options and
futures contracts.
The Municipal Bond Fund may temporarily invest some of its assets in cash
reserves or certain high-quality, taxable money market instruments, or may en-
gage in other investment activities. Permitted taxable investments and invest-
ment activities consist of U.S. Government Obligations, CMOs, STRIPS, certifi-
cates of deposit, commercial paper, taxable
municipal securities, repurchase agreements and loans of portfolio securities.
Such temporary investments would most likely be made by the Adviser when there
is an unexpected or abnormal level of investor purchases or redemptions of Mu-
nicipal Bond Fund shares or because of unusual market conditions. The income
from these temporary investments and investment activities would be subject to
federal income taxes.
The Municipal Bond Fund may invest any portion of its assets in industrial
revenue bonds ("IRBs") backed by private issuers, and may invest up to 25% of
its total assets in IRBs related to a single industry. The Municipal Bond Fund
may also invest 25% or more of its total assets in municipal securities whose
revenue sources are from similar types of projects, e.g., education, electric
utilities, healthcare, housing, transportation, or water, sewer and gas utili-
ties. There may be economic, business or political developments or other con-
ditions that affect securities of a similar type or within a single industry.
Therefore, developments affecting a single issuer, industry or type of project
could have a significant effect on the Municipal Bond Fund's performance.
30
<PAGE>

The annual portfolio turnover rate is not a factor in the management of the
Municipal Bond Fund; however, it is not expected to exceed 100% in any year. A
high portfolio turnover rate should not result in the Municipal Bond Fund's
paying substantially more brokerage commissions, since most transactions in mu-
nicipal securities are effected on a principal basis; such securities, however,
are subject to a mark-up. For more information concerning these and other in-
vestments that the Fund may make, see "The Funds in Detail--Description of In-
vestments" and the SAI.
The CALIFORNIA TAX-FREE FUND invests primarily in intermediate to long-term,
investment grade California municipal securities that are rated at the date of
purchase in the top four rating categories by a nationally recognized statisti-
cal rating organization, such as obligations rated AAA/Aaa, AA/Aa, A/A and
BBB/Baa by S&P or Moody's respectively. The California Tax-Free Fund also may
invest in unrated municipal securities that are determined by the Adviser to be
of comparable quality. Securities with the lowest investment grade rating have
speculative characteristics and changes in economic conditions or other circum-
stances are more likely to lead to a weakened capacity to make principal and
interest payments than is the case with higher grade debt obligations.
As a matter of fundamental policy, at least 80% of the California Tax-Free
Fund's total assets are invested (under normal market conditions) in municipal
securities that pay interest which is exempt from federal income taxes and
which is not subject to the federal alternative minimum tax. In addition, under
normal market conditions, at least 65% of the California Tax-Free Fund's total
assets are invested in municipal securities that pay interest which is exempt
from California personal income taxes. The California Tax-Free Fund may invest
25% or more of its assets in California municipal securities that are related
in such a way that an economic, business or political development or change af-
fecting one such security would also affect the other securities, for example,
municipal securities the interest on which is paid from revenues of similar
projects. See "Special Factors Affecting the California Tax-Free Fund" in the
SAI.
Because the California Tax-Free Fund invests primarily in securities issued
by entities within the State, the Fund is more susceptible to changes in value
due to political or economic changes affecting the State of California or its
subdivisions than funds that do not invest a significant portion of their as-
sets in California securities. From mid-1990 to early 1994, California suffered
a recession, resulting in high unemployment rates and recurring budget defi-
cits. Additionally, the state sustained a budget deficit in its Special Fund
for Economic Uncertainties ("SFEU"). Consequently, between October 1991 and
July 1994, the rating agencies reduced the State's credit ratings. Moody's low-
ered its rating from "Aaa" to "A1", S&P lowered its rating from "A+" to "A" and
Fitch Investors Service lowered its rating from "AAA" to "A".
Since the beginning of 1994, the California economy has been steadily recov-
ering from the recession of the early 1990s. Employment has grown by 500,000
additional jobs during 1994 and 1995 and by 400,000 new jobs between the fourth
quarters of 1996 and 1997. Due to the improved economy, the state has had bud-
get surpluses for five consecutive fiscal
31
<PAGE>

years. As a result of these economic improvements, S&P updated its rating of
California municipal obligations to A+ on July 30, 1996, where it remains to-
day. Griffin Advisers will continue to monitor and evaluate the Fund's invest-
ments in light of the events in California and the Fund's investment objective
and policies. For additional information, see "Special Factors Affecting the
California Tax-Free Fund" in the SAI.
The Adviser will, under normal market conditions, invest substantially all of
the California Tax-Free Fund's assets in the following types of municipal secu-
rities: fixed, variable or floating rate general obligation and revenue bonds
(including municipal lease obligations and resource recovery bonds); zero cou-
pon and asset-backed securities; tax, revenue or bond anticipation notes; and
tax-exempt commercial paper issued by or on behalf of the State of California,
its cities, municipalities, political subdivisions and other public authori-
ties. The California Tax-Free Fund may buy or sell securities on a when-issued
or delayed- delivery basis, and may purchase restricted and illiquid securi-
ties. The California Tax-Free Fund may also buy and sell options and futures
contracts.
The California Tax-Free Fund may temporarily invest some of its assets in
cash reserves or certain high-quality, taxable money market instruments, or may
engage in other investment activities. Permitted taxable investments and in-
vestment activities consist of U.S. Government Obligations, CMOs, certificates
of deposit, STRIPS, commercial paper, taxable municipal securities, repurchase
agreements, interest rate swaps, interest rate caps and floors, and loans of
portfolio securities. Such temporary investments would most likely be made when
there is an unexpected or abnormal level of investor purchases or redemptions
of California Tax-Free Fund shares or because of unusual market conditions. The
income from these temporary investments and investment activities would be sub-
ject to federal income taxes and California personal income taxes.
The California Tax-Free Fund is classified as "non-diversified" under the In-
vestment Company Act of 1940 and, as such, is not limited in the proportion of
its assets that it may invest in the obligations of a single issuer. However,
the Fund intends to conduct its operations to qualify as a "regulated invest-
ment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In order to so qualify, among other requirements, the
Fund will limit its investments so that (i) not more than 25% of the market
value of the Fund's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets,
(A) not more than 5% of the value of its total assets will be invested in the
securities of a single issuer, and (B) the Fund will not own more than 10% of
the outstanding voting securities of a single issuer (since the securities or-
dinarily purchased by the Fund are nonvoting securities, there is typically no
limit on the percentage of an issuer's obligations that the Fund may own).
The annual portfolio turnover rate is not a factor in the management of the
California Tax-Free Fund; however, it is not expected to exceed 100% in any
year. A high portfolio turnover rate should not result in the California Tax-
Free Fund paying substantially more
32
<PAGE>

brokerage commissions, since most transactions in municipal securities are ef-
fected on a principal basis; such securities, however, are subject to a mark-
up. For more information concerning these and other investments that the Fund
may make, see "The Funds in Detail--Description of Investments" and the SAI.
The BOND FUND invests in corporate debt securities which are debt obliga-
tions of all types issued by U.S. or foreign corporations, banks or other
business organizations. The debt obligations in which the Fund invests include
bonds, notes, commercial paper, certificates of deposit, convertible bonds,
asset-backed securities, zero coupon bonds and other types of fixed-income in-
struments with fixed or floating interest rates. The Fund may invest in non-
corporate debt obligations issued by U.S. or foreign governments or government
agencies, including U.S. Government Obligations, mortgage-backed securities,
including collateralized mortgage obligations, and money market instruments
such as repurchase agreements. The Bond Fund may also buy and sell options and
futures contracts.
Under normal market conditions, at least 65% of the Bond Fund's total assets
will be invested in bonds, and at least 65% of its total assets will be in-
vested in debt securities that are rated investment grade by a nationally rec-
ognized statistical rating organization (i.e., are rated in one of the top
four rating categories) or are unrated but are determined by the Adviser to be
of comparable quality. The Bond Fund may also invest up to 5% of its net as-
sets in securities rated below investment grade by a nationally recognized
statistical rating organization (or, if not rated, of comparable quality).
Securities with the lowest investment grade rating (e.g., those rated Baa by
Moody's or BBB by S&P) have speculative characteristics and changes in eco-
nomic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade debt obligations. These concerns are heightened in the case of securi-
ties rated below investment grade. See "Additional Securities and Investment
Practices--High Yield, High Risk Securities" in the SAI for additional infor-
mation. In general, investment grade debt securities involve less credit risk
and lower yields than lower-rated debt securities.
The Bond Fund has no specific limitations on the maturity of its invest-
ments, but generally expects to focus on longer-term bonds. The Bond Fund may
make substantial temporary investments in short-term securities and money mar-
ket instruments for defensive purposes when, in the Adviser's judgment, market
conditions warrant.
In managing the Bond Fund's investments, the Adviser takes into account a
variety of factors, including the outlook for interest rates, credit condi-
tions and relative yields and returns for various types of fixed-income in-
struments. The Bond Fund is not limited to U.S. securities, and may invest
with a global perspective if the Adviser believes foreign securities offer at-
tractive returns. In this regard, the Fund may invest up to 25% of its total
assets in dollar-denominated securities of foreign issuers located in devel-
oped and developing countries. Investments in foreign securities involve cer-
tain risks that are not typically associated with investments in domestic se-
curities. See "The Funds in Detail-- Description of Investments--Foreign Secu-
rities" in this Prospectus, and "Additional Securities and Investment Practic-
es--Foreign Securities" in the SAI. The Adviser has broad
33
<PAGE>

flexibility to vary the Bond Fund's exposure to securities with different ma-
turities, yields, credit quality and other characteristics based on its judg-
ment on how to best seek the Bond Fund's objective. The Bond Fund may also
consider the potential for capital appreciation when selecting investments.
To manage its investment exposure, the Bond Fund may invest in options,
futures contracts and other investments linked to security prices, interest
rates or other financial indicators. See "The Funds in Detail--Description of
Investments--Futures Contracts and Related Options." More detailed information
about these securities is contained in the SAI. These contracts will be used
only as a hedge against interest rate and securities price changes. Some of
the Bond Fund's investments may have returns linked to commodity prices, which
may help manage the impact of inflation on the Fund's portfolio.
The annual portfolio turnover rate generally is not a factor in the manage-
ment of the Bond Fund; generally, however, it is not expected to exceed 200%.
A high portfolio turnover rate should not result in higher brokerage costs for
the Bond Fund, since most transactions in debt securities are effected on a
principal basis; such securities, however, are subject to a mark-up. For more
information concerning these and other investments that the Fund may make, see
"The Funds in Detail--Description of Investments" and the SAI.
The GROWTH & INCOME FUND invests primarily in common stocks that offer the
potential for capital growth, current income or both. Under normal market con-
ditions, at least 65% of the Fund's total assets is invested in common stocks.
Emphasis is placed on (i) common stocks which are trading at low valuation
levels relative to their fundamentals, such as price-to-current earnings, ei-
ther relative to the market or to the security's historic price-to-earnings
relationship, (ii) in common stocks which are trading at low prices in rela-
tion to their prospects for long-term growth in dividends and earnings, and
(iii) in common stocks of issuers that have historically paid above-average or
growing dividends. The Growth & Income Fund invests in common stocks so as to
diversify its investments among companies and prevent concentration within in-
dustries.
The Growth & Income Fund also may purchase corporate bonds, notes and deben-
tures, asset-backed securities, preferred stocks, convertible securities (both
debt securities and preferred stocks) and U.S. Government securities if the
Adviser determines that their purchase would help achieve the Growth & Income
Fund's investment objective. The Growth & Income Fund may invest up to 25% of
its assets in corporate bonds and notes of investment grade quality (i.e.,
that are rated in one of the top four rating categories by a nationally recog-
nized statistical rating organization or, if unrated, are determined by the
Adviser to be of equivalent quality). Securities with the lowest investment
grade rating have speculative characteristics and changes in economic condi-
tions or other circumstances are more likely to lead to a weakened capacity to
make principal and interest payments than is the case with higher grade debt
obligations. The Growth & Income Fund also may hold a portion of its assets in
cash and money market instruments.
The Growth & Income Fund may engage in repurchase and reverse repurchase
transactions. In addition, the Growth & Income Fund may purchase futures con-
tracts and op-
34
<PAGE>

tions on futures contracts, and may purchase or write options on securities.
The Growth & Income Fund may invest in dollar-denominated foreign securities,
although it does not intend to invest more than 10% of its total assets in such
securities.
At times, the Adviser may judge that conditions in the securities markets
make pursuing the Growth & Income Fund's basic investment strategy inconsistent
with the best interests of the Growth & Income Fund's shareholders. At such
times, the Adviser may temporarily use alternative strategies, primarily de-
signed to reduce fluctuations in the value of the Growth & Income Fund's as-
sets.
In implementing these "defensive" strategies, the Growth & Income Fund may
invest without limit in high quality debt securities or preferred stocks, or in
other securities that the Adviser considers consistent with such defensive
strategies. When the Growth & Income Fund is in a temporary defensive position,
it may not be pursuing its investment objective. It is impossible to predict
when, or for how long, the Growth & Income Fund will pursue these alternative
strategies.
The annual portfolio turnover rate generally is not a factor in the manage-
ment of the Growth & Income Fund; however, it is not expected to exceed 100%. A
higher portfolio turnover rate may result in higher brokerage costs for the
Fund. For more information regarding the Growth & Income Fund's permissible in-
vestments, see "The Funds in Detail--Description of Investments" and the SAI.
The GROWTH FUND invests primarily in the common stocks of mid-cap companies
that, in the opinion of the Adviser, offer above-average growth potential. Un-
der normal market conditions, the Growth Fund will invest at least 65% of its
total assets in the common stocks of mid-cap companies that are considered to
offer the potential for above-average growth. The Growth Fund seeks to invest
in mid-cap companies that (i) offer proven products or services, (ii) have a
historical record of above-average earnings growth, (iii) demonstrate the po-
tential to sustain earnings growth, (iv) operate in industries experiencing in-
creasing demand, and/or (v) are believed to be reasonably valued in the market.
Mid-cap growth companies are often still in the early, more dynamic phase of
a company's life cycle, but have enough corporate history that they are no
longer considered new or emerging. They are usually mature enough to have es-
tablished organizational structures and the depth of management needed to ex-
pand their operations. In addition, these companies generally have sufficient
financial resources and access to capital to finance any future growth.
While investing in mid-cap growth companies generally entails greater risk
and volatility than investing in larger, more-established companies, mid-cap
companies generally offer the potential for more rapid growth. They also may
offer greater potential for capital appreciation because of their higher growth
rates. In addition, the stocks of mid-cap companies are less actively followed
by securities analysts and may, therefore, at times be undervalued by the mar-
ket in general.
In addition to common stocks, the Growth Fund may invest in preferred stocks,
convertible securities and futures and options. The Growth Fund may invest up
to 25% of its
35
<PAGE>

total assets in dollar-denominated foreign securities. The Growth Fund may pur-
chase securities on a when-issued or delayed-delivery basis, may loan its port-
folio securities and may invest in securities issued by other investment compa-
nies, consistent with the Growth Fund's investment objective and policies. Fur-
thermore, the Growth Fund may invest in restricted and illiquid securities. The
Growth Fund also may hold a portion of its assets in cash and money market in-
struments.
At times, the Adviser may judge that conditions in the securities markets
make pursuing the Growth Fund's basic investment strategy inconsistent with the
best interests of the Growth Fund's shareholders. At such times, the Adviser
may temporarily use alternative strategies, primarily designed to reduce fluc-
tuations in the value of the Growth Fund's assets.
In implementing these "defensive" strategies, the Growth Fund may invest
without limit in high quality debt securities or preferred stocks, or invest in
other securities that the Adviser considers consistent with such defensive
strategies. When the Growth Fund is in a temporary defensive position, it may
not be pursuing its investment objective. It is impossible to predict when, or
for how long, the Fund will pursue these alternative strategies.

The annual portfolio turnover rate generally is not a factor in the manage-
ment of the Fund; however, it is not expected to exceed 100% in any year. A
higher portfolio turnover rate may result in higher brokerage costs for the
Fund. For more information concerning these and other investments that the Fund
may make, see "The Funds in Detail--Description of Investments" and the SAI.

YEAR 2000

Since many computer programs use two digits to identify a year, the change
from "99" to "00" on January 1, 2000, if not managed correctly, may pose diffi-
culties. Most of the services provided to The Griffin Funds depends on reliable
and efficient functioning of computer systems. Although, The Griffin Funds'
principal service providers have been working to prevent any complications dur-
ing this time, there can be no guarantee that these programs will not be nega-
tively impacted. Since the Year 2000 issue affects virtually all organizations,
the companies in which the Funds invest may also be adversely impacted. The ex-
tent of this impact is difficult to predict.

36
<PAGE>

Your Fund Account
TYPES OF ACCOUNTS
You may set up an account directly in any of the Funds. The various types of
accounts that can be established with The Griffin Funds are described below.
Remember: The account guidelines may not apply to certain retirement ac-
counts. If your employer offers any of the Funds through a retirement program,
contact your employer for more information. Otherwise, call The Griffin Funds
directly, or contact your WM Distributors Representative.
INDIVIDUAL OR JOINT TENANTS. Individual accounts are owned by one person.
Joint accounts can have two or more owners (tenants).
RETIREMENT. Retirement plans can help individuals to "shelter" investment in-
come and capital gains from current taxes. In addition, contributions to these
accounts may be tax deductible. Retirement accounts require special applica-
tions and typically have lower minimum initial and subsequent investment
amounts. The following summarizes the general attributes of tax laws common to
retirement programs. You should consult your tax adviser for more specific in-
formation.
. Individual Retirement Accounts (IRAs) allow individuals who are not active
participants in certain types of retirement plans and who are under age 70
1/2 with earned income to make deductible contributions to an IRA subject
to certain dollar limitations.
. Rollover IRAs offer special tax advantages for certain distributions from
employer-sponsored retirement plans.
. Keogh or Corporate Profit Sharing and Money Purchase Pension Plans allow
self-employed individuals or small business owners (and their employees)
to make tax deductible contributions for themselves and any eligible em-
ployees up to $30,000 per year.
. New Savings Incentive Match Plans for Employees (SIMPLE Plans) and older
Simplified Employee Pension Plans (SEP-IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with
many of the same advantages as a Keogh plan, together with fewer adminis-
trative requirements.
. 403(b) Custodial Accounts are available to employees of most tax-exempt
institutions, including schools, hospitals and other charitable organiza-
tions.
. 401(k) Programs allow employees of a company which has established such a
program to contribute a percentage of their wages on a tax-deferred basis.
These accounts need to be established by the trustee of the plan.
. Spousal IRAs allow a nonworking or lower paid spouse filing a joint return
to establish an IRA and include his or her working or higher paid spouse's
income with respect to contributions to the IRA, subject to certain condi-
tions and limitations.
. Roth IRAs allow individuals, including individuals over the age of 70 1/2,
to take tax-free distributions of the earnings on nondeductible contribu-
tions.
EDUCATION. Education investment accounts allow certain taxpayers to contribute
up to $500 per child per year to an education IRA. Earnings on such contribu-
tions may be distributed tax free if used to pay the child's postsecondary ed-
ucation expenses.
37
<PAGE>

The Tax-Free Money Market Fund, the Municipal Bond Fund and the California
Tax-Free Fund probably are not appropriate investments for tax-exempt institu-
tions or tax-sheltered retirement and education accounts, as such investors
would receive no benefit from the tax-exempt status of any of these Funds'
dividends.
GIFTS OR TRANSFER TO MINORS (UGMA, UTMA). These custodial accounts enable a
donor to give or otherwise transfer money to a child and to obtain certain tax
benefits. A donor can give up to $10,000 a year per child without having such
contributions be subject to federal gift tax. Depending on applicable state
laws, a custodial account can be established under either the Uniform Gifts to
Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).
TRUST. The trust must be established before an account can be opened. You may
have to provide additional materials or sign additional documents.
BUSINESS OR ORGANIZATION. Corporations, associations, partnerships, institu-
tions and other organizations should contact a WM Distributors Representative
for more information.

HOW TO PURCHASE SHARES
If you are a new investor in the Funds, you may open your account in person
or by wire as described on page 38. You also may complete and sign an account
application and mail it together with your check. If you need an application,
call 1-800-676-4450 or contact your WM Distributors Representative.
If you are already an investor in any Fund, you can make further investments
in one of the Funds:
. In person,
. By mailing in an application with a check, or
. By exchanging from another Fund, subject to the limitations described in
the other Fund's prospectus.
You can arrange withdrawals from your checking or savings deposit account to
open a new Fund account or to add to an existing Fund account, subject to the
terms of the deposit account.
If you are a first-time investor through a tax-sheltered retirement plan,
such as an IRA, you will need a special application. Ask your WM Distributors
Representative or call 1-800-676-4450 for more information about retirement
plan investment procedures and a retirement application.
If you buy shares by check, and then redeem those shares by any method other
than by exchange to another Griffin Fund, the redemption proceeds will be
mailed upon clearance of your purchase check, which may take up to fifteen
days.
All purchases made by check should be in U.S. dollars and be made payable to
the appropriate Griffin Fund. Third-party checks, except those payable to an
existing shareowner who is a natural person (as opposed to a corporation or
partnership), credit cards and cash will not be accepted.
38
<PAGE>

From time to time, shares of the Money Market Fund and the Tax-Free Money
Market Fund also may be available for purchase through various sweep and cash
management programs offered by various entities, including WM Distributors and
its affiliates, on terms specified in those programs.

SHARE PRICE
MONEY MARKET FUNDS. The Money Market Funds' share price, referred to as the net
asset value ("NAV"), is calculated every day that the New York Stock Exchange
("NYSE") is open for business.
Share purchases are effected at the share price next determined after an or-
der and good funds are received and accepted by a Money Market Fund. Share
price is determined at 12:00 noon, Eastern time. Orders received with good
funds before noon, Eastern time, are effective that day and orders received at
or after noon, Eastern time, are effective the following business day. You will
begin to accrue daily dividends the day after becoming a shareholder.

NON-MONEY MARKET FUNDS. Purchase orders for shares of the Non-Money Market
Funds are effected at the NAV next determined (less any applicable sales
charge) after an order and good funds are received and accepted by the Non-
Money Market Fund. The offering price of Class A Shares of each Non-Money Mar-
ket Fund is calculated on each day the NYSE is open for business, and reflects
a sales load of 4.50% with respect to Non-Money Market Funds, other than the
Short-Term Bond Fund, and 3.50% with respect to the Short-Term Bond Fund, un-
less you qualify for a reduction or waiver as described under "Sales Load Re-
ductions and Waivers." The amount remaining after deduction of any applicable
sales load is invested at NAV. Class B Shares are offered at NAV but are sub-
ject to a maximum deferred sales charge of 5.00% with respect to Non-Money Mar-
ket Funds, other than the Short-Term Bond Fund, and 4.00% with respect to the
Short-Term Bond Fund, of the lesser of NAV at purchase or NAV at redemption.
Each day that the NYSE is open for business the NAV is calculated for each
class of shares of each Non-Money Market Fund. NAV is determined as of the
close of regular trading on the NYSE.

- --------------------------------------------------------------------------------
Purchasing Shares
<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
Method To Open an Account To Add to an Account
<C> <S> <C>
IN PERSON . Bring your application . Bring your check to a
and check to a WM WM Distributors Representative.
Distributors Call 1-800-676-4450 for the
Representative. Call Representative nearest you.
1-800-676-4450 for the
Representative nearest
you.
MAIL . Complete and sign the . Make your check payable to "Money
application. Make your Market Fund," "Tax-Free Money
check payable to Market Fund," "Short-Term Bond
"Money Market Fund," Fund," "U.S. Government Income
"Tax-Free Money Market Fund," "Municipal Bond Fund,"
Fund," "Short-Term "California Tax-Free Fund," "Bond
Bond Fund," "U.S. Fund," "Growth & Income Fund," or
Government Income "Growth Fund." Indicate your Fund
Fund," "Municipal Bond account number on your check.
Fund," "California
Tax-Free Fund," "Bond
Fund," "Growth &
Income Fund," or
"Growth Fund."
Mail to: Mail to (checks only):
P.O. Box 419245 P.O. Box 419647
Kansas City, Missouri Kansas City, Missouri 64141
64141
. Exchange by mail:
call 1-800-676-4450 for instructions.
PHONE . Exchange from another . Exchange from another Fund account
1-800-676-4450 Fund account with the with the same registration (identical
same registration name(s), address, and taxpayer ID
(identical name(s), number).
address, and taxpayer
ID number).
WIRE . Call 1-800-676-4450 to
set up your account
and to arrange a wire
transaction. Not
available for certain
retirement accounts.
. Wire within 24 hours . Wire to: Investors Fiduciary Trust Co.
to: Routing #101 0036 21
Investors Fiduciary Account #752-7144
Trust Co. Specify Fund and include your
Routing #101 0036 21 account number and your name.
Account #752-7144
Specify Fund and
include your new
account number and
your name.
AUTOMATIC . Automatic investments on a regular
INVESTMENT PLANS basis: Call 1-800-676-4450.
- -------------------------------------------------------------------------------------
</TABLE>
HOW TO REDEEM SHARES
You can take money out of your Fund account at any time by redeeming some or
all of your shares. Your shares will be redeemed at the next share price calcu-
lated after your
40
<PAGE>

order is received and accepted by a Fund. Except for any applicable contingent
deferred sales charge ("CDSC"), The Griffin Funds impose no charge for redeem-
ing shares.
To redeem shares in a non-retirement account, you may use any of the methods
described in this section.
To redeem shares in a retirement account, your request must be made in writ-
ing, except for exchanges to other Griffin Funds, which can be requested by
phone or in writing. Call 1-800-676-4450 for a retirement distribution form.
If you are redeeming some but not all of your shares, you must leave an ag-
gregate of at least $1,000 worth of shares in your Griffin Funds account(s) to
keep your account(s) open ($250 for retirement accounts).
To redeem shares by wire, you will need to provide advance authorization.
You may redeem shares of the Money Market Funds through the Money Market
Funds' checkwriting service. There is no charge for this service and you may
write an unlimited number of checks. The minimum check amount is $500. You may
not use the checkwriting service if you have set up a systematic withdrawal
plan. In addition, you should not write a check for the entire value of your
account or close your account by writing a check.
Certain redemption requests must include a signature guarantee. A signature
guarantee is designed for your protection. Your request must be made in writing
and must include a signature guarantee in any of the following situations:
.You wish to redeem more than $100,000 worth of shares,
. Your account registration has changed within the last 60 days,
. The check is not being mailed to the address on your account (record
address),
. The check is not being made payable to the account holder, or
. The redemption proceeds are being transferred to a Griffin Fund account
registered in a different name.
You can obtain a signature guarantee from a bank, broker (including WM Dis-
tributors offices), dealer, credit union (if authorized under state law), secu-
rities exchange or association, clearing agency, or savings association. A
notary public cannot provide a signature guarantee.
The Griffin Funds, WM Distributors and the transfer agent are not liable for
damages resulting from following instructions communicated by telephone that
they reasonably believe to be genuine. The Griffin Funds will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
If The Griffin Funds fails to do so, it may be liable for any losses due to un-
authorized or fraudulent instructions. The following procedures may be used to
process telephone redemptions: (i) your Social Security number is requested;
(ii) the dollar amount of the transaction is confirmed by reading it back to
you; (iii) the address of record or predesignated account number for the dis-
tribution is confirmed; and (iv) you are given a control number so that the
transaction can be traced should you have any questions.
41
<PAGE>

Certain purchase, redemption and exchange features (e.g., checkwriting (if
applicable), automatic investment, systematic withdrawal, etc.) generally
available to shareholders of the Money Market Fund and the Tax-Free Money Mar-
ket Fund may not be available to an investor who purchases shares of such Funds
through a sweep or other cash management program offered by various entities,
including WM Distributors and its affiliates.

REDEEMING SHARES IN WRITING

Write a "letter of instruction" with:
. Your name,
. The Fund's name,
. Your Fund account number,
. The dollar amount or number of shares to be redeemed, and
. Any other applicable requirements listed in the following table.
Unless otherwise instructed, The Griffin Funds will send a check to the record
address. Mail your instructions to:
The Griffin Funds, Inc.
P.O. Box 419245
Kansas City, Missouri 64141
42
<PAGE>

- --------------------------------------------------------------------------------
Redeeming Shares
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
Method Account Type Special Requirements
<C> <S> <C>
PHONE All account types except . Maximum check request: $100,000
1-800-676-4450 certain retirement
accounts
. You may exchange to other Funds if
both accounts are registered with the
same name(s), address, and taxpayer
ID number.
MAIL OR IN PERSON Individual, Joint . The letter of instruction must be signed
Tenants, by all persons required to authorize
Sole Proprietorships, transactions, exactly as their names
UGMA, UTMA appear on the account.
Retirement accounts . The account owner should complete a
retirement distribution form. Call
1-800-676-4450 to request one.
Trust . The trustee must sign the letter in this
capacity. If the trustee is not named in
the account registration, provide a copy
of the trust document certified within
the last 60 days.
Business or Organization . At least one person authorized (by
corporate resolution or other action) to
act on behalf of the account must sign
the letter.
. Include a corporate resolution with
corporate seal or a signature guarantee.
Executor, Administrator, . Call 1-800-676-4450 for instructions.
Conservator, Guardian
WIRE All account types except . You must authorize in writing the wire
certain retirement feature before using it. To verify that
accounts the authorization is in place, call
1-800-676-4450. Minimum wire: $5,000.
. Your wire redemption must be received
by The Griffin Funds before 4 p.m.
Eastern time for money to be wired
on the next business day.
CHECKWRITING All account types except .Call 1-800-676-4450 to apply for checkwriting.
(MONEY MARKET retirement .Minimum check amount: $500.
FUNDS ONLY)
- ---------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>

SHAREHOLDER SERVICES
The Griffin Funds provide the following services to help you with your ac-
count:

INFORMATION SERVICES
You may visit a WM Distributors Representative for information or assistance
or you can call a 24-hour toll-free telephone number for automated account bal-
ance information.
Statements and reports that you will receive include the following:
.Confirmation statements (generally after every transaction, except a
reinvestment, that affects your account balance or your account
registration)
.Account statements (quarterly)
.Fund reports (every six months)
To reduce expenses, only one copy of most Fund reports will be mailed to you,
even if you have more than one Fund account. Call 1-800-676-4450 if you need
additional copies of any Fund reports or historical account information.

TRANSACTION SERVICES
EXCHANGE PRIVILEGES allow you to redeem your shares in any of the Funds and
buy shares of any other Fund by telephone or written exchange. Class A Shares
of a Non-Money Market Fund may be exchanged for Class A Shares of another Non-
Money Market Fund or for shares of the Money Market Fund or the Tax-Free Money
Market Fund in an identically registered account at respective NAVs, provided
that, if the other Fund charges a sales load on the purchase of the class of
shares being acquired that is higher than the sales load that you have paid in
connection with the shares you are exchanging, you pay the difference.
Class B Shares of a Non-Money Market Fund may be exchanged for Class B Shares
of another Non-Money Market Fund or for shares of the Money Market Fund or the
Tax-Free Money Market Fund in an identically registered account at respective
NAVs. The CDSC will not be imposed with respect to exchanges of Class B Shares
for shares of another Fund but will be imposed, subject to applicable time pe-
riods, upon a subsequent redemption. When a shareholder exchanges Class B
Shares of a Non-Money Market Fund for shares of the same class of another Non-
Money Market Fund or for shares of the Money Market Fund or the Tax-Free Money
Market Fund, the remaining period of time (if any) that the CDSC is in effect
will be computed from the time of the initial purchase of the previously-held
shares. Accordingly, if a shareholder exchanges Class B Shares of a Non-Money
Market Fund for shares of the Money Market Fund or the Tax-Free Money Market
Fund, and redeems the shares of the Money Market Fund or the Tax-Free Money
Market Fund within six years (or four years with respect to the Short-Term Bond
Fund) of the receipt of the purchase order for the exchanged Class B Shares,
the shareholder will have to pay a deferred sales charge equal to the CDSC ap-
plicable to the previously exchanged Class B Shares. A shareholder who ex-
changes Class B Shares of a Non-Money Market
44
<PAGE>

Fund for shares of the Money Market Fund or the Tax-Free Money Market Fund sub-
sequently may re-exchange the acquired shares of the Money Market Fund or the
Tax-Free Money Market Fund only for Class B Shares of a Non-Money Market Fund.
If the shareholder re-exchanges the shares of the Money Market Fund or the Tax-
Free Money Market Fund for Class B Shares of such a Non-Money Market Fund, the
remaining period of time (if any) that the CDSC is in effect will be computed
from the shareholder's initial purchase of Class B Shares.
Shares of the Fund to be acquired must be registered for sale in the share-
holder's state of residence. Investors should obtain and read the Prospectus
for the Fund into which they desire to exchange before submitting an exchange
order. Please remember that exchanges between Funds are limited to four per
calendar year, and that exchanges may have tax consequences for you. For com-
plete policies and restrictions governing exchanges, including circumstances
under which a shareholder's exchange privilege may be suspended or revoked, see
"Fund Account Policies--Transaction Policies."

AUTOMATIC INVESTMENT plans can help you in pursuing your financial goals by
providing a convenient way to invest money regularly. The Griffin Funds lets
you transfer money into your Fund account automatically on a monthly or quar-
terly basis. Transfers will occur on or about the 5th or 20th day of the appli-
cable month. The minimum monthly automatic investment amount is $50. Certain
restrictions apply for retirement accounts. Call 1-800-676-4450 for more infor-
mation.

SYSTEMATIC WITHDRAWAL plans let you set up monthly, quarterly, semi-annual or
annual redemptions from your account. The minimum eligible account size for
this service is $10,000 and the minimum withdrawal amount is $50. Fund shares
will be redeemed as necessary to meet withdrawal payments. Remember that with-
drawals may result in a gain or loss for tax purposes, may involve the use of
principal and may deplete all of the shares in your account.

45
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Regular Investment Plans
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENTS
To transfer money from your bank or depository institution account to a Fund

Minimum
Frequency Opening or changing an Account
- --------------------------------------------------------------------------------

$50 Monthly or quarterly . For a new account, complete the
appropriate section on the Fund
application.

. For existing accounts, contact your
Griffin Representative or call 1-
800-676-4450 for an application.

. To change the amount or frequency
of your investment, visit a WM
Distributors office or call 1-800-
676-4450 at least ten business days
prior to your next scheduled
investment date.
- --------------------------------------------------------------------------------
DIRECT DEPOSIT
To send all or a portion of your paycheck or Social Security check to a Fund

Minimum
Frequency Opening or changing an Account
- --------------------------------------------------------------------------------

$50 Every pay period . Check the appropriate box on the
fund application, visit a WM
Distributors office or call 1-800-
676-4450 for an authorization form.

. Changes require a new authorization
form.
- --------------------------------------------------------------------------------
GRIFFIN AUTOMATIC EXCHANGES
To exchange shares of one Fund for shares of another Fund

Minimum
Frequency Setting up or changing
- --------------------------------------------------------------------------------

$50 Monthly, quarterly or . Check the appropriate box on the
annually Fund application, visit a WM
Distributors office or call 1-800-
676-4450 for an authorization form.

. To change the amount or frequency
of your investment, visit a WM
Distributors office or call 1-800-
676-4450

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Systematic Withdrawal Plans
- --------------------------------------------------------------------------------
AUTOMATIC REDEMPTIONS
To redeem shares on a regular basis

Minimum
Frequency Setting up or changing
- --------------------------------------------------------------------------------

$50 Monthly, quarterly, . For a new account, complete the
semiannually or appropriate section on the Fund
annually application.

. For existing accounts, contact your
Griffin Representative or call 1-
800-676-4450 to request the
appropriate form.
46
<PAGE>

DIVIDENDS, CAPITAL GAINS AND TAXES
Income dividends are accrued daily and paid monthly on all of the Funds ex-
cept the Growth & Income Fund and the Growth Fund. Income dividends are de-
clared and paid quarterly on the Growth & Income Fund and annually on the
Growth Fund. Capital gains, if any, are declared and paid annually on all
Funds.

DISTRIBUTION OPTIONS
When you open an account, specify on your application how you want to re-
ceive your distributions. Each Fund offers four options:
1. REINVESTMENT OPTION. Dividend and capital gain distributions will be
automatically reinvested in additional Fund shares of the same class. If
you do not indicate a choice on your application, it will be assumed that
you have chosen this option.
2. EARNED-INCOME OPTION. Capital gain distributions will be automatically re-
invested in shares of the same class, but you will be sent a check for
each dividend distribution.
3. CASH OPTION. A check for each dividend and capital gain distribution will
be sent to you.
4. DESIGNATED DISTRIBUTION OPTION. Dividend and capital gain distributions
will be automatically invested in shares of the same class of another
Griffin Fund owned through an identically registered account. Visit a WM
Distributors office or call 1-800-676-4450 for more information.

TAXES
Each of the Funds intends to qualify as a separate "regulated investment
company" under the Code. Such qualification relieves a Fund of liability for
federal income tax to the extent its net investment income and capital gains
are distributed annually in accordance with the Code. Each of the Funds in-
tends to annually distribute substantially all of its net investment income
and capital gains.
Distributions from net investment income, and net short-term capital gains,
if any, of the Money Market Fund, Short-Term Bond Fund, U.S. Government Income
Fund, Bond Fund, Growth & Income Fund, and Growth Fund, are designated as div-
idend distributions and are taxable to the Fund's shareholders as ordinary in-
come.
Dividends distributed from the Tax-Free Money Market Fund's, Municipal Bond
Fund's and the California Tax-Free Fund's net interest income from tax-exempt
securities will not be subject to federal income taxes. Dividends from the
California Tax-Free Fund will also be exempt from California personal income
tax to the extent such dividends are attributable to instruments that pay in-
terest which would be exempt from California personal income taxes, if such
instruments were held directly by an individual. Dividends attributable to the
Tax-Free Money Market Fund's, Municipal Bond Fund's and the California Tax-
Free Fund's interest income from taxable securities and short-term capital
gain distributions will be taxable as ordinary income.
Distributions from a Fund's net long-term capital gains, if any, are desig-
nated as capital gains distributions. Noncorporate shareholders may be taxed
on all or a portion of their capital gain distributions at preferential rates.
47
<PAGE>

Dividend and capital gain distributions will be taxable when paid, whether
distributions are taken in cash or are automatically reinvested in additional
Fund shares. However, taxable dividends, if declared in October, November, and
December and distributed in the following January, will be treated as if they
were paid by December 31.
As long as the Money Market Funds continually maintain a $1.00 share price,
shareholders of these Funds ordinarily will not recognize taxable gain or loss
on the redemption or exchange of their Fund shares. Redemptions (including re-
demptions in-kind) and exchanges of other Fund shares generally will result in
a taxable capital gain or loss (subject to certain limitations on losses), de-
pending on the amount received for the shares (or are deemed to receive in the
case of exchanges) and the amount paid (or are deemed to have paid) for the
shares.
Foreign shareholders may be subject to different tax treatment, including
withholding taxes. In certain circumstances, U.S. resident individuals may also
be subject to backup withholding taxes. See "Distributions and Taxes" in the
SAI.
The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the impor-
tant federal tax considerations generally affecting the Funds and their share-
holders. It is not intended as a substitute for careful tax planning. All in-
vestors should consult their own tax advisers with respect to their particular
tax situations, as well as with respect to foreign, state and local taxes. Ad-
ditional tax considerations are discussed in the SAI.

Fund Account Policies
TRANSACTION POLICIES
A single net asset value ("NAV") for each of the Money Market Funds and an
NAV per share for each class of the Non-Money Market Funds is determined each
day that the NYSE is open for trading. Each Money Market Fund's NAV is the
value of a single share. The NAV for each Money Market Fund is computed by add-
ing up the value of the Fund's investments, cash and other assets, subtracting
its liabilities, and then dividing the result by the number of shares outstand-
ing. The NAV per class of each of the Non-Money Market Funds is determined by
adding up the value of the investments, cash and other assets attributable to
the class, subtracting all liabilities of such class and dividing the result by
the total number of shares outstanding of such class.
Each Money Market Fund's portfolio investments are valued on the basis of am-
ortized cost. The value of assets of each Money Market Fund is determined as of
12:00 noon, Eastern time, on each day the NYSE is open, immediately after the
daily declaration of dividends. Each Money Market Fund's offering price (per
share) and redemption price of a share are the Fund's NAV.
The value of assets of each Non-Money Market Fund is determined as of the
close of regular trading on the NYSE, which is currently 4:00 p.m., Eastern
time. Except for debt obligations with remaining maturities of 60 days or less,
which are valued at amortized
48
<PAGE>

cost (unless the Board of Directors determines amortized cost does not reflect
the securities' fair value), assets are valued at current market prices, or if
such prices are not readily available, at fair value as determined in good
faith by or under the supervision of the Board of Directors. Prices used for
such valuations may be provided by independent pricing services.
On your account application, you will be asked to certify that your Social
Security or Taxpayer Identification Number is correct and that you are not
subject to backup withholding by the IRS. If these certifications are not
made, the IRS can require The Griffin Funds to withhold 31% of your taxable
distributions and redemptions. A failure to provide a correct Taxpayer Identi-
fication Number to The Griffin Funds may also result in the imposition of IRS
penalties against you.
Each Fund reserves the right to suspend the offering of its shares for a pe-
riod of time. The Funds also reserve the right to reject any specific purchase
order, including certain purchases by exchange. See "Shareholder Services--Ex-
change Privileges." For example, a purchase order may be rejected if, in The
Griffin Funds' opinion, such order is of a size that would disrupt management
of a Fund.
Orders to buy shares will be processed at the next NAV calculated after your
order and good funds are received and accepted by a Fund. Note that:
. All of your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks.
. The Funds do not accept cash.
. When making a purchase with more than one check, each check must have a
value of at least $50.
. Each Fund reserves the right to limit the number of checks processed at
one time.
. If your check does not clear, or if payment is not received for any tele-
phone purchase, your purchase will be cancelled and you could be liable
for any losses or fees that a Fund or its transfer agent has incurred.
The Funds will in most cases issue share certificates upon request.
You can avoid the collection period associated with check purchases by pur-
chasing shares by bank wire, U.S. Postal money order, U.S. Treasury check,
Federal Reserve check or Direct Deposit.
When you place an order to redeem shares, your shares will be redeemed at
the next NAV calculated after your request is received and accepted, net of
any applicable CDSC. Please note the following:
. Normally, redemption proceeds will be mailed to you on the next business
day, although the Funds may take up to seven days to pay you.
. If you purchase shares by check, and then seek to redeem those shares by
any method other than through an exchange to another Griffin Fund, the re-
demption proceeds will be mailed upon clearance of your purchase check,
which may take up to fifteen days.
. Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed, when trading on the NYSE is restricted, or as authorized
by the SEC.
49
<PAGE>

If your Griffin Fund total account balance falls below $1,000 ($250 for re-
tirement accounts) as a result of redeeming shares, and The Griffin Funds
elects to close your account, you will be given 30 days' notice to reestablish
the minimum balance. If you do not increase your balance to the minimum account
size, The Griffin Funds may close your account and send the proceeds to you.
Your shares will be redeemed at the NAV on the day your account is closed.
As a shareholder, you have the option of exchanging shares of the Funds for
shares of other Griffin Funds, subject to the following:
. The Fund you are exchanging into must be registered for sale in your state
of residence.
. You may only exchange between Funds with accounts that are identically reg-
istered (i.e., with the same name(s), address and Taxpayer Identification
Number).
. If you exchange into a Fund with a sales charge, you pay the percentage
point difference between the Fund's sales charge and any sales charge you
have previously paid in connection with the shares you are exchanging. For
example, if you paid no sales charge on your shares and you exchange them
into a Fund with a 4.50% sales charge, you would pay a 4.50% sales charge.
. If you exchange shares of a Money Market Fund into Class B Shares of a Non-
Money Market Fund that imposes a contingent deferred sales charge ("CDSC"),
you will be subject to the CDSC applicable to such shares upon redemption
of the Class B Shares acquired through the exchange. In addition, if you
acquire Class B Shares of a Non-Money Market Fund through such an exchange,
the remaining period of time that the CDSC applicable to the acquired Class
B Shares remains in effect will be computed from the time of acquisition of
the shares exchanged.
. Exchanges may have tax consequences.
. Because excessive trading can adversely affect fund performance and share-
holders, the Funds reserve the right to temporarily or permanently termi-
nate the exchange privilege of any investor who makes more than four ex-
changes between Griffin Funds per calendar year. Accounts under common own-
ership or control, including accounts with the same Taxpayer Identification
Number, will be counted together for purposes of the four exchange limit.
. Each Fund also reserves the right to refuse exchange purchases by any per-
son or group if, in the Adviser's judgment, the receiving Fund would be un-
able to invest the money effectively in accordance with its investment ob-
jective and policies, or would otherwise potentially be adversely affected.
Although The Griffin Funds will attempt to give you prior notice whenever it
is reasonably able to do so, these restrictions may be imposed at any time. The
Funds reserve the right to terminate or modify the exchange privilege in the
future, upon 60 days' written notice to shareholders. Before exchanging into a
Fund you should read its prospectus.
50
<PAGE>

SALES LOAD REDUCTIONS AND WAIVERS
SALES LOAD--CLASS A SHARES
Sales loads relating to the purchase of Class A Shares in each of the Non-
Money Market Funds are as follows:

- --------------------------------------------------------------------------------
Class a Shares of all Non-Money Market Funds Except the Short-Term Bond Fund
<TABLE>
- ----------------------------------------------------------
<CAPTION>
Sales Agent
Sales Load Sales Load Allowance
as % of as % of as % of
Offering Net Amount Offering
Amount of Purchase Price Invested Price*
- ----------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
$50,000 up to $99,999 4.00% 4.17% 3.50%
$100,000 up to $249,999 3.50% 3.63% 3.00%
$250,000 up to $499,999 2.50% 2.56% 2.25%
$500,000 up to $999,999 2.00% 2.04% 1.75%
$1,000,000 and over 0.00%** 0.00%** 0.00%
- ----------------------------------------------------------
- ----------------------------------------------------------
Class a Shares of the Short-Term Bond Fund
- ----------------------------------------------------------
<CAPTION>
Sales Agent
Sales Load Sales Load Allowance
as % of as % of as % of
Offering Net Amount Offering
Amount of Purchase Price Invested Price*
- ----------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.00%
$50,000 up to $99,999 3.00% 3.09% 2.50%
$100,000 up to $249,999 2.50% 2.56% 2.00%
$250,000 up to $499,999 2.00% 2.04% 1.50%
$500,000 up to $999,999 1.50% 1.52% 1.00%
$1,000,000 and over 0.00%** 0.00%** 0.00%
- ----------------------------------------------------------
</TABLE>
*WM Distributors, as distributor, reallows the percentage amounts indicated to
selling agents ("Reallowance Amounts") that WM Distributors may from time to
time retain. In cases where Non-Money Market Fund shares are sold directly
through WM Distributors, WM Distributors may compensate its sales representa-
tives based on such Reallowance Amounts.
**A CDSC of 1.00% of the lesser of the NAV at purchase or NAV at redemption is
imposed on redemptions requested within one year of purchase.

Class B Shares are not subject to a front-end sales load. However, Class B
Shares are subject to a CDSC when redeemed within six years (or four years with
respect to the Short-Term Bond Fund) from the receipt of a purchase order. For
further information, see "Contingent Deferred Sales Charge--Class B Shares."

REDUCED SALES LOAD--CLASS A SHARES
Volume Discounts are also available to you based on the combined dollar
amount you invest in Class A Shares of any of the Non-Money Market Funds.
The Right of Accumulation allows you to combine the amount being invested in
Class A Shares of a Non-Money Market Fund with the aggregate NAV of the Class A
Shares you own in any of the other Non-Money Market Funds to determine reduced
sales loads in
51
<PAGE>

accordance with the above sales load schedule. To obtain such discount, you
must provide sufficient information at the time of purchase to permit verifica-
tion that the purchase qualifies for the reduced sales load, and confirmation
of the purchase is subject to such verification. The Right of Accumulation may
be modified or discontinued at any time with respect to all Class A Shares pur-
chased thereafter.
A Statement of Intention allows you to purchase Class A Shares of the Non-
Money Market Funds over a 13-month period at reduced sales loads based on the
total amount you intend to purchase plus the aggregate NAV of Class A Shares in
any of the Griffin Funds you already own. Each investment you make during the
period receives the reduced sales load applicable to the total amount of the
intended investment. If such amount is not invested within the period, you must
pay the difference between the sales loads applicable to the purchases made and
the charges previously paid.
The Reinvestment Privilege allows you to reinvest proceeds from a redemption
of Class A Shares of a Non-Money Market Fund in Class A Shares of such Fund or
in Class A Shares of another Non-Money Market Fund, without a sales load,
within 90 days after the redemption. The Class A Shares of the Non-Money Market
Fund to be acquired must be registered for sale in your state of residence. The
amount that may be so reinvested may not exceed the amount of the redemption
proceeds, and a written order for the purchase of the Class A Shares must be
received by the Non-Money Market Fund or IFTC within 90 days after the effec-
tive date of the redemption.
If you realize a gain on the redemption, the reinvestment will not affect the
amount of any federal capital gains tax payable on the gain. If you realize a
loss on the redemption, the reinvestment may cause some or all of the loss to
be disallowed as a tax deduction, depending on the number of Class A Shares
purchased by reinvestment and the period of time that has elapsed after the re-
demption, although for tax purposes, the amount disallowed is added to the cost
of the Class A Shares acquired upon the reinvestment.
Reductions in sales loads apply to purchases by a single "person," including
an individual, members of a family unit, consisting of a husband, wife and
children under the age of 21 purchasing securities for their own account, or a
trustee or other fiduciary purchasing for a single fiduciary account or single
trust estate.
General. Reductions in sales loads also apply to purchases by individual mem-
bers of a "qualified group." The reductions are based on the aggregate dollar
amount of Class A Shares purchased by all members of the qualified group. For
purposes of this paragraph, a qualified group consists of a "company," as de-
fined in the Investment Company Act of 1940, which has been in existence for
more than six months and which has a primary purpose other than acquiring
shares of the Non-Money Market Funds at a reduced sales load, and the "related
parties" of such company. For purposes of this paragraph, a "related party" of
a company is: (i) any individual or other company who directly or indirectly
owns, controls or has the power to vote five percent or more of the outstanding
voting securities of such company; (ii) any other company of which such company
directly or indirectly owns, controls or has the power to vote five percent of
more of its outstand-
52
<PAGE>

ing voting securities; (iii) any other company under common control with such
company; (iv) any executive officer, director or partner of such company or of
a related party; and (v) any partnership of which such company is a partner.
The Griffin Funds also may sell Class A Shares of the Non-Money Market Funds
at a purchase price equal to the NAV of such shares, without a sales load, to
present and retired directors, officers and employees (and their spouses and
children under the age of 21) of H.F. Ahmanson & Company and its affiliates.
Such sales also may be made to employee pension, profit sharing, or stock bonus
plans qualified under Section 401(a) of the Code, governmental plans within the
meaning of Section 414(d) of the Code, simplified employee pensions within the
meaning of Section 408(k) of the Code and to any investment advisory, trust or
other fiduciary account (other than an individual retirement account) provided
that such plan, pension or account is sponsored, serviced, administered, main-
tained, managed or advised by H.F. Ahmanson & Company or its affiliates. In ad-
dition, Class A Shares may be purchased without a sales charge to the extent
such a purchase is made with the entire proceeds from the redemption of shares
of a non-affiliated mutual fund on which the investor paid either an initial
sales charge or a CDSC. However, any such purchase must be made within 60 days
from the date of the prior redemption and The Griffin Funds must receive a copy
of the confirmation of the redemption transaction. Class A Shares also may be
purchased without a sales charge by participant-directed employee benefit plans
with at least 25 eligible employees.
To qualify for a reduced sales charge, an investor must notify The Griffin
Funds that the purchase being made qualifies for a reduced sales charge at the
time of purchase.

CONTINGENT DEFERRED SALES CHARGE
CLASS A SHARES
A CDSC of 1.00% of the lesser of the NAV at time of purchase or NAV at time
of redemption is imposed on redemptions of Class A Shares of the Non-Money Mar-
ket Funds occurring within one year of purchases totalling $1,000,000 or more
(where an initial sales charge was not paid).

CLASS B SHARES
Class B Shares of the U.S. Government Income, Municipal Bond, California Tax-
Free, Bond, Growth & Income and Growth Funds which are redeemed within one,
two, three, four, five or six years of the date of receipt of a purchase order
will be subject to a CDSC equal to 5%, 4%, 3%, 3%, 2% or 1%, respectively, of
an amount equal to the lesser of the NAV at the time of purchase for the Class
B Shares being redeemed or the NAV of such shares at the time of redemption.
Class B Shares of the Short-Term Bond Fund which are redeemed within one, two,
three or four years of the date of receipt of a purchase order will be subject
to a CDSC equal to 4%, 3%, 2% or 1%, respectively, of an amount equal to the
lesser of the NAV at the time of purchase for the Class B Shares being redeemed
or the
53
<PAGE>

NAV of such shares at the time of redemption. Accordingly, a CDSC will not be
imposed on amounts representing increases in NAV above the NAV at the time of
purchase. In addition, a charge will not be assessed on Class B Shares pur-
chased through reinvestment of dividends or capital gains distributions. In
determining whether a CDSC is applicable to a redemption, the calculation will
be made in the manner which results in the lowest possible charge being as-
sessed.
Waivers of the CDSC. The CDSC is waived on redemptions of Class B Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) to the extent that the redemption represents a minimum required distribu-
tion from an IRA or other retirement plan to a shareholder who has reached age
70 1/2, (iii) effected pursuant to The Griffin Funds' right to liquidate a
shareholder's account if the aggregate NAV of the shareholder's Griffin Fund
account is less than the minimum account size, (iv) in connection with the
combination of The Griffin Funds with any other registered investment company
by a merger, acquisition of assets or by any other transaction, or (v) to the
extent the redemption represents continuing, periodic withdrawals under the
Systematic Withdrawal Plan, up to an annual total of 12% of the value of a
shareholder's Class B Share account in a Fund. The CDSC also is waived on re-
demptions of Class B Shares where the entire proceeds of such redemptions are
invested, through a Portfolio Builder Account, in shares of a Griffin Money
Market Fund, Class A Shares of a Non-Money Market Fund or any other Fund
available through a Portfolio Builder Account.
Conversion Feature. Class B Shares which have been outstanding for six years
will automatically convert to Class A Shares on the first day after the six
year anniversary of the issuance of the shares and, consequently, will no
longer be subject to the distribution and service fees applicable to Class B
Shares. Such conversion will be on the basis of the relative NAVs of the two
classes, without the imposition of any sales charge or other charge except
that the 12b-1 fee applicable to the Class A Shares shall thereafter be ap-
plied to such converted shares. Any Class B Shares acquired through the rein-
vestment of dividends and distributions will convert on a pro rata basis with
the Class B Shares purchased directly by a shareholder. If a shareholder ex-
changes Class B Shares of a Non-Money Market Fund for Class B Shares of an-
other Non-Money Market Fund during the six-year period, the holding period for
shares so exchanged will be counted toward the holding period for the shares
acquired, and such acquired shares will be subject to the CDSC schedule appli-
cable to the shares originally purchased.
Reinstatement Privilege. A shareholder of a Non-Money Market Fund who re-
deems Class B shares and pays a CDSC may, within 90 days of the date of such
redemption, request that such prior investment in Class B Shares, or a portion
thereof, be reinstated in Class B Shares of the same or another Non-Money Mar-
ket Fund at the NAV next determined after the reinstatement request is re-
ceived by IFTC. A shareholder exercising this privilege will receive pro rata
credit for any CDSC paid in connection with the previous redemption. A rein-
statement of prior investment will be treated as a new investment for purposes
of determining the amount of any CDSC applicable to a subsequent redemption.
54
<PAGE>

A shareholder may not exercise this privilege with the proceeds of a redemp-
tion of shares previously purchased through the reinstatement privilege. The
reinstatement privilege may be terminated or modified at any time.
Other Information. If you are seeking to invest $1,000,000 or more in the
Funds you should not purchase Class B Shares as no sales load (other than any
applicable CDSC) is charged on such an investment in Class A Shares. Other in-
vestors should compare the fees assessed on Class A Shares against those as-
sessed on Class B Shares in light of the amount to be invested and the antici-
pated time that the shares will be owned.

The Funds in Detail
STRUCTURE
The Griffin Funds was organized as a Maryland corporation on August 5, 1993.
Each Money Market Fund is comprised of only one class of shares. Each Non-
Money Market Fund is comprised of two classes of shares--Class A Shares and
Class B Shares. The classes have identical rights with respect to the portfo-
lio of which they are a part, but certain matters affect each class different-
ly. Currently, the only such matters are the differing sales loads, distribu-
tion and servicing fees, exchange privileges and conversion rights described
in this Prospectus.
The Griffin Funds is governed by a Board of Directors, which has overall re-
sponsibility for the management of the Funds and is responsible for protecting
the interests of shareholders. The directors meet periodically throughout the
year to oversee each Fund's activities and review arrangements with the compa-
nies that provide major services to the Funds and the performance of the
Funds.
The Funds typically will not hold annual shareholders meetings, although
special meetings may be called from time to time. These meetings may be called
to elect or remove directors, change fundamental policies, approve management
contracts or for other purposes. Shareholders not attending these meetings are
encouraged to vote by proxy. Proxy materials, including a voting card and in-
formation about the proposals to be voted on, will be mailed in advance of a
meeting. Shareholders are entitled to one vote for each share owned. The Grif-
fin Funds will hold special meetings of 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 its outstanding voting securities, and will
assist shareholders in communicating with other shareholders.
H.M Ahmanson & Company, the parent company of The Griffin Funds, Inc. has
signed an agreement to merge with Washington Mutual, Inc. The merger is ex-
pected to close in the first quarter of 1999. The proposed merger, subject to
certain regulatory approvals, must be approved by shareholders of both holding
companies. The quality of advisory and other services provided to the Funds
will not be adversely impacted by this merger.

SERVICE PROVIDERS
GRIFFIN ADVISERS serves the Funds as investment adviser pursuant to an advi-
sory contract. Payden & Rygel acts as sub-adviser to the Money Market Fund,
the Tax-Free Money
55
<PAGE>

Market Fund, the U.S. Government Income Fund, the Municipal Bond Fund and the
California Tax-Free Fund. Payden & Rygel, which had approximately $27 billion
in assets under management as of September 30, 1998, is the sub-adviser to a
fixed income global mutual fund unaffiliated with The Griffin Funds, as well as
to a series of group trusts, and several pooled accounts for a wide variety of
clients. T. Rowe Price acts as sub-adviser to the Short-Term Bond Fund and the
Growth Fund. T. Rowe Price had approximately $132 billion in assets under man-
agement as of September 30, 1998. TBCAM, an indirect wholly owned subsidiary of
Mellon Bank Corporation, acts as sub-adviser to the Bond Fund and the Growth &
Income Fund. TBCAM, which had approximately $22.1 billion in assets under man-
agement as of September 30, 1998, provides equity, fixed income and cash man-
agement services to investment companies and other investment accounts. The
Funds' sub-advisers have primary responsibility for choosing investments for
the Funds and periodic reports on the investment strategy and performance of
the Funds.
PAYDEN & RYGEL is primarily responsible for the portfolio management 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. All investment
decisions for such Funds are made by an investment committee and no person(s)
is primarily responsible for making recommendations to that committee. The com-
mittee consists of five investment professionals who primarily use a fundamen-
tal approach supported by extensive quantitative analysis.
T. ROWE PRICE is primarily responsible for the portfolio management of the
Growth Fund and the Short-Term Bond Fund. The Growth Fund is managed by an In-
vestment Advisory Committee composed of the following members: Richard T.
Whitney, Chairman, Donald J. Peters and K.D. Farrow. As Committee Chairman, Mr.
Whitney has primary responsibility for managing the portfolio and works with
the Committee on developing and executing the Growth Fund's investment program.
Mr. Whitney has been the Chairman of the Growth Fund's Investment Advisory Com-
mittee since March 1996. Mr. Whitney has held the position of Managing Director
of T. Rowe Price since October 1995. From April 1988 to October 1995, Mr.
Whitney was a Vice President of T. Rowe Price.
The portfolio manager for the Short-Term Bond Fund is Edmund M. Notzon, III.
Mr. Notzon has served as the portfolio manager for the Short-Term Bond Fund
since the Fund's inception. Mr. Notzon is a vice president of T. Rowe Price and
a senior portfolio manager in T. Rowe Price's Taxable Bond Department, and
serves as a portfolio manager of several separately managed fixed income and
asset allocation portfolios. Prior to joining T. Rowe Price in 1989, Mr. Notzon
was a charter member of the U.S. Senior Executive Service and the Director of
the Analysis and Evaluation Division of the Office of Water Regulation and
Standards of the U.S. Environmental Protection Agency. Mr. Notzon has earned a
B.S. in mathematics from the Massachusetts Institute of Technology and an M.S.
in statistics and Ph.D. in operations research from Stanford University. Mr.
Notzon also has completed Harvard University's Program for Senior Managers in
Government and has achieved the Chartered Financial Analyst designation.
56
<PAGE>

TBCAM is primarily responsible for the portfolio management of the Bond Fund
and the Growth & Income Fund. The Bond Fund is co-managed by Matthew N. Fon-
taine and Arthur J. MacBride III. Mr. Fontaine has served as a portfolio man-
ager of the Bond Fund since March, 1995. Mr. Fontaine is a Vice President of
TBCAM with eleven years of investment experience and serves on the Fixed Income
Strategy Committee. Prior to joining TBCAM in 1994, Mr. Fontaine was Assistant
Vice President of Fixed Income Securities at Massachusetts Financial Services.
Mr. Fontaine graduated from Hobart William Smith with a B.A. in History and
also holds an M.B.A. from Boston College. He has earned the Chartered Financial
Analyst designation, and is a member of the Boston Security Analysts Society,
Inc. Mr. MacBride joined TBCAM in 1988 and currently serves as a fixed income
portfolio manager, the Director of Fixed Income and the Chairman of the Fixed
Income Strategy Committee. Mr. MacBride is a graduate of Franklin & Marshall
College and holds an M.B.A. from Fordham University. He has served as a manager
of the Bond Fund since January 1996. The portfolio manager for the Growth & In-
come Fund is Quinn R. Stills. Mr. Stills has served as the portfolio manager of
the Growth & Income Fund since March, 1995. Mr. Stills is a Senior Vice Presi-
dent of TBCAM with eleven years of investment experience and serves on the Eq-
uity Policy Group. Prior to joining TBCAM in 1990, Mr. Stills worked as an ana-
lyst for Kidder, Peabody & Company. Previously he was an associate at Drexel
Burnham Lambert as well as a futures analyst at Goldman, Sachs & Company. Mr.
Stills graduated from Vassar with a B.A. and also holds a M.B.A. from Stanford
University. He is also a member of the Investment Committee of the Interna-
tional Foundation of Employee Benefits.
GRIFFIN ADMINISTRATORS is the Funds' administrator and provides administra-
tive and accounting services to the Funds.
IFTC is the Funds' custodian and transfer, shareholder service and dividend-
paying agent. IFTC is located at 801 Pennsylvania, Kansas City, Missouri 64105.
IFTC also provides certain sub-administrative services to the Funds.
WM DISTRIBUTORS, located at 601 West Main Avenue, Suite 300, Spokane, Wash-
ington 99201, distributes and markets the Funds.
Griffin Advisers and Griffin Administrators are wholly-owned subsidiaries of
Griffin Financial Services of America, which is a wholly-owned subsidiary of
H.F. Ahmanson & Company, a savings and loan holding company, and are affiliates
of Home Savings and Savings of America.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, EN-
DORSED OR GUARANTEED BY, HOME SAVINGS, SAVINGS OF AMERICA OR ANY OF THEIR AF-
FILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMEN-
TAL AGENCY.

SUMMARY OF FUND EXPENSES
Like all mutual funds, the Funds pay expenses related to their operations.
Expenses charged to a Fund and paid out of a Fund's assets are reflected in its
share price or dividends.
57
<PAGE>

Each Fund pays a management fee to Griffin Advisers for managing its assets.
The Funds also pay other expenses, which are described below, and in "Fund Ex-
penses."
Griffin Advisers or Griffin Administrators may, from time to time, voluntar-
ily agree to waive or reimburse the Funds for management fees and other ex-
penses. Waiver or reimbursement arrangements, which may be terminated at any
time without notice, can enhance a Fund's performance by decreasing its ex-
penses.

MANAGEMENT FEE
The management fee is calculated and paid to Griffin Advisers every month.
The fee for each of the Funds, except the Growth & Income Fund and the Growth
Fund, is calculated by multiplying a Fund's average daily net assets 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 as-
sets by 0.60% on an annualized basis. Griffin Advisers, in turn, pays Payden &
Rygel, T. Rowe Price and TBCAM for their respective sub-advisory services pro-
vided to the Funds. Payden & Rygel is paid an annual rate of 0.25% of the
first $25 million of each of the Money Market Funds' average daily net assets,
and 0.20% of each of the Money Market Funds' average daily net assets in ex-
cess of $25 million. Payden & Rygel is paid an annual rate of 0.30% of the
first $50 million of each of the U.S. Government Income, Municipal Bond and
California Tax-Free Funds' average daily net assets, 0.25% of each such Fund's
next $450 million and 0.20% of each such Fund's assets in excess of $500 mil-
lion with a minimum annual fee of $25,000 for each Fund. T. Rowe Price is paid
at the annual rate of 0.30% of the first $50 million of each of the Short-Term
Bond and Growth Funds' average daily net assets, 0.25% of each such Fund's
next $450 million and 0.20% of each such Fund's assets in excess of $500 mil-
lion with a minimum annual fee of $25,000 for each Fund. TBCAM is paid at the
annual rate of 0.30% of the first $50 million of each of the Bond and Growth &
Income Funds' average daily net assets, 0.25% of each such Fund's next $450
million and 0.20% of each such Fund's assets in excess of $500 million. For
the fiscal year ended September 30, 1998, after waivers, the Money Market
Fund, Growth & Income Fund Growth Fund Short-Term Bond Fund, U.S. Government
Income Fund, Bond Fund, and the California Tax-Free Fund paid management fees
to Griffin Advisers at the rate of 0.20%, 0.25%, 0.25%, 0.01%, 0.09%, 0.01%
and 0.01%, respectively, of their average daily net assets. For the same peri-
od, after waivers, the Tax-Free Money Market Fund and the Municipal Bond Fund
paid no management fees to Griffin Advisers.

DISTRIBUTION AND SERVICE FEES
WM Distributors is the distributor ("Distributor") of shares of the Funds.
The Griffin Funds has adopted Distribution and Services Plans on behalf of the
Money Market Fund, the Tax-Free Money Market Fund, and each Non-Money Market
Fund's Class A Shares and Distribution Plans on behalf of each Non-Money Mar-
ket Fund's Class B Shares under
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the SEC's Rule 12b-1 (the "Plans"). Under the Plans, the Distributor may re-
ceive compensatory payments and/or reimbursements to defray all or part of the
cost of preparing, printing and delivering prospectuses to prospective share-
holders of a Fund or for other distribution-related or sales support services.
Payments under a Plan may not exceed, on an annual basis, 0.20% of the average
daily net assets of each of the Money Market and Tax-Free Money Market Funds,
0.25% of the average daily net assets of the Class A Shares of a Non-Money
Market Fund and 0.75% of the average daily net assets of the Class B Shares of
a Non-Money Market Fund.
The fees paid under a Plan for the Money Market Fund, the Tax-Free Money
Market Fund and Class A Shares of each of the Non-Money Market Funds also can
be used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their invest-
ments. A separate service fee is imposed on Class B Shares of the Non-Money
Market Funds which may not exceed 0.25% of the average daily net assets of the
Class B Shares of a Non-Money Market Fund represented by Class B Shares owned
by investors with whom the servicing agent maintains a servicing relationship.

OTHER EXPENSES
The Funds incur the following expenses in addition to the management fee and
distribution and service fees.
The Funds contract with Griffin Administrators to provide various adminis-
trative and accounting services. These services include processing shareholder
transactions and calculating the Funds' share prices. The administrative fee
is determined and paid to Griffin Administrators every month. The fee is de-
termined by multiplying each Fund's average daily net assets by 0.20% on an
annualized basis. Griffin Administrators, in turn, pays IFTC for
subadministration services it provides to the Funds. For the fiscal year ended
September 30, 1998, after waivers, the Money Market Fund, the Tax-Free Money
Market Fund, the Short-Term Bond Fund, the U.S. Government Income Fund, the
California Tax-Free Fund, the Bond Fund, the Growth & Income Fund, Growth Fund
and the Municipal Bond Fund paid administration fees to Griffin Administrators
at the rate of 0.20%, 0.20%, 0.20%, 0.20%, 0.18%, 0.20%, 0.20%, 0.20% and
0.09%, respectively, of their average daily net assets.
In addition to the management fee and the other fees paid to Griffin Advis-
ers, WM Distributors and Griffin Administrators, the Funds pay other expenses,
such as legal, audit and custodian fees, proxy solicitation costs and the com-
pensation of directors who are not affiliated with Griffin Advisers, WM Dis-
tributors or Griffin Administrators.

PERFORMANCE
MONEY MARKET FUNDS
The Money Market Funds' performance may be advertised in terms of current
yield or effective yield. In addition, the Tax-Free Money Market Fund's per-
formance may be
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advertised in terms of tax-equivalent yield or effective tax-equivalent yield.
These performance figures are based on historical results calculated under uni-
form SEC formulas and should not be considered representative of future perfor-
mance.
Yield refers to the income generated by an investment in a Fund over a seven-
day period, expressed as an annual percentage rate. Effective yields are calcu-
lated similarly, but assume that the income earned from a Fund is reinvested in
the Fund. Because of the effects of compounding, effective yields are slightly
higher than current yields. The tax-equivalent yield and the effective tax-
equivalent yield of the Tax-Free Money Market Fund show the level of taxable
yield needed to produce an after-tax equivalent of the Fund's tax-free yield.
This is done by increasing the Fund's yield (calculated as above) by the amount
necessary to reflect the payment of federal income tax at a stated tax rate.
The application of the stated income tax rate results in a higher yield figure.

NON-MONEY MARKET FUNDS
The performance of each class of shares of the Non-Money Market Funds may be
advertised in terms of yield and total return. These performance figures are
based on the historical earnings and performance of such class of shares and
should not be considered representative of future performance.
The total return of a class of shares of a Non-Money Market Fund will be cal-
culated by subtracting (i) the public offering price (which includes the maxi-
mum sales charge) of one share of the class of shares at the beginning of the
period, from (ii) the NAV at the end of the period for the share held at the
beginning of the period (assuming reinvestment of all dividends and capital
gain distributions), and dividing by (iii) the public offering price per share
of the class of shares at the beginning of the period. The resulting percentage
indicates the positive or negative rate of return that an investor would have
earned from reinvested dividends and capital gain distributions and changes in
share price during the period for the class of shares. The Non-Money Market
Funds may also, at times, calculate total return of a class of shares based on
NAV per share of a class of shares (rather than the public offering price), in
which case the figures would not reflect the effect of any sales charges that
would have been paid by an investor in the class of shares, provided that total
return data derived pursuant to the calculation described above are also pre-
sented.
The yield of a class of shares of a Non-Money Market Fund will be computed by
dividing its net investment income per share earned during a specified period
by its public offering price per share (which includes the maximum sales
charge) on the last day of such period and annualizing the result. Tax-equiva-
lent yield for the Municipal Bond Fund and the California Tax-Free Fund, which
assumes that a stated income tax rate has been applied to non-exempt income to
derive the tax-exempt portion of the relevant Fund's yield, also may be adver-
tised. For purposes of sales literature, these yields may also, at times, be
calculated on the basis of the NAV per share of the class (rather than the pub-
lic offering price), in which case the figures would not reflect the effect of
any sales charges
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that would have been paid by an investor in the class of shares, or by assuming
that a sales charge other than the maximum sales charge (reflecting the volume
discounts set forth above) is assessed, provided that yield data derived pursu-
ant to the calculation described above are also presented.
Because of differences in the fees and/or expenses borne by Class B Shares of
the Non-Money Market Funds, the net yield on such shares can be expected, at
any given time, to be lower than the net yield on Class A Shares. Standardized
yield quotations will be computed separately for Class A Shares and Class B
Shares.
The annual and semi-annual reports for The Griffin Funds contain additional
performance information and are available upon request by calling The Griffin
Funds at 1-800-676-4450.

DESCRIPTION OF INVESTMENTS
The following pages contain more detailed information about the types of se-
curities in which the Funds may invest and strategies the Advisers may employ
in pursuit of the Funds' investment objectives. A summary of risks and restric-
tions associated with these securities and investment practices is included as
well. Additional information about these securities and investment practices is
contained in the SAI. Except as specifically noted, policies and limitations
are considered at the time of purchase; the sale of securities is not required
in the event of a subsequent change in circumstances.

ASSET-BACKED SECURITIES. Each of the Funds may invest in asset-backed securi-
ties. Asset- backed securities arise through the grouping by governmental, gov-
ernment-related, and private organizations of loans, receivables and other as-
sets originated by various lenders. Asset-backed securities acquired by a Fund
may consist of both mortgage and non-mortgage-backed securities. Unlike other
forms of debt securities, which normally provide for periodic payment of inter-
est in fixed amounts with principal paid at maturity or specified call dates,
asset-backed securities provide periodic payments which generally consist of
both interest and principal payments.
The life of an asset-backed security varies with the prepayment experience
with respect to the underlying debt instruments. The rate of such prepayments,
and hence the life of an asset-backed security, will be primarily a function of
current market interest rates, although other economic and demographic factors
may be involved. For example, falling interest rates generally result in an in-
crease in the rate of prepayments of mortgage loans while rising interest rates
generally decrease the rate of prepayments. An acceleration in prepayments in
response to sharply falling interest rates will shorten the security's average
maturity and limit the potential appreciation in the security's value relative
to a conventional debt security. Consequently, asset-backed securities may not
be as effective in locking in high, long-term yields. Conversely, in periods of
sharply rising rates, prepayments are generally slow, increasing the security's
average life and its potential for price appreciation.
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Mortgage-backed securities represent an ownership interest in a pool of
mortgage loans, the interest in which is in many cases issued and guaranteed
by an agency or instrumentality of the U.S. Government, though not necessarily
by the U.S. Government itself. One such type of mortgage-backed security is a
Government National Mortgage Association ("GNMA") Certificate. GNMA Certifi-
cates are backed as to the timely payment of principal and interest by the
full faith and credit of the U.S. Government. Another type is a Federal Na-
tional Mortgage Association ("FNMA") Certificate, the principal and interest
of which are guaranteed only by FNMA itself, not by the full faith and credit
of the U.S. Government. Another type is a Federal Home Loan Mortgage Corpora-
tion ("FHLMC") Participation Certificate. This type of obligation is guaran-
teed by FHLMC as to payment of principal and interest. However, like a FNMA
security, it is not guaranteed by the full faith and credit of the U.S. Gov-
ernment. Mortgage-backed securities issued by private issuers, whether or not
such obligations are subject to guarantees by the private issuer, may entail
greater risk than obligations directly or indirectly guaranteed by the U.S.
Government. Mortgage-backed securities issued by private issuers will be pur-
chased for a Fund only when the Adviser determines that they are readily mar-
ketable at the time of purchase. Except as limited by their respective invest-
ment objectives and policies, there is no limit on the amount or type of mort-
gage-backed securities the Short-Term Bond Fund, U.S. Government Income Fund,
Municipal Bond Fund, California Tax-Free Fund, Bond Fund or Growth & Income
Fund may purchase, except that the California Tax-Free Fund will not purchase
any mortgage-backed securities issued by private issuers.
The average life of mortgage-backed securities varies with the maturities of
the underlying mortgage instruments. The average life is likely to be substan-
tially less than the original maturity of the mortgage pools underlying the
securities due to mortgage prepayments, mortgage refinancings or foreclosures,
which in turn may affect Fund performance. The rate of mortgage prepayments,
and hence the average life of the certificates, will be a function of the
level of interest rates, general economic conditions, the location and age of
the mortgage and other social and demographic conditions. These prepayments
tend to increase when interest rates decline, presenting a Fund with more
principal to invest at lower rates. Such prepayments are passed through to the
registered holder with the regular monthly payments of principal and interest
and have the effect of reducing future payments. The converse also tends to be
the case when interest rates rise.
The Short-Term Bond Fund, U.S. Government Income Fund, Municipal Bond Fund,
California Tax-Free Fund and Bond Fund also may invest in collateralized mort-
gage obligations ("CMOs") and multi-class pass-through mortgage securities.
Multi-class pass-through mortgage securities are equity interests in a trust
comprised of mortgage loans or other mortgage-backed securities, and all ref-
erences herein to CMOs will include multi-class pass-through securities. Pay-
ments of principal and interest on underlying collateral provide the funds to
pay debt service on the CMO or make scheduled distributions on the multi-class
pass-through security. CMOs and multi-class pass-through securities may be is-
sued by agencies or instrumentalities of the U.S. Government or by private
organizations.
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In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause a class to be retired sub-
stantially earlier than the stated maturities or final distribution dates, re-
sulting in a loss of all or part of the premium if any has been paid. The prin-
cipal and interest on the underlying mortgages may be allocated among the sev-
eral classes of a series of a CMO in many ways. One or more tranches of a CMO
may have coupon rates which reset periodically at a specified increment over an
index such as the London Interbank Offered Rate ("LIBOR"). These floating-rate
CMOs are typically issued with lifetime caps on the coupon rate thereon. The
Short-Term Bond, U.S. Government Income, Municipal Bond, California Tax-Free
and Bond Funds may also invest in inverse or reverse floating CMOs. Inverse or
reverse floating CMOs constitute a tranche of a CMO with a coupon rate that
moves in the reverse direction to an applicable index such as LIBOR. According-
ly, the coupon rate thereon will increase as interest rates decrease. Inverse
or reverse floating CMOs are typically more volatile than fixed- or floating-
rate tranches of CMOs. Investments in inverse or reverse floating CMOs would be
purchased to attempt to protect against a reduction in the income earned on the
Fund's investments due to a decline in interest rates. The Short-Term Bond,
U.S. Government Income, Municipal Bond, California Tax-Free and Bond Funds
would be adversely affected by the purchase of such CMOs in the event of an in-
crease in interest rates since the coupon rate thereon will decrease as inter-
est rates increase, and, like other mortgage-backed securities, the value will
decrease as interest rates increase.
The Short-Term Bond, U.S. Government Income, Municipal Bond, California Tax-
Free and Bond Funds may invest in Stripped Mortgage-Backed Securities ("SMBS"),
which are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks and special subsidiaries of the foregoing.
The Short-Term Bond Fund may invest up to 10% of its net assets in SMBS.
There are generally two classes of SMBS, one of which (the "IO class") enti-
tles the holders thereof to receive distributions consisting solely or primar-
ily of all or a portion of the interest on the underlying pool of mortgage
loans or mortgage-backed securities ("Mortgage Assets") and the other of which
(the "PO class") entitles the holders thereof to receive distributions consist-
ing solely or primarily of all or a portion of the principal of the underlying
pool of Mortgage Assets. The cash flows and yields on IO and PO classes are ex-
tremely sensitive to the rate of principal payments (including prepayments) on
the related underlying Mortgage Assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the yield to maturity
of IOs or POs, respectively. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, an investor in the IO class
may incur substantial losses. Conversely, if the underlying Mortgage Assets ex-
perience slower than anticipated prepayments of principal, the yield on
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a PO class will be affected more severely than would be the case with a tradi-
tional mortgage-backed security.
The Funds also may invest in non-mortgage backed securities including inter-
ests in pools of receivables, such as motor vehicle installment purchase obli-
gations and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership in-
terests in the underlying pool of assets. Such securities also may be debt in-
struments, which also are known as collateralized obligations and are generally
issued as the debt of a special purpose entity organized solely for the purpose
of owning such assets and issuing such debt.
Non-mortgage backed securities are not issued or guaranteed by the U.S. Gov-
ernment or its agencies or instrumentalities; however, the payment of principal
and interest on such obligations may be guaranteed up to certain amounts and
for a certain time period by a letter of credit issued by a financial institu-
tion (such as a bank or insurance company) unaffiliated with the issuers of
such securities. Only readily marketable non-mortgage backed securities that
are rated "A" or better by S&P, or "A" or better by Moody's or that are deter-
mined by the Adviser to be of comparable quality at the time of purchase are
eligible for purchase by the U.S. Government Fund, Municipal Bond Fund, Cali-
fornia Tax-Free Fund, Bond Fund and Growth & Income Fund. In addition, such se-
curities generally will have remaining estimated lives at the time of purchase
of five years or less.

BANKERS' ACCEPTANCES. The Money Market Funds may invest in Bankers Acceptances,
which are negotiable obligations of a bank to pay a draft which has been drawn
on it by a customer. These obligations are drawn on large banks and usually
backed by goods in international trade.

BOND ANTICIPATION NOTES. The Tax-Free Money Market Fund, Municipal Bond Fund
and California Tax-Free Fund may invest in Bond Anticipation Notes, which nor-
mally provide interim financing in advance of an issue of bonds or notes, the
proceeds of which are used to repay the anticipation notes. Tax revenue and
bond anticipation notes are unsecured. The Tax-Free Money Market Fund intends
to invest only in notes having a maximum maturity of 397 days.

CERTIFICATES OF DEPOSIT (CDS). All of the Funds may invest in CDs, which are
negotiable certificates representing a depository institution's obligation to
repay funds deposited with it, earning specified rates of interest over a given
period of time. The Money Market Funds intend to invest in negotiable CDs with
a stated maturity of 397 days or less. Many CDs by their terms are not
withdrawable; others impose penalties upon early withdrawal. Because such in-
struments trade in a developed secondary market, however, early withdrawal pen-
alties should not affect the ability to dispose of the investment.

COMMERCIAL PAPER. All of the Funds may invest in commercial paper, which refers
to short-term debt obligations issued by banks, broker-dealers, corporations
and other entities for
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purposes such as financing their current operations. The Money Market Funds in-
tend to invest in commercial paper having maximum maturities of 270 days.

COMMODITY-LINKED BONDS. The Bond Fund may invest in Commodity-Linked Bonds,
which are bonds indexed to gold, silver, other precious metals, oil, coal and
other commodities meeting certain internationally recognized specifications.

COMMON AND PREFERRED STOCKS. The Growth Fund may invest in common and preferred
stocks, which represent shares of ownership in a company. Generally, preferred
stock has a specified dividend and ranks after bonds and before common stocks
in its claim on income for dividend payments and on assets should the company
be liquidated. After other claims are satisfied, common stockholders partici-
pate in company profits on a pro rata basis; profits may be paid out in divi-
dends or reinvested in the company to help it grow. Increases and decreases in
earnings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all cor-
porate securities. While most preferred stocks pay a dividend, the Growth Fund
may purchase preferred stock where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily for
their capital appreciation potential.
The Growth Fund may invest in warrants, which are options to buy a stated
number of shares of common stock at a specified price at any time during the
life of the warrants (generally, two or more years).
The Growth & Income Fund also may invest in common stocks. Under normal mar-
ket conditions, at least 90% of the Growth & Income Fund's equity securities,
including, for this purpose, convertible securities, will be issued by large
companies (i.e., companies with a market capitalization of more than $1 bil-
lion). Both the Growth Fund and the Growth & Income Fund may invest in equity
securities of medium and smaller sized companies (i.e., those companies with at
least $250 million but less than $1 billion in market 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. Investment in securities of such companies may involve
greater risks than investments in larger companies. There may be some addi-
tional risks associated with investments in medium and smaller companies be-
cause their shares tend to be less liquid than securities of larger companies.
Further, shares of medium and 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. The Growth & Income Fund's investments in medium and
smaller companies is not expected to exceed 10% of the Fund's investment in eq-
uity securities.

CONVERTIBLE BONDS. The Bond Fund may invest in convertible bonds which are
fixed-income debt securities which may be converted at a stated price within a
specified period
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of time into a certain quantity of the common stock of the same issuer. Con-
vertible bonds, while usually subordinate to similar non-convertible bonds,
are senior to common stocks in an issuer's capital structure. Convertible
bonds 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 advan-
tage of increases in the price of the issuer's common stock through the con-
version feature. Fluctuations in the convertible bond'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 convert-
ible bonds that are either rated in one of the four highest rating categories
by Moody's, S&P or another nationally recognized statistical rating organiza-
tion, or unrated securities determined by the Adviser, under the supervision
of the Board of Directors, to be of comparable quality.

CONVERTIBLE SECURITIES. The Growth & Income Fund and the Growth Fund may pur-
chase convertible securities that are fixed-income debt securities or pre-
ferred 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.
The Growth & Income Fund will seek to invest in convertible securities that
provide current income and that are issued by companies that have a strong
earnings and credit record. Convertible securities, while usually subordinate
to similar non-convertible securities, are senior to common stock in an is-
suer's capital structure. Convertible securities offer flexibility by provid-
ing 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 issuer's common stock or changes in market interest rates.

CORPORATE BONDS AND NOTES. All of the Funds, except the U.S. Government In-
come, Municipal Bond and California Tax-Free Funds, may invest in corporate
bonds and notes, which include debt securities issued by domestic corpora-
tions, U.S. dollar-denominated debt securities issued by foreign corporations,
Yankee bonds and supranational obligations. Yankee bonds are U.S. dollar-de-
nominated obligations issued by foreign governments or companies. Suprana-
tional obligations are U.S. dollar-denominated obligations issued by interna-
tional entities such as The World Bank and the Inter-American Development
Bank. A bond generally is an interest-bearing security--an IOU--issued by com-
panies or governmental units. The issuer has a contractual obligation to pay
interest at a stated rate on specific dates and to repay principal (the bond's
face value) on a specified date. An issuer may have the right to redeem or
"call" a bond before maturity, and the investor may have to reinvest the pro-
ceeds at lower market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed
for the life of the bond. Its yield (income as a percent of current price)
will fluctuate to reflect the
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changes in interest rate levels. A bond's price usually rises when interest
rates fall, and vice versa, so its yield stays current. Bonds may be unsecured
(backed by the issuer's general creditworthiness only) or secured (also backed
by specified collateral).
Certain bonds have interest rates that are adjusted periodically which tend
to minimize fluctuations in their principal value. In calculating the Fund's
weighted average maturity, the maturity of these securities may be shortened
under certain specified conditions. Bonds may be senior or subordinated obliga-
tions. Senior obligations generally have the first claim on a corporation's
earnings and assets and, in the event of liquidation, are paid before subordi-
nated debt.
The Growth & Income Fund may invest up to 25% of its assets in corporate
bonds and notes of investment grade quality. Securities with the lowest invest-
ment grade rating have speculative characteristics and changes in economic con-
ditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade debt
obligations.

DELAYED-DELIVERY TRANSACTIONS. All of the Funds may participate in delayed-de-
livery transactions, which involve securities that are purchased on a when-is-
sued or delayed-delivery basis, with payment and delivery taking place at a fu-
ture date. The Money Market Funds purchase securities on a delayed-delivery ba-
sis to generate income and to hedge against changes in interest rates and secu-
rities' prices. The market value of securities purchased in this way may change
before the delivery date, which could affect the market value of a Fund's as-
sets. Ordinarily, a Fund will not earn interest on securities until they are
delivered. The Funds may also buy and sell securities on a forward commitment
basis. When delayed-delivery purchases are outstanding, a Fund will set aside
cash or liquid high quality debt instruments in a segregated custodial account
to cover its purchase obligations. There is no limit on the amount of Non-Money
Market Fund assets that may be subject to delayed-delivery transactions. See
"Additional Securities and Investment Practices--Delayed-Delivery Transactions"
in the SAI.

DEMAND FEATURES. The Money Market Funds may invest in securities with demand
features, which are puts that entitle a security holder to repayment of the
principal amount of the underlying security on no more than 30 days' notice at
any time or at specified intervals not exceeding 397 days.

DERIVATIVE MUNICIPAL OBLIGATIONS. The Municipal Bond Fund and California Tax-
Free Fund may invest in derivative municipal obligations, which include custo-
dial receipts or certificates evidencing ownership of future interest payments,
principal payments or both on underlying municipal securities. Derivative mu-
nicipal obligations also include municipal securities with embedded interest
rate derivative products. These Funds will not invest more than 20% of their
respective total assets in derivative municipal obligations. These interest
rate derivative products allow funds to hedge against fluctuations in interest
rates. Invest-
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ment in certain of these instruments (e.g., Inverse Components) may increase
the volatility of these Funds' NAV and market value of these Funds' shares. A
discussion of interest rate derivative products is set forth in the SAI under
"Derivative Municipal Obligations."

FOREIGN INDEX LINKED INSTRUMENTS. The U.S. Government Income Fund and the Bond
Fund may invest up to 10% of their total assets in Foreign Index Linked Instru-
ments. Foreign Index Linked Instruments are fixed income securities which are
issued by U.S. issuers (including U.S. subsidiaries of foreign issuers) and are
denominated in U.S. dollars but return principal and/or pay interest to invest-
ors in amounts which are linked to the level of a particular foreign index. Ad-
ditional information concerning Foreign Index Linked Instruments is included in
the SAI.

FOREIGN SECURITIES. Each of the Short-Term Bond Fund, the Bond Fund, the Growth
& Income Fund, the U.S. Government Income Fund and the Growth Fund may invest
in securities of foreign governments, private issuers and supranational organi-
zations that are denominated in and pay interest in U.S. dollars. Such invest-
ments may include, among other securities, American Depositary Receipts (ADRs).
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying foreign securities. Designed for use in U.S. secu-
rities markets, ADRs are alternatives to the purchase of the underlying securi-
ties in their national markets and currencies. Investments in foreign securi-
ties involve certain considerations that are not typically associated with in-
vesting in domestic securities. There may be less publicly available informa-
tion about a foreign issuer than about a domestic issuer. Foreign issuers also
are not generally subject to the same accounting, auditing and financial re-
porting standards or governmental supervision as domestic issuers. In addition,
with respect to certain foreign countries, taxes may be withheld at the source
under foreign tax laws, and there is a possibility of expropriation or confis-
catory 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 lo-
cated in those countries. Each of the Short-Term Bond Fund, the Bond Fund and
the Growth Fund may invest up to 25% of its total assets, and the Growth & In-
come Fund does not intend to invest more than 10% of its total assets, in for-
eign securities.
In the near future, the Euro will become the single currency for at least
eleven European nations, thus eliminating many national currencies such as the
German mark and the French franc. It is difficult to predict what effect this
will have upon financial markets and the European economy. Countries partici-
pating in the Economic Monetary Union may now be viewed by investors as a sin-
gle entity, which in turn would strongly influence investment behavior. The Ad-
viser may need to adapt certain investment strategies as a result of the imple-
mentation of the Euro.

FUTURES CONTRACTS AND RELATED OPTIONS. To the extent provided under "Investment
Objectives and Policies," the Non-Money Market Funds may invest in futures con-
tracts on securities and indexes, and related options.
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The Non-Money Market Funds may engage in transactions in such futures con-
tracts in an effort to hedge against market risks and/or manage cash flow into
the Non-Money Market Funds. For example, when interest rates are expected to
rise or market values of portfolio securities are expected to fall, the Non-
Money Market Funds can seek through the sale of futures contracts to offset a
decline in the value of their portfolio securities. When interest rates are
expected to fall or market values are expected to rise, the Non-Money Market
Funds, through the purchase of such contracts, can attempt to secure better
rates or prices for the Non-Money Market Funds than might later be available
in the market when they effect anticipated purchases. Alternatively, futures
may be used to manage cash flows into and out of the Non-Money Market Funds.
For example, the investment manager may wish to be fully invested in a partic-
ular asset class. Through the use of futures, the manager can achieve this ob-
jective immediately while temporarily deferring industry and security selec-
tion, in the interest of timeliness.
The acquisition of put and call options on futures contracts will give the
Non-Money Market Funds the right (but not the obligation), for a specified
price, to sell or to purchase, respectively, the underlying futures contract
upon exercise of the option at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid
for related options, may not exceed 5% of each Non-Money Market Fund's total
assets, and the value of securities that are the subject of such futures and
options (both for receipt and delivery) may not exceed 30% of the market value
of each Non-Money Market Fund's total assets. Futures transactions also will
be limited to the extent necessary to maintain each Non-Money Market Fund's
qualification as a regulated investment company.
Futures transactions involve brokerage costs and require the Non-Money Mar-
ket Funds to segregate cash or liquid high quality debt instruments to cover
contracts that would require the Non-Money Market Funds to purchase securi-
ties. All such contracts will be fully collateralized by the assets in the
segregated account, which will be maintained by the custodian. The Non-Money
Market Funds may lose the expected benefit of futures transactions if interest
rates, exchange rates or securities prices move in an unanticipated manner.
Such losses are potentially significant and unanticipated changes may result
in poorer overall performance than if the Non-Money Market Funds had not en-
tered into any futures transactions. In addition, the value of a Non-Money
Market Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting the Non-Money
Market Fund's ability to hedge effectively against interest rate, exchange
rate and/or market risk and giving rise to additional risks. There is no as-
surance of liquidity in the secondary market for purposes of closing out fu-
ture positions. Where a liquid secondary market does not exist, a Non-Money
Market Fund is unlikely to be able to control losses by closing out futures
positions. Finally, gains and losses on investments in options and futures de-
pend on Griffin Advisers' ability to predict correctly the direction of inter-
est rates and other economic factors. The potential loss from the use of
futures transactions can exceed a Non-Money Market Fund's initial investments
in such contracts.
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ILLIQUID INVESTMENTS. Each of the Money Market Funds may invest up to 10% of
its net assets, and each of the Non-Money Market Funds may invest up to 15% of
its net assets in illiquid investments. Illiquid investments are those that
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the price at which they are valued. Under the supervi-
sion of the Board of Directors, the Adviser determines the liquidity of each
Fund's investments. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid in-
vestments before maturity may be time-consuming and expensive and it may be
difficult or impossible for a Fund to sell illiquid investments promptly at an
acceptable price. See "Additional Securities and Investment Practices--Illiq-
uid Investments" in the SAI.

INTEREST ONLY AND PRINCIPAL ONLY OBLIGATIONS. Each of the U.S. Government In-
come Fund, Municipal Bond Fund, California Tax-Free Fund and Bond Fund may
make limited investments (not exceeding 20% of the relevant Fund's total as-
sets) in separately traded principal and interest components of securities is-
sued by the United States Treasury or which are restructured in the secondary
market. The principal and interest components of selected U.S. Treasury secu-
rities are traded independently under the Separate Trading of Registered In-
terest and Principal of Securities program ("STRIPS"). Under the STRIPS pro-
gram, the principal and interest components are individually numbered and sep-
arately issued by the U.S. Treasury at the request of depository financial in-
stitutions, which then trade the component parts independently. STRIPS, par-
ticularly the interest component, are more volatile than coupon-bearing U.S.
Treasury securities with comparable maturities.

INTEREST RATE SWAPS AND INTEREST RATE CAPS AND FLOORS. The Municipal Bond
Fund, California Tax-Free Fund and Short-Term Bond Fund may participate in in-
terest rate swaps and interest rate caps and floors, which are transactions
that preserve a return or a spread on a particular investment or that protect
against an increase in the price of securities anticipated for purchase at a
later date. See "Additional Securities and Investment Practices--Interest Rate
Transactions" in the SAI.

MONEY MARKET INSTRUMENTS refer to instruments with remaining maturities of one
year or less. Each of the Funds will hold a certain portion of its assets in
money market instruments, including repurchase agreements, rated in the two
highest rating categories, maturing in one year or less. For temporary, defen-
sive purposes, the Funds may invest without limitation in such instruments.
This reserve position provides flexibility in meeting redemptions, expenses,
and the timing of new investments, and serves as a short-term defense during
periods of unusual market volatility.

MUNICIPAL LEASE OBLIGATIONS AND CERTIFICATES OF PARTICIPATION. The Tax-Free
Money Market Fund, Municipal Bond Fund and California Tax-Free Fund may invest
in municipal lease obligations and certificates of participation, which are
issued by a state or local government or authority to acquire land and a wide
variety of equipment and facilities. These obligations typically are not fully
backed by the municipality's credit, and their interest
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may become taxable if the lease is assigned. In certain instances, if funds are
not appropriated for the following year's lease payments, a lease may termi-
nate, with the possibility of default on the lease obligation and significant
loss to the Fund. A participation interest in a municipal lease obligation rep-
resents a specified, undivided interest in the obligation in proportion to the
purchased interest in the total amount of the obligation and may have limited
marketability.

MUNICIPAL SECURITIES. The Money Market Funds, Municipal Bond Fund and Califor-
nia Tax-Free Fund may invest in Municipal Securities, which include general ob-
ligation securities, which are backed by the full taxing power of a municipali-
ty, and revenue securities, which are backed by revenues of a specific tax,
project or facility. Industrial revenue bonds are a type of revenue bond backed
by the credit and security of a private issuer and may involve greater risk.
Private activity municipal securities, which may be subject to the federal al-
ternative minimum tax, include securities issued to finance housing and other
construction projects, student loans and privately owned solid waste disposal
and water and sewage treatment facilities.

OPTIONS. The Non-Money Market Funds may purchase and sell options, which can be
either put or call options on securities in which a particular Non-Money Market
Fund may invest directly and are traded on registered domestic securities ex-
changes or result from separate, privately negotiated transactions with primary
U.S. Government securities dealers recognized by the Board of Governors of the
Federal Reserve System. Purchases of put and call options are limited to 5% of
each Non-Money Market Funds' total assets at the time of purchase. In addition,
each Non-Money Market Fund may write (i.e., sell) covered put and call options
provided such transactions do not exceed 5% of the Fund's total assets at the
time of sale.

OTHER INVESTMENT COMPANIES. All of the Funds may invest in shares of other
open-end management investment companies to the extent consistent with a Fund's
investment objectives and policies and subject to the limitations of Section
12(d)(1) of the Investment Company Act of 1940. Such investment companies can
be expected to charge fees for certain operating expenses, such as investment
advisory and administration fees, that would be in addition to those charged by
the Funds. The Tax-Free Money Market Fund may invest in shares of another tax-
free money market fund provided, however, that the Tax-Free Money Market Fund
may only invest in a tax-free money market fund with a fundamental policy of
investing, under normal conditions, at least 80% of its total assets in obliga-
tions that are exempt from federal income taxes and that are not subject to the
federal alternative minimum tax. The Money Market Funds will only invest in the
shares of other money market funds after conducting a credit analysis of such
funds.

REPURCHASE TRANSACTIONS. All of the Funds may participate in repurchase trans-
actions, which are transactions involving a purchase of a security by a Fund
that simultaneously
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commits to resell that security to the seller at an agreed upon price on an
agreed upon date within a number of days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon incremental amount. In
the event of the bankruptcy of the other party to a repurchase agreement, a
Fund could experience delays in recovering its cash or disposing of the securi-
ties obtained from the other party. To the extent that in the meantime, the
value of the securities purchased may have decreased, a Fund could experience a
loss. In all cases, the creditworthiness of the other party to a transaction is
reviewed and found satisfactory by the Adviser. Repurchase agreements are, in
effect, loans of Fund assets.

RESOURCE RECOVERY BONDS. The Tax-Free Money Market Fund, Municipal Bond Fund
and California Tax-Free Fund may invest in Resource Recovery Bonds, which are a
type of revenue bond issued to build facilities such as solid waste incinera-
tors or waste-to-energy plants. Typically, a private corporation will be in-
volved, at least during the construction phase, and the revenue stream will be
secured by fees or rents paid by municipalities for the use of facilities. The
viability of a resource recovery project, environmental protection regulations,
and project operator tax incentives may affect the value and credit quality of
resource recovery bonds.

RESTRICTED SECURITIES. All of the Funds may purchase securities which cannot be
sold to the public without registration under the Securities Act of 1933. Un-
less registered for sale, these securities can only be sold in privately nego-
tiated transactions or pursuant to an exemption from registration.

REVERSE REPURCHASE TRANSACTIONS. All of the Funds may participate in reverse
repurchase transactions. In a reverse repurchase transaction, a Fund sells a
portfolio instrument to another party such as a bank or broker-dealer, in re-
turn for cash. At the same time, the Fund agrees to repurchase the instrument
at an agreed upon price and time. Reverse repurchase agreements are, in effect,
borrowings by the Funds. Each Fund expects that it will engage in reverse re-
purchase agreements for the limited purpose of meeting redemptions. Reverse re-
purchase agreements may increase the risk of fluctuation in the market value of
each Fund's assets or in its yield. As a matter of fundamental policy, each
Money Market Fund may not engage in reverse repurchase agreements in an amount
exceeding 10% of its total assets. When a Fund enters into a reverse repurchase
transaction, it will place cash or liquid high quality debt instruments in a
segregated account with its custodian in an amount at least equal to its obli-
gations under the reverse repurchase transaction.

SECURITIES LENDING. To increase return on portfolio securities, the Short-Term
Bond Fund, Bond Fund, Growth & Income Fund and Growth Fund may lend their port-
folio securities to broker-dealers and other institutional investors pursuant
to agreements requiring that
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<PAGE>

the loans be continuously secured by collateral equal at all times in value to
at least the market value of the securities loaned. There may be risks of de-
lay in receiving additional collateral or in recovering the securities loaned
or even a loss of rights in the collateral should the borrower of the securi-
ties fail financially. However, loans are made only to borrowers deemed by the
Adviser to be of good standing and when, in its judgment, the income to be
earned from the loan justifies the attendant risks. The aggregate of all out-
standing loans of a Fund may not exceed 33 1/3% of the value of its total as-
sets.

STANDBY COMMITMENTS. The Tax-Free Money Market Fund, the Municipal Bond and
the California Tax-Free Fund may invest in standby commitments, which are puts
that entitle the security holder to same-day settlement at amortized cost plus
accrued interest. Issuers or financial intermediaries who provide demand fea-
tures or standby commitments often support their ability to buy securities on
demand by obtaining letters of credit ("LOCs") or other guarantees from domes-
tic or foreign banks. LOCs also may be used as credit supports for other types
of municipal instruments. The Adviser may rely upon its evaluation of a bank's
credit in determining whether to purchase an instrument supported by an LOC.
In evaluating a foreign bank's credit, the Adviser will consider whether ade-
quate public information about the bank is available and whether the bank may
be subject to unfavorable political or economic developments, currency con-
trols, or other governmental restrictions that might affect the bank's ability
to honor its credit commitment.

TAX AND REVENUE ANTICIPATION NOTES. The Tax-Free Money Market Fund, Municipal
Bond Fund and California Tax-Free Fund may invest in Tax and Revenue Anticipa-
tion Notes, which are issued by municipalities in expectation of future tax or
other revenues, and are payable from those specific taxes or revenues.

TAX-EXEMPT COMMERCIAL PAPER. The Tax-Free Money Market Fund, the Municipal
Bond Fund and the California Tax-Free Fund may purchase tax-exempt commercial
paper, which is issued by municipalities to help provide short-term capital or
finance operating needs.

TAX-EXEMPT SECURITIES. The Municipal Bond and California Tax-Free Funds may
invest in tax-exempt securities, which include those on which the interest
rate has been divided into two or more different components. Typically, one
component (the "Auction Component") pays an interest rate that is reset peri-
odically 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 differ-
ence 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 float-
ing rate from the total amount paid
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<PAGE>

by the issuer of the tax-exempt security. Either Fund may purchase Auction Com-
ponents without limitation and, with respect to up to 20% of the Fund's total
assets, may purchase Inverse Components. 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 se-
curity having similar credit quality, redemption provisions and maturity. In-
vestments in Inverse Components may therefore increase the volatility of the
NAV of Fund shares.

TENDER OPTION BONDS. The Tax-Free Money Market Fund may invest in tender option
bonds, which are created by coupling an intermediate- or long-term, fixed rate
tax-exempt bond with a tender agreement that gives the holder the option to
tender the bond at its face value. In return for providing the tender option,
the sponsor (usually a bank, broker-dealer or other financial institution) re-
ceives periodic fees equal to the difference between the bond's fixed coupon
rate and the rate that would cause the bond, coupled with the tender option, to
trade at par value. Subject to applicable regulatory requirements, the Fund may
buy tender option bonds if the tender option agreement gives the Fund the right
to tender the bond to its sponsor no less frequently than once every 397 days.
A sponsor may terminate a tender option if, for example, the issuer of the un-
derlying bond defaults on interest payments.

U.S. GOVERNMENT OBLIGATIONS. All of the Funds may invest in U.S. Government Ob-
ligations, which are securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities. Not all U.S. Government Obligations are di-
rect obligations of the U.S. Treasury. Payment of their principal and interest
may be backed by the full faith and credit of the United States (e.g., U.S.
Treasury bills and GNMA certificates) or solely by the issuing or guaranteeing
agency or instrumentality itself (e.g., FNMA notes). In the latter case, in-
vestors must look to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment. GNMA certificates and FNMA notes represent
ownership interests in a pool of mortgages and the resulting cash flow from
those mortgages. The stated maturities of these obligations may be shortened by
unscheduled prepayments of principal and interest on the underlying mortgages,
thereby affecting a Fund's yield.

VARIABLE- OR FLOATING-RATE INSTRUMENTS. All of the Funds may invest in
variable- or floating-rate instruments (including notes purchased directly from
issuers), which bear variable or floating interest rates and may carry a demand
feature that permits holders to demand full payment from the issuers or certain
financial intermediaries. Floating-rate
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securities have interest rates that change whenever there is a change in a
designated market-based interest rate, while variable-rate instruments provide
for a specified periodic adjustment in the interest rate.

ZERO COUPON BONDS. The Tax-Free Money Market Fund, U.S. Government Income Fund,
Municipal Bond Fund, California Tax-Free Fund and Bond Fund may invest in zero
coupon bonds, which are bonds that do not make regular interest payments; in-
stead they are sold at a deep discount from their face value and are redeemed
at face value when they mature. Because zero coupon bonds do not pay current
income, their prices can be very volatile when interest rates change. In calcu-
lating dividends, the Funds will take into account as income a portion of the
difference between a zero coupon bond's purchase price and its face value.

INVESTMENT LIMITATIONS
Each Fund's investment objective, as set forth in the "The Funds in Brief"
section, is fundamental; that is, it may not be changed without approval by
vote of the holders of a majority of the relevant Fund's outstanding voting se-
curities. In addition, any fundamental investment policy may not be changed
without such shareholder approval. If the Board of Directors determines, howev-
er, that a Fund's investment objective can best be achieved by a substantive
change in a non-fundamental investment policy or strategy, the Board may make
such change without shareholder approval and will disclose any such material
changes in the then current prospectus. Any policy that is not specified in a
Fund's Prospectus, or in the SAI, as being fundamental, is non-fundamental.

MONEY MARKET FUNDS
Set forth below are some of the Money Market Funds' principal investment lim-
itations. A complete listing is contained in the SAI.
(1) Each Fund normally may not invest more than 5% of its total assets in the
securities (other than U.S. Government securities) of any one issuer.
(2) Each Fund will not purchase a security (other than U.S. Government securi-
ties) if, as a result, more than 25% of its total assets would be invested
in a particular industry, except that the Money Market Fund will concen-
trate more than 25% of its total assets in the financial services industry.
(3) Each Fund (a) may borrow money for temporary or emergency purposes (not for
leveraging or investment) or engage in reverse repurchase agreements in an
amount not to exceed 10% of its total assets; and (b) may not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding; and
(4) Each Fund (a) may make securities or other loans to other parties, but not
in excess of 33 1/3% of its total assets, and (b) may engage in repurchase
agreements.
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Limitations 1, 2 and 4(a) are fundamental investment policies. Except for the
percentage limitation in 4(a), these limitations and policies are considered at
the time of purchase; the sale of securities is not required in the event of a
subsequent change in circumstances.
Because the Money Market Fund concentrates more than 25% of its total assets
in the financial services industry, its performance may be affected by condi-
tions affecting banks and other financial services companies. Companies in the
financial services industry are subject to various risks related to that indus-
try, such as governmental regulation, changes in interest rates and exposure on
loans, including loans to foreign borrowers.
Investments in the financial services industry will consist of, among other
things, obligations of domestic banks, savings and loan associations, consumer
and industrial finance companies, securities brokerage companies, leasing com-
panies and a variety of firms in the insurance field. These obligations include
time deposits, certificates of deposit, bankers' acceptances and commercial pa-
per.

NON-MONEY MARKET FUNDS
Set forth below are some of the Non-Money Market Funds' principal investment
limitations. A complete listing is contained in the SAI. Each Non-Money Market
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, and except that this re-
striction does not apply to the California Tax-Free Fund, which is a non-
diversified fund.
(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 securi-
ties 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) with respect to the California Tax-Free Fund there is no
limitation with respect to municipal obligations (for purposes of this lim-
itation, with respect to the California Tax-Free Fund, 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, and with respect to
the Municipal Bond Fund, 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 activ-
ities 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.
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(3) Borrow money, except that each Fund may borrow money for temporary or emer-
gency purposes (not for leveraging or investment) or engage in reverse re-
purchase 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).
(4) Lend any security or make any 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 instruments or to repurchase agreements.
Each of the above is a fundamental investment policy. If a percentage limita-
tion is satisfied at the time of investment, a later increase or decrease in
such percentage resulting from a change in the value of a Fund's portfolio se-
curities will not constitute a violation of such limitation.
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INVESTMENT ADVISER
Griffin Financial Investment Advisers
5000 Rivergrade Road
Irwindale, California 91706

SUB-ADVISER TO THE MONEY MARKET FUND, TAX-FREE
MONEY MARKET FUND, U.S. GOVERNMENT INCOME FUND,
MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE FUND
Payden & Rygel Investment Counsel
333 South Grand Avenue, 32nd Floor
Los Angeles, California 90071

SUB-ADVISER TO THE BOND FUND AND GROWTH & INCOME FUND
The Boston Company Asset Management, Inc.
One Boston Place
Boston, Massachusetts 02108

SUB-ADVISER TO THE SHORT-TERM BOND FUND AND GROWTH FUND
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202

DISTRIBUTOR
WM Funds Distributor, Inc.
1300 21st Street
Sacramento, California 95814

TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105
78
<PAGE>

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, California 90017

LEGAL COUNSEL
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

For more information about the Funds, simply call (800) 676-4450, or write:
WM Funds Distributors, Inc.
1300 21st Street
Sacramento, California 95814

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE
SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
79
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(THIS PAGE INTENTIONALLY LEFT BLANK)
80
<PAGE>

the griffin funds

PROSPECTUS DECEMBER 16, 1998

................................................................................
MONEY MARKET FUND

The Money Market Fund seeks to provide investors with as high a level of
current income as is consistent with the preservation of principal and
liquidity.

TAX-FREE MONEY MARKET FUND

The Tax-Free Money Market Fund seeks to provide investors with as high a
level of current income, exempt from federal income taxes, as is consistent
with a portfolio of high quality short-term municipal obligations selected on
the basis of liquidity and stability of capital.
Investments in the Money Market Fund and Tax-Free Money Market Fund (each a
"Fund," together the "Funds") are neither insured nor guaranteed by the U.S.
Government. There can be no assurance that either the Money Market Fund or the
Tax-Free Money Market Fund will be able to maintain a stable net asset value of
$1.00 per share.
This Prospectus sets forth concisely the information about the Money Market
Fund and the Tax-Free Money Market Fund of The Griffin Funds, Inc. ("The
Griffin Funds") that a prospective investor ought to know before investing in
the Funds. Please read this Prospectus carefully before investing and keep it
for future reference.
Subject to shareholder approval, it is expected that the Funds will be merged
into corresponding funds in the WM Group of Funds on or about March 1999. If
approved, the effect of this reorganization will be that shareholders of the
Funds would become shareholders in such corresponding mutual funds in the WM
Group of Funds with similar investment objectives and policies. For more
information on this transaction, see "The Funds in Detail--Structure" in this
Prospectus.
A Statement of Additional Information ("SAI") dated December 16, 1998
containing additional information about the Funds has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. The SAI is available free upon request by calling The Griffin Funds
at 1-800-676-4450.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, WASHINGTON MUTUAL, INC. ("WASHINGTON MUTUAL") OR ANY
OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN EITHER OF THE FUNDS INVOLVES CERTAIN
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
GRIFFIN FINANCIAL INVESTMENT ADVISERS ("GRIFFIN ADVISERS") IS THE INVESTMENT
ADVISER AND, TOGETHER WITH ITS AFFILIATES, PROVIDES CERTAIN OTHER SERVICES TO
THE FUNDS, FOR WHICH THEY ARE COMPENSATED. GRIFFIN ADVISERS IS AFFILIATED WITH
WASHINGTON MUTUAL. WM FUNDS DISTRIBUTOR, INC. ("WM DISTRIBUTORS") IS THE
DISTRIBUTOR FOR THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>

KEY FUND FACTS

THE FUNDS IN BRIEF..................................................... 3

WHO MAY WANT TO INVEST................................................. 4

FUND EXPENSES

FUND EXPENSES.......................................................... 5

FINANCIAL HIGHLIGHTS

FINANCIAL HIGHLIGHTS................................................... 6

INVESTMENT POLICIES AND
PROCEDURES

INVESTMENT POLICIES AND PROCEDURES..................................... 6

YOUR FUND ACCOUNT

TYPES OF ACCOUNTS...................................................... 7
Different ways to set up an account.

HOW TO PURCHASE SHARES................................................. 8
Opening an account and making additional Fund purchases.

HOW TO REDEEM SHARES................................................... 10
Redeeming shares and closing your account.

SHAREHOLDER SERVICES................................................... 12

DIVIDENDS, CAPITAL GAINS AND TAXES..................................... 13

FUND ACCOUNT POLICIES

TRANSACTION POLICIES................................................... 14
Share price calculations and purchase and redemption policies.

THE FUNDS IN DETAIL

STRUCTURE.............................................................. 16
How the Funds are structured.

SERVICE PROVIDERS...................................................... 16

SUMMARY OF FUND EXPENSES............................................... 16
Fund operating costs and how they are calculated.

PERFORMANCE............................................................ 17

DESCRIPTION OF INVESTMENTS............................................. 18

INVESTMENT LIMITATIONS................................................. 22

No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the
offering made by the Prospectus, and if given or made, such information or
representations must not be relied upon as having been authorized by The
Griffin Funds, Inc. or WM Distributors. This Prospectus does not constitute an
offering by The Griffin Funds, Inc. in any jurisdiction in which such offering
may not lawfully be made.
<PAGE>

KEY FUND FACTS

THE FUNDS IN BRIEF

INVESTMENT OBJECTIVES AND POLICIES: THE MONEY MARKET FUND, a diversified fund,
seeks to provide investors with as high a level of current income as is
consistent with the preservation of principal and liquidity.

THE TAX-FREE MONEY MARKET FUND, a diversified fund, seeks to provide
investors with as high a level of current income, exempt from federal income
taxes, as is consistent with a portfolio of high quality short-term municipal
obligations selected on the basis of liquidity and stability of capital. As a
matter of fundamental policy, under normal market conditions, the Tax-Free
Money Market Fund will invest its assets so that at least 80% of its income
distributions are exempt from federal income tax and the federal alternative
minimum tax.

The Funds may purchase only high quality securities that Griffin Advisers
believes present minimal risks. To be considered high quality, a security
generally must be rated in accordance with applicable rules in one of the two
highest categories for short-term securities by at least two nationally
recognized statistical rating services (or by one, if only one rating service
has rated the security) or, if unrated, be judged to be of equivalent quality
by Griffin Advisers.

The Money Market Fund and Tax-Free Money Market Fund must limit their
investments to securities with remaining maturities of 397 days or less and
must maintain a dollar-weighted average maturity of 90 days or less.

As with any mutual fund, there can be no assurance that a Fund will achieve
its investment objective. An investment in a Fund is not insured against loss
of principal. The ability of the Funds to achieve a high level of income is
circumscribed by their investment exclusively in high quality, short-term
instruments.

For more detailed information about portfolio practices see "Investment
Policies and Procedures" and "The Funds In Detail -- Description of
Investments" and "-- Investment Limitations."

As used herein, the "Adviser" means Griffin Advisers and/or Payden & Rygel as
the context requires.

DISTRIBUTOR: WM Distributors, a registered broker-dealer, is the distributor of
the Funds. In this capacity, WM Distributors has the exclusive right to
distribute shares of the Funds. WM Distributors is an indirect wholly-owned
subsidiary of Washington Mutual.

ADMINISTRATOR: Griffin Financial Administrators ("Griffin Administrators")
serves as the administrator of the Funds and provides various administration
and accounting services to the Funds. Investors Fiduciary Trust Company
("IFTC") provides certain sub-administration services to the Funds.

HOW TO PURCHASE AND REDEEM SHARES: For a description of how to purchase and
redeem shares, see "Your Fund Account -- How to Purchase Shares," and "-- How
to Redeem Shares" in this Prospectus.

Customers of WM Distributors may invest in the Funds through a Griffin
Financial Services Portfolio Builder Account ("Portfolio Builder Account").
Investments through a Portfolio Builder Account are governed by the terms and
conditions of the Portfolio Builder Account, which are set forth in a separate
Portfolio Builder Account Client Agreement provided by WM Distributors to each
Portfolio Builder Account holder. In light of the discretionary asset
allocation structure of investments through the Portfolio Builder Account,
certain of the features described in this Prospectus are not available to all
investors purchasing shares of the Funds through a Portfolio Builder Account.
3
<PAGE>

Specifically, shares of a Fund purchased through a Portfolio Builder Account
may be redeemed only through the Portfolio Builder Account, and the dividend
and distribution options and exchange privileges described in this Prospectus
are not available with respect to shares purchased through a Portfolio Builder
Account. Potential Portfolio Builder Account holders should refer to the Client
Agreement for more information regarding the Portfolio Builder Account,
including information about fees and expenses.

WHO MAY WANT TO INVEST

THE MONEY MARKET FUND is designed as a convenient vehicle for those investors
seeking to obtain the yields available from money market instruments while
maintaining liquidity. The Money Market Fund makes it possible for investors to
participate in a more diversified portfolio of money market instruments than
the amount of their investments might otherwise permit.

THE TAX-FREE MONEY MARKET FUND offers investors a convenient way to invest in
a professionally managed portfolio of short-term municipal obligations.
Investments in the Tax-Free Money Market Fund earn federally tax-exempt income
while remaining liquid and diversified.

IMPORTANT RISK FACTORS. Each Fund's ability to achieve its respective
investment objective depends on the successful implementation of its investment
strategies. The Funds' policies are intended to help maintain a stable $1.00
share price. However, the value of the instruments which the Funds may purchase
can change under certain circumstances, such as when interest rates or issuers'
creditworthiness change, or if an issuer or guarantor of a security fails to
pay interest or principal when due. If these changes in value are material, a
Fund's share price could deviate (positively or negatively) from $1.00.
Securities with longer maturities generally are more susceptible to price
changes, although they may provide higher yields. Debt securities that are not
backed by the United States Government are subject to credit risk, which is the
risk that the issuer may not be able to pay principal and/or interest when due.
In addition, the market value of fixed income securities in a Fund's portfolio
can, generally, be expected to vary inversely to changes in prevailing interest
rates. Thus, in periods of declining interest rates, the market value of a
Fund's portfolio of fixed income securities will tend to increase, and in
periods of rising interest rates will tend to decrease. Neither of the Funds on
an individual basis constitutes a complete investment plan.

4
<PAGE>

FUND EXPENSES

MONEY MARKET FUND
TAX-FREE MONEY MARKET FUND

- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
- -----------------------------------------------------------
<CAPTION>
TAX-FREE
MONEY MONEY
MARKET MARKET
FUND FUND
- -----------------------------------------------------------
<S> <C> <C>
Maximum sales load
imposed on pur-
chases None None
Maximum sales load
imposed on rein-
vested dividends None None
Maximum deferred
sales load None None
Redemption fees None None
Exchange fees None None
- -----------------------------------------------------------

- -----------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES **
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- -----------------------------------------------------------
<CAPTION>
TAX-FREE
MONEY MONEY
MARKET MARKET
FUND FUND
- -----------------------------------------------------------
<S> <C> <C>
Management fees
(after waivers)* 0.20% 0.00%
12b-1 fees 0.20% 0.20%
Other expenses
(after waivers
and reimburse-
ments)* 0.32% 0.31%
Total Fund
operating
expenses (after
waivers and
reimbursements)* 0.72% 0.81%
- -----------------------------------------------------------
</TABLE>
* Griffin Advisers and Griffin Administrators currently intend to voluntarily
waive a portion of their respective fees and reimburse the Funds for certain
expenses. The percentages shown above under "Management fees (after waivers),"
"Other expenses (after waivers and reimbursements)" and "Total Fund operating
expenses (after waivers and reimbursements)" are based on amounts incurred
during the most recent fiscal year, restated to reflect voluntary fee waivers
and expense reimbursements that are expected to continue during the current
fiscal year. Absent such voluntary waivers and reimbursements, these
percentages are expected to be 0.50%, 0.32% and 1.02%, respectively, for the
Money Market Fund and 0.50%, 0.56% and 1.26%, respectively, for the Tax-Free
Money Market Fund. There can be no assurance that the foregoing voluntary fee
waivers and expense reimbursements will continue.

Effective April 1999, it is anticipated that certain voluntary fee waivers
and expense reimbursements will be discontinued. Accordingly, as of such date
"Management Fees", "Other Expenses" and "Total Operating Expenses" for the
indicated Fund are expected to be as follows: Griffin Money Market Fund--0.23%,
0.32% and 0.75% respectively; Griffin Tax-Free Money Market Fund--0.18%, 0.34%
and 0.72% respectively:

<TABLE>
<S> <C>
After 1 year
Money Market Fund $ 8
Tax-Free Money Market Fund $ 8
After 3 years
Money Market Fund $24
Tax-Free Money Market Fund $24
After 5 years
Money Market Fund $42
Tax-Free Money Market Fund $42
After 10 years
Money Market Fund $93
Tax-Free Money Market Fund $93
</TABLE>

THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

The purpose of the foregoing tables is to help you understand the various
costs and expenses that a shareholder in a Fund will bear directly or
indirectly. Operation of the Funds involves a variety of expenses for
shareholder statements, tax reporting, legal, accounting and other services.
These expenses are paid out of each Fund's assets and are illustrated by the
above tables.

5
<PAGE>

FINANCIAL HIGHLIGHTS

The following financial information relating to the Funds has been derived from
the financial statements of The Griffin Funds, and should be read in
conjunction with such financial statements and the related notes that appear in
the Funds' Annual Report, dated September 30, 1998, which is incorporated by
reference in the SAI. The financial statements of The Griffin Funds for the
periods presented have been audited by KPMG Peat Marwick LLP, the independent
auditors to The Griffin Funds, whose report thereon appears in the Annual
Report. Further information about, and management's discussion of, the Funds'
performance is contained in the Funds' Annual Report, which may be obtained
upon request and without charge. The Funds' SAI is incorporated by reference
into this Prospectus.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE
MONEY MARKET MONEY MARKET
------------------------------------------------- ----------------------------------------------
YEAR YEAR YEAR YEAR PERIOD YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A) 9/30/98 9/30/97 9/30/96 9/30/95 9/30/94(A)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value--
beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income (loss) from
investment operations:
Net investment income... 0.05 0.05 0.05 0.05 0.03 0.03 0.03 0.03 0.03 0.02
Total from investment
operations............. 0.05 0.05 0.05 0.05 0.03 0.03 0.03 0.03 0.03 0.02
Less distributions:
Dividends from net
investment income...... (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.03) (0.03) (0.03) (0.02)
Total distributions..... (0.05) (0.05) (0.05) (0.05) (0.03) (0.03) (0.03) (0.03) (0.03) (0.02)
Net increase (decrease)
in net asset value..... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net asset value--end of
period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return (not
annualized)(b)......... 5.02% 5.12% 5.05% 5.52% 3.36% 2.92% 3.02% 3.00% 3.44% 2.22%
Ratios/supplemental
data:
Net assets, end of
period (000)........... $237,590 $229,774 $184,648 $79,964 $49,988 $23,078 $16,161 $11,652 $8,621 $10,633
Ratios to average net
assets (annualized):
Ratio of expenses to
average net assets(i).. 0.72% 0.53% 0.58% 0.42% 0.15% 0.73% 0.68% 0.62% 0.44% 0.17%
Ratio of net investment
income to average net
assets(ii)............. 4.90% 5.01% 4.92% 5.40% 4.25% 2.83% 2.98% 2.93% 3.39% 2.56%
(i) Ratio of expenses to
average net assets
prior to waivers and
reimbursements(c)... 1.02% 1.02% 1.09% 1.29% 1.64% 1.26% 1.42% 1.53% 1.90% 2.28%
(ii) Ratio of net
investment income
to average net
assets prior to:
waivers and
reimbursements(c).. 4.60% 4.52% 4.41% 4.53% 2.76% 2.30% 2.24% 2.02% 1.92% 0.45%
Portfolio Turnover Rate. N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- -------
(a) The Fund commenced operations on October 19, 1993.
(b) Total return represents aggregate total return for the periods indicated.
(c) Ratio reflects fees reduced in connection with specific agreements only for
periods ended after September 30, 1995.

- --------------------------------------------------------------------------------
INVESTMENT POLICIES AND PROCEDURES

The MONEY MARKET FUND invests in high quality U.S. dollar-denominated money
market instruments, including (i) bank obligations, consisting of certificates
of deposit and bankers' acceptances of U.S. and foreign banks; (ii) commercial
paper; (iii) U.S. Government obligations; and (iv) other debt obligations,
consisting of municipal obligations, corporate bonds, asset-backed securities
and securities issued by special purpose entities. The Money Market Fund also
may engage in repurchase and reverse repurchase transactions. In addition, the
Fund may buy or sell securities on a when-issued or delayed-delivery basis and
may purchase restricted and illiquid instruments.
The Fund will concentrate (I.E., invest more than 25% of its total assets) in
the financial services industry. Because the Fund concentrates its investments
in the financial services industry, its

6
<PAGE>

performance may be affected more significantly by conditions affecting banks
and other financial services companies than the performance of funds that do
not concentrate in the financial services industry. See "The Funds in Detail --
Investment Limitations."

The TAX-FREE MONEY MARKET FUND invests in high quality, short-term municipal
obligations selected on the basis of liquidity and stability of principal.
These include municipal obligations issued by states or their counties,
municipalities, authorities or other political subdivisions, and municipal
obligations issued by territories or possessions of the U.S., such as Puerto
Rico.

As a matter of fundamental policy, under normal market conditions, the Fund
will invest its assets so that at least 80% of its income distributions are
exempt from federal income tax and the federal alternative minimum tax.

The Tax-Free Money Market Fund invests in high quality, short-term municipal
securities but it may also invest in high quality, long-term fixed, variable or
floating rate municipal instruments (including tender option bonds) and
municipal instruments with demand features and standby commitments whose
features give them interest rates, maturities and prices similar to short-term
instruments. See "Additional Securities and Investment Practices -- Variable-
or Floating-Rate Demand Obligations," and "Additional Securities and Investment
Practices -- Standby Commitments" in the SAI. Generally, the Fund's investments
in municipal securities will consist of tax, revenue or bond anticipation
notes; tax-exempt commercial paper, general obligation or revenue bonds
(including municipal lease obligations and resource recovery bonds); and zero
coupon bonds. The Fund may buy or sell securities on a when-issued or delayed-
delivery basis, and may purchase restricted securities and illiquid
instruments.

The Tax-Free Money Market Fund may temporarily change its investment focus
for defensive purposes. During periods when, in the Adviser's opinion, a
temporary defensive posture in the market is appropriate, the Fund may hold
cash that is not earning interest or invest in obligations whose interest may
be federally taxable. Under such circumstances, the Fund may temporarily invest
so that less than 80% of its income distributions are federally tax-free.
Federally taxable obligations in which the Fund may invest include obligations
issued by the U.S. Government or any of its agencies or instrumentalities, high
quality commercial paper, certificates of deposit and repurchase agreements.

Pursuant to procedures adopted by the Board of Directors, the Funds may
purchase only high-quality securities that the Adviser believes present minimal
credit risks. To be considered high quality, a security must be rated in
accordance with applicable rules in one of the two highest categories for
short-term securities by at least two nationally recognized statistical rating
services (or by one, if only one rating service has rated the security) or, if
unrated, must be judged to be of equivalent quality by the Adviser. For more
information concerning the instruments in which the Funds may invest, see "The
Funds in Detail -- Description of Investments."

YEAR 2000

Since many computer programs use two digits to identify a year, the change
from "99" to "00"on January 1, 2000, if not managed correctly, may pose
difficulties. Most of the services provided to the Griffin Funds depends on
reliable and efficient functioning of computer systems. Although the Griffin
Funds' principal service providers have been working to prevent any
complications during this time, there can be no guarantee that these programs
will not be negatively impacted. Since the Year 2000 issue affects virtually
all organizations, the companies in which the Funds invest may also be
adversely impacted. The extent of this impact is difficult to predict.

YOUR FUND ACCOUNT

TYPES OF ACCOUNTS
You may set up an account directly in either Fund. The various types of
accounts that can be established with The Griffin Funds are described below.

Remember: The account guidelines may NOT apply to certain retirement
accounts. If your employer offers either of the Funds through a retirement
program, contact your employer for more information. Otherwise, call The
Griffin Funds directly or contact your WM Distributors Representative.

INDIVIDUAL OR JOINT TENANTS
Individual accounts are owned by one person. Joint accounts can have two or
more owners (tenants).

RETIREMENT
Retirement plans can help individuals to "shelter" investment income and
capital gains from current taxes. In addition, contributions to these accounts
may be tax deductible. Retirement accounts require special applications and
typically have lower minimum initial and subsequent investment amounts. The
following summarizes the general attributes of tax laws common to retirement
programs. You should consult your tax adviser for more specific information.

7
<PAGE>

. Individual Retirement Accounts (IRAs) allow individuals who are not active
participants in certain types of retirement plans and who are under age 70-
1/2 with earned income to make deductible contributions to an IRA subject to
certain dollar limitations.
. Rollover IRAs offer special tax advantages for certain distributions from
employer-sponsored retirement plans.
. Keogh or Corporate Profit Sharing and Money Purchase Pension Plans allow
self-employed individuals or small business owners (and their employees) to
make tax deductible contributions for themselves and any eligible employees
up to $30,000 per year.
. New Savings Incentive Match Plans for Employees (SIMPLE Plans) and older
Simplified Employee Pension Plans (SEP-IRAs) provide small business owners
or those with self-employed income (and their eligible employees) with many
of the same advantages as a Keogh plan, together with fewer administrative
requirements.
. 403(b) Custodial Accounts are available to employees of most tax-exempt
institutions, including schools, hospitals, and other charitable
organizations.
. 401(k) Programs allow employees of a company which has established such a
program to contribute a percentage of their wages on a tax-deferred basis.
These accounts need to be established by the trustee of the plan.

. Spousal IRAs allow a nonworking or lower paid spouse filing a joint return
to establish an IRA and include his or her working or higher paid spouse's
income with respect to contributions to the IRA, subject to certain
conditions and limitations.
. Roth IRAs allow individuals, including individuals over the age of 70 1/2,
to take tax-free distributions of the earnings on NONdeductible
contributions.

EDUCATION
Education investment accounts allow certain taxpayers to contribute up to
$500 per child per year to an education IRA. Earnings on such contributions may
be distributed tax free if used to pay the child's postsecondary education
expenses.

The Tax-Free Money Market Fund is not an appropriate investment for tax-
exempt institutions or tax-sheltered retirement and education accounts, as such
investors would receive no benefit from the tax-exempt status of the Fund's
dividends.

GIFTS OR TRANSFER TO MINORS (UGMA, UTMA)
These custodial accounts enable a donor to give or otherwise transfer money
to a child and to obtain certain tax benefits. A donor can give up to $10,000 a
year per child without having such contributions be subject to federal gift
tax. Depending on applicable state laws, a custodial account can be established
under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to
Minors Act (UTMA).

Trust
The trust must be established before an account can be opened. You may have
to provide additional materials or sign additional documents.

BUSINESS OR ORGANIZATION
Corporations, associations, partnerships, institutions and other
organizations should contact a Griffin Financial Representative for more
information.

HOW TO PURCHASE SHARES

If you are a new investor in the Funds, you may open your account in person
or by wire as described on page 9. You also may complete and sign an account
application and mail it together with your check. If you need an application,
call 1-800-676-4450 or contact your WM Distributors Representative.

If you are already an investor in any portfolio of The Griffin Funds (each, a
"Griffin Fund"), you can make further investments in one of the Griffin Funds:
. In person,
. By mailing in an application with a check, or
. By exchanging from another Griffin Fund, subject to the limitations
described in the other Griffin Fund's prospectus.

You can arrange withdrawals from your checking or savings deposit account to
open a new Fund account or to add to an existing Fund account, subject to the
terms of the deposit account.

If you are a first-time investor through a tax-sheltered retirement plan,
such as an IRA, you will need a special application. Ask your WM Distributors
Representative or call1-800-676-4450 for more information about retirement plan
investment procedures and a retirement application.

If you purchase shares by check, and then redeem those shares by any method
other than by exchange to another Griffin Fund, the redemption proceeds will be
mailed upon clearance of your purchase check, which may take up to fifteen
days.

All purchases made by check should be in U.S. dollars and be made payable to
the appropriate Griffin Fund. Third-party checks, except those payable to an
existing shareowner who is a natural person (as opposed to a corporation or
partnership), credit cards and cash will not be accepted.

8
<PAGE>

From time to time, shares of the Funds also may be available for purchase
through various sweep and cash management programs offered by various entities,
including WM Distributors and its affiliates, on terms specified in those
programs.

SHARE PRICE
The Funds' share price, referred to as the net asset value ("NAV"), is
calculated every day that the New York Stock Exchange ("NYSE") is open for
business.
Share purchases are effected at the share price next determined after an
order and good funds are received and accepted by a Fund. Share price is
determined at noon, Eastern time. Orders received with good funds before 12:00
noon, Eastern time, are effective that day and orders received at or after
noon, Eastern time, are effective the following business day. You will begin to
accrue daily dividends the day after becoming a shareholder.

MINIMUM INVESTMENT AMOUNTS
FOR NEW ACCOUNTS
<TABLE>
<S> <C>
Minimum total initial investment $1,000
Minimum investment per Fund $ 250
For retirement accounts $ 250
FOR ADDITIONAL INVESTMENTS $ 100
For retirement accounts $ 100
Through automatic investment $ 50
</TABLE>
- --------------------------------------------------------------------------------
PURCHASING SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
METHOD TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
<S> <C> <C>
In Person . BRING YOUR APPLICATION . BRING YOUR CHECK TO A WM
AND CHECK TO A WM DISTRIBUTORS REPRESENTATIVE. CALL
DISTRIBUTORS 1-800-676-4450 FOR THE
REPRESENTATIVE. CALL 1- REPRESENTATIVE NEAREST YOU.
800-676-4450 FOR THE
REPRESENTATIVE NEAREST
YOU.

Mail . COMPLETE AND SIGN THE . MAKE YOUR CHECK PAYABLE TO "MONEY
APPLICATION. MAKE YOUR MARKET FUND"OR "TAX-FREE MONEY
CHECK PAYABLE TO "MONEY MARKET FUND." INDICATE YOUR FUND
MARKET FUND" OR "TAX-FREE ACCOUNT NUMBER ON YOUR CHECK.
MONEY MARKET FUND."

Mail to: P.O. Box 419245 Mail to (checks only): P.O. Box
Kansas City, Missouri 419647 Kansas City, Missouri 64141
64141

. EXCHANGE BY MAIL: CALL 1-800-676-
4450 FOR INSTRUCTIONS.

Phone 1-800- . EXCHANGE FROM ANOTHER . EXCHANGE FROM ANOTHER GRIFFIN FUND
676-4450 GRIFFIN FUND ACCOUNT WITH . ACCOUNT WITH THE SAME REGISTRATION
THE SAME REGISTRATION . (IDENTICAL NAME(S), ADDRESS, AND
(IDENTICAL NAME(S), . TAXPAYER ID NUMBER).
ADDRESS, AND TAXPAYER ID
NUMBER).

Wire . CALL 1-800-676-4450 TO
SET UP YOUR ACCOUNT AND TO
ARRANGE A WIRE
TRANSACTION. NOT AVAILABLE
FOR CERTAIN RETIREMENT
ACCOUNTS.

. WIRE WITHIN 24 HOURS TO: . WIRE TO: INVESTORS FIDUCIARY TRUST
INVESTORS FIDUCIARY TRUST CO. ROUTING #101 0036 21 ACCOUNT
CO. ROUTING #101 0036 21 #752-7144 SPECIFY FUND AND INCLUDE
ACCOUNT #752-7144 SPECIFY YOUR ACCOUNT NUMBER AND YOUR NAME.
FUND AND INCLUDE YOUR NEW
ACCOUNT NUMBER AND YOUR
NAME.

Automatic . AUTOMATIC INVESTMENTS ON A REGULAR
Investment BASIS: CALL 1-800-676-4450.
Plans
</TABLE>
9
<PAGE>

HOW TO REDEEM SHARES
You can take money out of your Fund account at any time by redeeming some or
all of your shares. Your shares will be redeemed at the next share price
calculated after your order is received and accepted by the Fund.
To redeem shares in a non-retirement account, you may use any of the methods
described in this section.
To redeem shares in a retirement account, your request must be made in
writing, except for exchanges to other Griffin Funds, which can be requested by
phone or in writing. Call 1-800-676-4450 for a retirement distribution form.
If you are redeeming some but not all of your shares, you must leave an
aggregate of at least $1,000 worth of shares in your Griffin Funds account(s)
to keep your account(s) open ($250 for retirement accounts).
To redeem shares by wire, you will need to provide advance authorization.
You may redeem shares through the Funds' checkwriting service. There is no
charge for this service and you may write an unlimited number of checks. The
minimum check amount is $500. You may not use the checkwriting service if you
have set up a systematic withdrawal plan. In addition, you should not write a
check for the entire value of your account or close your account by writing a
check.
Certain redemption requests must include a signature guarantee. A signature
guarantee is designed for your protection. Your request must be made in writing
and must include a signature guarantee in any of the following situations:
. You wish to redeem more than $100,000 worth of shares,
. Your account registration has changed within the last 60 days,
. The check is not being mailed to the address on your account (record
address),
. The check is not being made payable to the account holder, or
. The redemption proceeds are being transferred to a Griffin Fund account
registered in a different name.
You can obtain a signature guarantee from a bank, broker (including WM
Distributors offices), dealer, credit union (if authorized under state law),
securities exchange or association, clearing agency or savings association. A
NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE.
The Griffin Funds, WM Distributors and the transfer agent are not liable for
damages resulting from following instructions communicated by telephone that
they reasonably believe to be genuine. The Griffin Funds will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
If The Griffin Funds fails to do so, it may be liable for any losses due to
unauthorized or fraudulent instructions. The following procedures may be used
to process telephone redemptions: (i) your Social Security number is requested;
(ii) the dollar amount of the transaction is confirmed by reading it back to
you; (iii) the address of record or predesignated account number for the
distribution is confirmed; and (iv) you are given a control number so that the
transaction can be traced should you have any questions.
Certain purchase, redemption and exchange features (E.G., checkwriting,
automatic investment, systematic withdrawal, etc.) generally available to
shareholders of a Fund may not be available to an investor who purchases shares
of a Fund through a sweep or other cash management program offered by various
entities, including WM Distributors and its affiliates.

REDEEMING SHARES IN WRITING

Write a "letter of instruction" with:
. Your name,
. The Fund's name,
. Your Fund account number,
. The dollar amount or number of shares to be redeemed, and
. Any other applicable requirements listed in the following table. Unless
otherwise instructed, The Griffin Funds will send a check to the record
address. Mail your instructions to:

The Griffin Funds, Inc.
P.O. Box 419245
Kansas City, Missouri 64141
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REDEEMING SHARES
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METHOD ACCOUNT TYPE SPECIAL REQUIREMENTS
<S> <C> <C>
Phone 1-800- ALL ACCOUNT TYPES EXCEPT . MAXIMUM CHECK REQUEST: $100,000
676-4450 CERTAIN RETIREMENT
ACCOUNTS

All account types . YOU MAY EXCHANGE TO OTHER GRIFFIN
FUNDS IF BOTH ACCOUNTS ARE
REGISTERED WITH THE SAME NAME(S),
ADDRESS, AND TAXPAYER ID NUMBER.

Mail or in INDIVIDUAL, JOINT . THE LETTER OF INSTRUCTION MUST BE
Person TENANTS, SOLE SIGNED BY ALL persons required to
PROPRIETORSHIPS, UGMA, authorize transactions, exactly as
UTMA their names appear on the account.

Retirement accounts . THE ACCOUNT OWNER SHOULD COMPLETE
A RETIREMENT DISTRIBUTION FORM.
CALL 1-800-676-4450 TO REQUEST ONE.

Trust . THE TRUSTEE MUST SIGN THE LETTER
IN THIS CAPACITY. IF THE TRUSTEE IS
NOT NAMED IN THE ACCOUNT
REGISTRATION, PROVIDE A COPY OF THE
TRUST DOCUMENT CERTIFIED WITHIN THE
LAST 60 DAYS.

Business or Organization . AT LEAST ONE PERSON AUTHORIZED (BY
CORPORATE RESOLUTION OR OTHER
ACTION) TO ACT ON BEHALF OF THE
ACCOUNT MUST SIGN THE LETTER.

. INCLUDE A CORPORATE RESOLUTION
WITH CORPORATE SEAL OR A SIGNATURE
GUARANTEE.

Executor, Administrator, . CALL 1-800-676-4450 FOR
Conservator, Guardian INSTRUCTIONS.

Wire All account types except . YOU MUST AUTHORIZE IN WRITING THE
certain retirement WIRE FEATURE BEFORE USING IT. TO
accounts VERIFY THAT THE AUTHORIZATION IS IN
PLACE, CALL 1-800-676-4450. MINIMUM
WIRE: $5,000.

. YOUR WIRE REDEMPTION REQUEST MUST
BE RECEIVED BY THE GRIFFIN FUNDS
BEFORE 4 P.M. EASTERN TIME FOR
MONEY TO BE WIRED ON THE NEXT
BUSINESS DAY.

Checkwriting All account types except . CALL 1-800-676-4450 TO APPLY FOR
retirement CHECKWRITING.

. MINIMUM CHECK AMOUNT: $500.
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SHAREHOLDER SERVICES

The Griffin Funds provide the following services to help you with your
account.

INFORMATION SERVICES

You may visit a WM Distributors Representative for information or assistance
or you can call a 24-hour toll-free telephone number for automated account
balance information.

Statements and reports that you will receive include the following:

. Confirmation statements (generally after every transaction, except a
reinvestment, that affects your account balance or your account
registration)
. Account statements (quarterly)
. Fund reports (every six months)

To reduce expenses, only one copy of most Fund reports will be mailed to you,
even if you have more than one Fund account. Call 1-800-676-4450 if you need
additional copies of any Fund reports or historical account information.

TRANSACTION SERVICES

EXCHANGE PRIVILEGES allow you to redeem your shares in either of the Funds
and buy shares of the other Fund or shares of any other Griffin Fund by
telephone or written exchange. Shares of the Fund or Griffin Fund to be
acquired must be registered for sale in the shareholder's state of residence.
Investors should obtain and read the Prospectus for the Fund into which they
desire to exchange before submitting an exchange order. Please remember that
exchanges from a Fund are limited to four per calendar year, and that exchanges
may have tax consequences for you. For complete policies and restrictions
governing exchanges, including circumstances under which a shareholder's
exchange privilege may be suspended or revoked, see "Fund Account Policies--
Transaction Policies."

AUTOMATIC INVESTMENT PLANS can help you in pursuing your financial goals by
providing a convenient way to invest money regularly. The Griffin Funds lets
you transfer money into your Fund account automatically on a monthly or
quarterly basis. Transfers will occur on or about the 5th or 20th day of the
applicable month. The minimum monthly automatic investment amount is $50.
Certain restrictions apply for retirement accounts. Call 1-800-676-4450 for
more information.

SYSTEMATIC WITHDRAWAL PLANS let you set up monthly, quarterly, semi-annual or
annual redemptions from your account. The minimum eligible account size for
this service is $10,000 and the minimum withdrawal amount is $50. Fund shares
will be redeemed as necessary to meet withdrawal payments. Remember that
withdrawals may result in a gain or loss for tax purposes, may involve the use
of principal and may deplete all of the shares in your account.

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REGULAR INVESTMENT PLANS
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AUTOMATIC INVESTMENTS
To transfer money from your bank or depository institution account to a Fund or
a Griffin Fund

MINIMUM FREQUENCY OPENING OR CHANGING AN ACCOUNT
<S> <C> <C>
$50 MONTHLY OR . FOR A NEW ACCOUNT, COMPLETE THE APPROPRIATE SECTION ON
QUARTERLY THE FUND APPLICATION.

. FOR EXISTING ACCOUNTS, CONTACT YOUR GRIFFIN
REPRESENTATIVE OR CALL 1-800-676-4450 FOR AN
APPLICATION.

. TO CHANGE THE AMOUNT OR FREQUENCY OF YOUR INVESTMENT,
VISIT A WM DISTRIBUTORS OFFICE OR CALL 1-800-676-4450 AT
LEAST TEN BUSINESS DAYS PRIOR TO YOUR NEXT SCHEDULED
INVESTMENT DATE.
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DIRECT DEPOSIT
To send all or a portion of your paycheck or Social Security check to a Griffin
Fund

MINIMUM FREQUENCY OPENING OR CHANGING AN ACCOUNT
<S> <C> <C>
$50 EVERY PAY . CHECK THE APPROPRIATE BOX ON THE FUND APPLICATION,
PERIOD VISIT A WM DISTRIBUTORS OFFICE OR CALL 1-800-676-4450
FOR AN AUTHORIZATION FORM.

. CHANGES REQUIRE A NEW AUTHORIZATION FORM.
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GRIFFIN AUTOMATIC EXCHANGES
To exchange shares of one Griffin Fund for shares of another Griffin Fund

MINIMUM FREQUENCY SETTING UP OR CHANGING
<S> <C> <C>
$50 MONTHLY, . CHECK THE APPROPRIATE BOX ON THE FUND APPLICATION,
QUARTERLY VISIT A WM DISTRIBUTORS OFFICE OR CALL 1-800-676-4450
OR FOR AN AUTHORIZATION FORM.
ANNUALLY

. TO CHANGE THE AMOUNT OR FREQUENCY OF YOUR INVESTMENT,
VISIT A WM DISTRIBUTORS OFFICE OR CALL 1-800-676-4450

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SYSTEMATIC WITHDRAWAL PLANS
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AUTOMATIC REDEMPTIONS
To redeem shares on a regular basis

MINIMUM FREQUENCY SETTING UP OR CHANGING
<S> <C> <C>
$50 MONTHLY, . FOR A NEW ACCOUNT, COMPLETE THE APPROPRIATE SECTION ON
QUARTERLY, THE FUND APPLICATION.
SEMIANNUALLY
OR
ANNUALLY

. FOR EXISTING ACCOUNTS, CONTACT YOUR GRIFFIN
REPRESENTATIVE OR CALL 1-800-676-4450 TO REQUEST THE
APPROPRIATE FORM.
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DIVIDENDS, CAPITAL GAINS AND TAXES

Income dividends are accrued daily and paid monthly on both Funds. Capital
gains, if any, are declared and paid annually.

DISTRIBUTION OPTIONS

When you open an account, specify on your application how you want to receive
your distributions. Each Fund offers four options:
1. REINVESTMENT OPTION. Dividend and capital gain distributions will be
automatically reinvested in additional Fund shares. If you do not indicate a
choice on your application, it will be assumed that you have chosen this
option.
2. EARNED-INCOME OPTION. Capital gain distributions will be automatically
reinvested, but you will be sent a check for each dividend distribution.
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3. CASH OPTION. A check for each dividend and capital gain distribution will be
sent to you.

4. DESIGNATED DISTRIBUTION OPTION. Dividend and capital gain distributions will
be automatically invested in shares of the same class of another Griffin
Fund owned through an identically registered account. Visit a WM
Distributors office or call 1-800-676-4450 for more information.

TAXES

Each of the Funds intends to qualify as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Fund of liability for federal income tax to the extent
its net investment income and capital gains are distributed annually in
accordance with the Code. Each of the Funds intends to annually distribute
substantially all of its net investment income and capital gains.

Dividends distributed from the Tax-Free Money Market Fund attributable to its
net interest income from tax-exempt securities will not be subject to federal
income taxes. Dividends distributed from the Tax-Free Money Market Fund and the
Money Market Fund attributable to their income from other investments and net
short-term capital gain will be taxable to shareholders as ordinary income.
Corporate shareholders will not be able to exclude any distributions from their
taxable income.

The Funds will pass on to shareholders any net capital gain (for this
purpose, generally the excess of net long-term capital gain over net short-term
capital loss) earned by the Funds as capital gain distributions. In general,
these distributions will be taxable to shareholders as long-term capital gain.
Noncorporate shareholders may be taxed on such distributions at preferential
rates.

To the extent dividend and other distributions from a Fund are taxable, such
distributions will be taxable to you when paid, whether such distributions are
paid in cash or automatically reinvested in additional Fund shares. However,
distributions declared in October, November and December of one year and
distributed in January of the following year will be taxable as if they were
paid on December 31 of the first year. At the end of each year, you will be
notified as to the federal income tax status of your distributions from a Fund
during the year. As long as a Fund continually maintains a $1.00 share price,
shareholders ordinarily will not recognize taxable gain or loss on the
redemption or exchange of their Fund shares.

Foreign shareholders may be subject to different tax treatment, including
withholding taxes. In certain circumstances, U.S. resident individuals may also
be subject to backup withholding taxes. See "Distributions and Taxes" in the
SAI.

The foregoing discussion regarding taxes is based on tax laws which were in
effect as of the date of this Prospectus and summarizes only some of the
important federal tax considerations generally affecting the Funds and their
shareholders. It is not intended as a substitute for careful tax planning. All
investors should consult their own tax advisers with respect to their
particular tax situations, as well as with respect to foreign, state and local
taxes. Additional tax considerations are discussed in the SAI.

FUND ACCOUNT POLICIES

TRANSACTION POLICIES

Each Fund's net asset value ("NAV") per share is determined on each day the
NYSE is open for trading. Each Fund's NAV is the value of a single share. The
NAV is computed by adding up the value of a Fund's investments, cash and other
assets, subtracting its liabilities, and then dividing the result by the number
of shares outstanding.

Each Fund's portfolio investments are valued on the basis of amortized cost.
The value of assets of each Fund is determined as of 12:00 noon, Eastern time,
on each day the NYSE is open, immediately after the daily declaration of
dividends. Each Fund's offering price (per share) and redemption price of a
share are the Fund's NAV.

On your account application, you will be asked to certify that your Social
Security or Taxpayer Identification Number is correct and that you are not
subject to backup withholding by the IRS. If these certifications are not made,
the IRS can require The Griffin Funds to withhold 31% of your taxable
distributions and redemptions. A failure to provide a correct Taxpayer
Identification Number to The Griffin Funds may also result in the imposition of
IRS penalties against you.

Each Fund reserves the right to suspend the offering of its shares for a
period of time. The Funds also reserve the right to reject any specific
purchase order, including certain purchases by exchange. See "Shareholder
Services -- Exchange Privileges" in this Prospectus. For example, a purchase
order may be rejected if, in The Griffin Funds' opinion, such order is of a
size that would disrupt management of a Fund.

Orders to buy shares will be processed at the next NAV calculated after your
order and good funds are received and accepted by the Fund. Note that:

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. All of your purchases must be made in U.S. dollars and checks must be drawn
on U.S. banks.
. The Funds do not accept cash.
. When making a purchase with more than one check, each check must have a
value of at least $50.
. Each Fund reserves the right to limit the number of checks processed at one
time.
. If your check does not clear, or if payment is not received for any tele-
phone purchase, your purchase will be cancelled and you could be liable for
any losses or fees that a Fund or its transfer agent has incurred.

The Funds will in most cases issue share certificates upon request.

You can avoid the collection period associated with check purchases by
purchasing shares by bank wire, U.S. Postal money order, U.S. Treasury check,
Federal Reserve check or Direct Deposit.

When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after your request is received and accepted. Please note
the following:

. Normally, redemption proceeds will be mailed to you on the next business
day, although the Funds may take up to seven days to pay you.
. If you purchase shares by check, and then seek to redeem those shares by any
method other than through an exchange to another Griffin Fund, the
redemption proceeds will be mailed upon clearance of your purchase check,
which may take up to fifteen days.
. Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed, when trading on the NYSE is restricted, or as authorized by
the SEC.

If your Griffin Fund total account balance falls below $1,000 ($250 for
retirement accounts) as a result of redeeming shares, and The Griffin Funds
elects to close your account, you will be given 30 days' notice to reestablish
the minimum balance. If you do not increase your balance to the minimum account
size, The Griffin Funds may close your account and send the proceeds to you.
Your shares will be redeemed at the NAV on the day your account is closed.

As a shareholder, you have the option of exchanging shares of the Funds for
shares of other Griffin Funds subject to the following:

. The Fund you are exchanging into must be registered for sale in your state
of residence.
. You may only exchange between Funds with accounts that are identically
registered (I.E., with the same name(s), address and Taxpayer Identification
Number.)
. If you exchange into a Griffin Fund with a sales charge, you pay the
percentage point difference between that Griffin Fund's sales charge and any
sales charge you have previously paid in connection with the shares you are
exchanging. For example, if you paid no sales charge on your shares and you
exchange them into Class A Shares of a Griffin Fund with a 4.5% sales
charge, you would pay a 4.5% sales charge.
. If you exchange shares of one of the Funds into Class B Shares of a Griffin
Fund that imposes a contingent deferred sales charge ("CDSC"), you will be
subject to the CDSC applicable to such shares upon redemption of the Class B
Shares acquired through the exchange. In addition, if you acquire Class B
Shares of a Griffin Fund through such an exchange, the remaining period of
time that the CDSC applicable to the acquired Class B Shares remains in
effect will be computed from the time of acquisition of the shares
exchanged.
. Exchanges may have tax consequences.
. Because excessive trading can adversely affect a Fund's performance and
shareholders, each of the Funds reserves the right to temporarily or
permanently terminate the exchange privilege of any investor who makes more
than four exchanges between Griffin Funds per calendar year. Accounts under
common ownership or control, including accounts with the same Taxpayer
Identification Number, will be counted together for purposes of the four
exchange limit.
. Each Fund also reserves the right to refuse exchange purchases by any person
or group if, in Griffin Advisers' judgment, the receiving Griffin Fund would
be unable to invest the money effectively in accordance with its investment
objective and policies, or would otherwise be adversely affected.

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Although The Griffin Funds will attempt to give you prior notice whenever it
is reasonably able to do so, these restrictions may be imposed at any time. The
Funds reserve the right to terminate or modify the exchange privilege in the
future upon 60 days' prior written notice to shareholders. Before exchanging
into a Griffin Fund, you should read its prospectus.

THE FUNDS IN DETAIL

STRUCTURE
The Griffin Funds was organized as a Maryland corporation on August 5, 1993.
Each Fund is comprised of only one class of shares. The Griffin Funds is
governed by a Board of Directors, which has overall responsibility for the
management of the Funds and is responsible for protecting the interests of
shareholders. The directors meet periodically throughout the year to oversee
each Fund's activities and review arrangements with the companies that provide
major services to the Funds and the performance of the Funds.
The Griffin Funds typically will not hold annual shareholders meetings,
although special meetings may be called from time to time. These meetings may
be called to elect or remove directors, change fundamental policies, approve
management contracts or for other purposes. Shareholders not attending these
meetings are encouraged to vote by proxy. Proxy materials, including a voting
card and information about the proposals to be voted on, will be mailed in
advance of a meeting. Shareholders are entitled to one vote for each share
owned. The Griffin Funds will hold special meetings of 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 outstanding voting
securities of the Funds and will assist shareholders in communicating with
other shareholders.
On September 30, 1998, H.F. Ahmanson & Company, the indirect parent to
Griffin Advisers, was merged into a wholly owned subsidiary of Washington
Mutual (the "Holding Company Merger"). As a result of the Holding Company
Merger, Griffin Advisers became a wholly owned subsidiary of Washington Mutual.
On December 14, 1998, the Board of Directors of The Griffin Funds approved
Agreements and Plans of Reorganization between The Griffin Funds, on behalf of
each Fund, and WM Trust I, on behalf of each corresponding WM portfolio, which
provide for the reorganization of each Fund into corresponding funds of the
WM Group of Funds--the proprietary fund complex advised by WM Advisors, Inc.
(which is a wholly owned subsidiary of Washington Mutual), and also the
reorganization of The Griffin Funds. The Agreements and Plans of Reorganization
will be submitted to shareholders of The Griffin Funds at a meeting to be held
on February 26, 1999. If the Agreements and Plans of Reorganization are
approved by shareholders, and certain other conditions are satisfied, the
assets and liabilities of each of the Funds will be transferred to
corresponding portfolios in the WM Group of Funds. Pursuant to the terms of the
Agreements and Plans of Reorganization, if approved, the Griffin Money Market
Fund and Griffin Tax-Free Money Market Fund would be reorganized into the WM
Money Market Fund and the WM Tax-Exempt Money Market Fund.

SERVICE PROVIDERS

GRIFFIN ADVISERS serves the Funds as investment adviser. Payden & Rygel acts
as sub-adviser to the Funds and as such has primary responsibility for choosing
investments for the Funds. Payden & Rygel, which had approximately $27 billion
in assets under management as of September 30, 1998, is the sub-adviser to
other separately managed series of The Griffin Funds and to a fixed income
global mutual fund unaffiliated with The Griffin Funds, as well as to a series
of group trusts, and several pooled accounts for a wide variety of clients.
Pursuant to sub-advisory contracts with Griffin Advisers, Payden & Rygel
provides periodic reports on the investment strategy and performance of the
Funds.
GRIFFIN ADMINISTRATORS is the Funds' administrator and provides
administrative and accounting services to the Funds.
IFTC is the Funds' custodian and transfer, shareholder service and dividend-
paying agent. IFTC is located at 801 Pennsylvania, Kansas City, Missouri 64105.
IFTC also provides certain sub-administrative services to the Funds.
WM DISTRIBUTORS, located at 1300 21st Street, Sacramento, CA 95814,
distributes and markets the Funds. WM Distributors is an indirect wholly owned
subsidiary of Washington Mutual.
Griffin Advisers and Griffin Administrators are wholly-owned subsidiaries of
Griffin Financial Services of America, which are indirect subsidiaries of
Washington Mutual.
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SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED,
ENDORSED OR GUARANTEED BY, WASHINGTON MUTUAL, OR ANY OF THEIR AFFILIATES. SUCH
SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY.

SUMMARY OF FUND EXPENSES

Like all mutual funds, the Funds pay expenses related to their operations.
Expenses charged to a Fund and paid out of a Fund's assets are reflected in its
share price or dividends.
Each Fund pays a management fee to Griffin Advisers for managing its assets.
The Funds also pay other expenses, which are described below, and in "Fund
Expenses" in this Prospectus.
Griffin Advisers or Griffin Administrators may, from time to time,
voluntarily agree to waive or reimburse the Funds for management fees and other
expenses. Waiver or reimbursement arrangements, which may be terminated at any
time without notice, can enhance a Fund's performance by decreasing its
expenses.

MANAGEMENT FEE
The management fee is calculated and paid to Griffin Advisers every month.
The fee is calculated by multiplying each Fund's average daily net assets by
0.50% on an annualized basis. Griffin Advisers, in turn, pays Payden & Rygel
for the sub-advisory services provided to the Funds at the annual rate of 0.25%
of the first $25 million of each Fund's average daily net assets and 0.20% of
each Fund's average daily net assets in excess of $25 million. For the fiscal
year ended September 30, 1998, after waivers, the Money Market Fund paid
management fees to Griffin Advisers at the rate of 0.20% of its average daily
net assets. For the same period, the Tax-Free Money Market Fund did not pay any
management fees to Griffin Advisers.

DISTRIBUTION AND SERVICE FEES
WM Distributors is the distributor ("Distributor") of shares of the Funds.
The Griffin Funds has adopted a Distribution and Services Plan on behalf of
each of the Funds under the SEC's Rule 12b-1 (the "Plans"). Under the Plans,
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 a Fund or for other distribution-
related or sales support services. The fees paid under the Plans also can be
used to pay servicing agents for shareholder liaison services, including
responding to customer inquiries and providing information on their
investments. Payments under the Plans may not exceed, on an annual basis, 0.20%
of each Fund's average daily net assets.

OTHER EXPENSES
The Funds incur the following expenses in addition to the management fee and
distribution and services fees.
The Funds contract with Griffin Administrators to provide various
administrative and accounting services. These services include processing
shareholder transactions and calculating the Funds' share prices. The
administrative fee is determined and paid to Griffin Administrators every
month. The fee is determined by multiplying each Fund's average daily net
assets by 0.20% on an annualized basis. Griffin Administrators, in turn, pays
IFTC for sub-administration services it provides to the Funds. For the fiscal
year ended September 30, 1998, after waivers, the Money Market Fund and the
Tax-Free Money Market Fund paid administration fees to Griffin Administrators
at the rate of 0.20% and 0.20%, respectively, of their average daily net
assets.
In addition to the management fee and the other fees paid to Griffin
Advisers, WM Distributors and Griffin Administrators, the Funds pay other
expenses, such as legal, audit and custodian fees, proxy solicitation costs and
the compensation of directors who are not affiliated with Griffin Advisers, WM
Distributors or Griffin Administrators.

PERFORMANCE

The Funds' performance may be advertised in terms of current yield or
effective yield. In addition, the Tax-Free Money Market Fund's performance may
be advertised in terms of tax-equivalent yield or effective tax-equivalent
yield. These performance figures are based on historical results calculated
under uniform SEC formulas and are not intended to indicate future performance.
Yield refers to the income generated by an investment in a Fund over a seven-
day period, expressed as an annual percentage rate. Effective yields are
calculated similarly, but assume that the income earned from a Fund is
reinvested in the Fund. Because of the effects of compounding, effective yields
are slightly higher than current yields. The
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tax-equivalent yield and the effective tax-equivalent yield of the Tax-Free
Money Market Fund show the level of taxable yield needed to produce an after-
tax equivalent of the Fund's tax-free yield. This is done by increasing the
Fund's yield (calculated as above) by the amount necessary to reflect the
payment of federal income tax at a stated tax
rate. The application of the stated income tax rate results in a higher yield
figure.
The annual and semi-annual reports for the Griffin Funds contain additional
performance information and are available upon request by calling The Griffin
Funds at 1-800-676-4450.

DESCRIPTION OF INVESTMENTS

The following pages contain more detailed information about the types of
securities in which the Funds may invest and the strategies the Adviser may
employ in pursuit of the Funds' investment objectives. A summary of risks and
restrictions associated with these securities and investment practices is
included as well. Additional information about these securities and investment
practices is contained in the SAI. Except as specifically noted, policies and
limitations are considered at the time of purchase; the sale of securities is
not required in the event of a subsequent change in circumstances.

BOTH FUNDS

ASSET-BACKED SECURITIES The Funds may invest in asset- backed securities.
Asset-backed securities arise through the grouping by governmental, government-
related, and private organizations of loans, receivables and other assets
originated by various lenders. Asset-backed securities acquired by a Fund may
consist of both mortgage and non-mortgage backed securities. Unlike other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal paid at maturity or specified call dates, asset-
backed securities provide periodic payments which generally consist of both
interest and principal payments.

The life of an asset-backed security varies with the prepayment experience
with respect to the underlying debt instruments. The rate of such prepayments,
and hence the life of an asset-backed security, will be primarily a function of
current market interest rates, although other economic and demographic factors
may be involved. For example, falling interest rates generally result in an
increase in the rate of prepayments of mortgage loans while rising interest
rates generally decrease the rate of prepayments. An acceleration in
prepayments in response to sharply falling interest rates will shorten the
security's average maturity and limit the potential appreciation in the
security's value relative to a conventional debt security. Consequently, asset-
backed securities are not as effective in locking in high, long-term yields.
Conversely, in periods of sharply rising rates, prepayments are generally slow,
increasing the security's average life and its potential for price
appreciation.

The Funds may invest in non-mortgage backed securities. Non-mortgage backed
securities include interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pool of assets. Such
securities also may be debt instruments, which also are known as collateralized
obligations and are generally issued
18
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as the debt of a special purpose entity organized solely for the purpose of
owning such assets and issuing such debt.

Non-mortgage backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.

BANKERS' ACCEPTANCES are negotiable obligations of a bank to pay a draft which
has been drawn on it by a customer. These obligations are drawn on large banks
and usually backed by goods in international trade.

CERTIFICATES OF DEPOSIT (CDS) are negotiable certificates representing a
depository institution's obligation to repay funds deposited with it, earning
specified rates of interest over a given period of time. The Funds intend to
invest in negotiable CDs with a stated maturity of 397 days or less. Many CDs
by their terms are not withdrawable; others impose penalties upon early
withdrawal. Because such instruments trade in a developed secondary market,
however, early withdrawal penalties should not affect the ability to dispose of
the investment.

COMMERCIAL PAPER refers to short-term debt obligations issued by banks, broker-
dealers, corporations and other entities for purposes such as financing their
current operations. The Funds intend to invest in commercial paper having
maximum maturities of 270 days.

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. A bond generally is an interest-bearing security -- an IOU --
issued by companies or governmental units. The issuer has a contractual
obligation to pay interest at a stated rate on specific dates and to repay
principal (the bond's face value) on a specified date. An issuer may have the
right to redeem or "call" a bond before maturity, and the investor may have to
reinvest the proceeds at lower market rates.

A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect the changes in interest rate levels. A bond's price
usually rises when interest rates fall, and vice versa, so its yield stays
current. Bonds may be unsecured (backed by the issuer's general
creditworthiness only) or secured (also backed by specified collateral).

Certain bonds have interest rates that are adjusted periodically which tend
to minimize fluctuations in their principal value. In calculating the Funds'
weighted average maturity, the maturity of these securities may be shortened
under certain specified conditions. Bonds may be senior or subordinated
obligations. Senior obligations generally have the first claim on a
corporation's earnings and assets and, in the event of liquidation, are paid
before subordinated debt.

DELAYED-DELIVERY TRANSACTIONS. The Funds may purchase securities on a when-
issued or delayed-delivery basis, with payment and delivery taking place at a
future date. The Funds may purchase securities on a delayed-delivery basis to
generate income and to hedge against changes in interest rates and securities'
prices. The market value of securities purchased in this way may change before
the delivery date, which could affect the market value of a Fund's assets.
Ordinarily, the Funds will not earn interest on securities until they are
delivered. The Funds may also purchase and sell securities on a forward
commitment basis. When delayed-delivery purchases are outstanding, a Fund will
set aside cash or liquid high quality debt instruments in a segregated
custodial account to cover its purchase obligations. See "Additional Securities
and Investment Practices -- Delayed-Delivery Transactions" in the SAI.

DEMAND FEATURES. The Funds may invest in securities with demand features, which
are puts that entitle a security holder to repayment of the principal amount of
the underlying security on no more than 30 days' notice at any time or at
specified intervals not exceeding 397 days.

ILLIQUID INVESTMENTS. Each Fund may invest up to 10% of its net assets in
illiquid investments. Illiquid investments are those that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Under the supervision of the
Board of Directors, Griffin Advisers determines the liquidity of each Fund's
investments. The absence of a trading
19
<PAGE>

market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments before maturity may be time-
consuming and expensive and it may be difficult or impossible for a Fund to
sell illiquid investments promptly at an acceptable price. See "Additional
Securities and Investment Practices -- Illiquid Investments" in the SAI.

MUNICIPAL SECURITIES. The Funds may invest in municipal securities, which
include general obligation securities, which are backed by the full taxing
power of a municipality, and revenue securities, which are backed by revenues
of a specific tax, project or facility. Industrial revenue bonds are a type of
revenue bond backed by the credit and security of a private issuer and may
involve greater risk. Private activity municipal securities, which may be
subject to the federal alternative minimum tax, include securities issued to
finance housing and other construction projects, student loans and privately
owned solid waste disposal and water and sewage treatment facilities.

OTHER INVESTMENT COMPANIES. The Funds may invest in shares of other open-end
management investment companies to the extent consistent with the Funds'
investment objectives and policies and subject to the limitations of Section
12(d)(1) of the Investment Company Act of 1940. Such investment companies can
be expected to charge fees for certain operating expenses, such as investment
advisory and administration fees, that would be in addition to those charged by
the Funds. The Tax-Free Money Market Fund may invest in shares of another tax-
free money market fund provided, however, that the Tax-Free Money Market Fund
may only invest in a tax-free money market fund with a fundamental policy of
investing, under normal conditions, at least 80% of its total assets in
obligations that are exempt from federal income taxes and that are not subject
to the federal alternative minimum tax. The Funds will only invest in the
shares of other money market funds after conducting a credit analysis of such
funds.

REPURCHASE TRANSACTIONS. The Funds may participate in repurchase transactions,
which are transactions involving a purchase of a security by a Fund that
simultaneously commits to resell that security to the seller at an agreed upon
price on an agreed upon date within a number of days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon incremental
amount. In the event of the bankruptcy of the other party to a repurchase
agreement, a Fund could experience delays in recovering its cash or disposing
of the securities obtained from the other party. To the extent that in the
meantime, the value of the securities purchased may have decreased, a Fund
could experience a loss. In all cases, the creditworthiness of the other party
to a transaction is reviewed and found satisfactory by the Adviser. Repurchase
agreements are, in effect, loans of Fund assets.

RESTRICTED SECURITIES. The Funds may purchase securities which cannot be sold
to the public without registration under the Securities Act of 1933. Unless
registered for sale, these securities can only be sold in privately negotiated
transactions or pursuant to an exemption from registration.

REVERSE REPURCHASE TRANSACTIONS. In a reverse repurchase transaction, a Fund
sells a portfolio instrument to another party such as a bank or broker-dealer,
in return for cash. At the same time, the Fund agrees to repurchase the
instrument at an agreed upon price and time. Reverse repurchase agreements are,
in effect, borrowings by the Funds. Each Fund expects that it will engage in
reverse repurchase agreements for the limited purpose of meeting redemptions.
Reverse repurchase agreements may increase the risk of fluctuation in the
market value of each Fund's assets or in its yield. As a matter of fundamental
policy, each Fund may not engage in reverse repurchase agreements in an amount
exceeding 10% of its total assets. When a Fund enters into a reverse repurchase
transaction, it will place cash or liquid high quality debt instruments in a
segregated account with its custodian in an amount at least equal to its
obligations under the reverse repurchase transaction.

U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in U.S. Government
Obligations, which are securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities. Not all U.S. Government Obligations are
direct obligations of the U.S. Treasury. Payment of their principal and
interest may be backed by the full faith and credit of the United States (E.G.,
U.S. Treasury bills and GNMA certificates) or solely by the issuing or
guaranteeing agency or instrumentality itself (E.G., FNMA notes). In the latter
case, investors must look to the agency or instrumentality issuing or
guaranteeing the obligation
20
<PAGE>

for ultimate repayment. GNMA certificates and FNMA notes represent ownership
interests in a pool of mortgages and the resulting cash flow from those
mortgages. The stated maturities of these obligations may be shortened by
unscheduled prepayments of principal and interest on the underlying mortgages,
thereby affecting a Fund's yield.

VARIABLE- OR FLOATING-RATE INSTRUMENTS. The Funds may invest in variable- or
floating-rate instruments (including notes purchased directly from issuers),
which bear variable or floating interest rates and may carry a demand feature
that permits holders to demand full payment from the issuers or certain
financial intermediaries. Floating-rate securities have interest rates that
change whenever there is a change in a designated market-based interest rate,
while variable-rate instruments provide for a specified periodic adjustment in
the interest rate.

The Tax-Free Money Market Fund ONLY
BOND ANTICIPATION NOTES normally provide interim financing in advance of an
issue of bonds or notes, the proceeds of which are used to repay the
anticipation notes. Tax revenue and bond anticipation notes are unsecured. The
Fund intends to invest only in notes having a maximum maturity of 397 days.
MUNICIPAL LEASE OBLIGATIONS AND CERTIFICATES OF PARTICIPATION are issued by a
state or local government or authority to acquire land and a wide variety of
equipment and facilities. These obligations typically are not fully backed by
the municipality's credit, and their interest may become taxable if the lease
is assigned. In certain instances, if funds are not appropriated for the
following year's lease payments, a lease may terminate, with the possibility of
default on the lease obligation and significant loss to the Fund.
A participation interest in a municipal lease obligation represents a
specified, undivided interest in the obligation in proportion to the purchased
interest in the total amount of the obligation and may have limited
marketability.

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

STANDBY COMMITMENTS are puts that entitle the security holder to same-day
settlement at amortized cost plus accrued interest. Issuers or financial
intermediaries who provide demand features or standby commitments often support
their ability to buy securities on demand by obtaining letters of credit
("LOCs") or other guarantees from domestic or foreign banks. LOCs also may be
used as credit supports for other types of municipal instruments. The Adviser
may rely upon its evaluation of a bank's credit in determining whether to
purchase an instrument supported by an LOC. In evaluating a foreign bank's
credit, the Adviser will consider whether adequate public information about the
bank is available and whether the bank may be subject to unfavorable political
or economic developments, currency controls, or other governmental restrictions
that might affect the bank's ability to honor its credit commitment.

TAX AND REVENUE ANTICIPATION NOTES are issued by municipalities in expectation
of future tax or other revenues, and are payable from those specific taxes or
revenues.

TAX-EXEMPT COMMERCIAL PAPER is issued by municipalities to help provide short-
term capital or finance operating needs.

TENDER OPTION BONDS are created by coupling an intermediate- or long-term,
fixed rate tax-exempt bond with a tender agreement that gives the holder the
option to tender the bond at its face value. In return for providing the tender
option, the sponsor (usually a bank, broker-dealer or other financial
institution) receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate that would cause the bond, coupled with the
tender option, to trade at par value. Subject to applicable regulatory
requirements, the Fund may buy tender option bonds if the tender option
agreement gives the Fund the right to tender the bond to its sponsor no less
frequently than once every 397 days. A sponsor may terminate a tender option
if, for example, the issuer of the underlying bond defaults on interest
payments.

ZERO COUPON BONDS are bonds that do not make regular interest payments; instead
they are sold at a deep discount from their face value and are redeemed at face
value when they mature. Because zero coupon bonds do not pay
21
<PAGE>

current income, their prices can be very volatile when interest rates change.
In calculating dividends, the Fund will take into account as income a portion
of the difference
between a zero coupon bond's purchase price and its face value.

Investment Limitations

The Funds' investment objectives, as set forth in the "The Funds in Brief"
section, are fundamental; that is, they may not be changed without approval by
vote of the holders of a majority of the relevant Fund's outstanding voting
securities. In addition, any fundamental investment policy may not be changed
without such shareholder approval. If the Board of Directors determines,
however, that a Fund's investment objective can best be achieved by a
substantive change in a non-fundamental investment policy or strategy, the
Board may make such change without shareholder approval and will disclose any
such material changes in the then current prospectus. Any policy that is not
specified in a Fund's Prospectus, or in the SAI, as being fundamental is non-
fundamental.
Set forth below are some of the Funds' principal investment limitations. A
complete listing is contained in the SAI.

(1) Each Fund normally may not invest more than 5% of its total assets in the
securities (other than U.S. Government securities) of any one issuer.
(2) Each Fund will not purchase a security (other than U.S. Government
securities) if, as a result, more than 25% of its total assets would be
invested in a particular industry, except that the Money Market Fund will
concentrate more than 25% of its total assets in the financial services
industry.
(3) Each Fund (a) may borrow money for temporary or emergency purposes (not for
leveraging an investment) or engage in reverse repurchase agreements in an
amount not to exceed 10% of its total assets; and (b) may not purchase any
security while borrowings representing more than 5% of its total assets are
outstanding; and
(4) Each Fund (a) may make securities or other loans to other parties, but not
in excess of 33 1/3% of its total assets, and (b) may engage in repurchase
agreements.

Because the Money Market Fund concentrates more than 25% of its total assets
in the financial services industry, its performance may be affected by
conditions affecting banks and other financial services companies. Companies in
the financial services industry are subject to various risks related to that
industry, such as governmental regulation, changes in interest rates and
exposure on loans, including loans to foreign borrowers.

Investments in the financial services industry will consist of, among other
things, obligations of domestic banks, savings and loan associations, consumer
and industrial finance companies, securities brokerage companies, leasing
companies and a variety of firms in the insurance field. These obligations
include time deposits, certificates of deposit, bankers' acceptances and
commercial paper.
22
<PAGE>

INVESTMENT ADVISER
Griffin Financial Investment Advisers
5000 Rivergrade Road
Irwindale, California 91706

SUB-ADVISER
Payden & Rygel Investment Counsel
333 South Grand Avenue, 32nd Floor
Los Angeles, California 90071

DISTRIBUTOR
WM Funds Distributor, Inc.
1300 21st Street
Sacramento, California 95814

TRANSFER AGENT AND CUSTODIAN
Investors Fiduciary Trust Company
801 Pennsylvania
Kansas City, Missouri 64105

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, California 90017

LEGAL COUNSEL
Morrison & Foerster LLP
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006

For more information about the Funds, simply call (800) 676-4450, or write:
WM Funds Distributor, Inc.
1300 21st Street
Sacramento, California 95814

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

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

DECEMBER 16, 1998

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"). This Statement of Additional Information relates to the single
class of shares offered by the Money Market Funds and the Class A and Class B
Shares offered by each Non-Money Market Fund. This Statement of Additional
Information is not a prospectus but should be read in conjunction with the
Funds' current Prospectuses, dated December 16, 1998. All terms used herein
that are defined in the Prospectuses have the meanings assigned in the
Prospectuses. Please retain this Statement of Additional Information for future
reference. To obtain additional copies of this Statement of Additional
Information or of the Funds' Prospectuses, please call The Griffin Funds at 1-
800-676-4450.
<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
General Information.................................................................. 3
Investment Limitations............................................................... 3
Money Market Fund.................................................................. 3
Tax-Free Money Market Fund......................................................... 4
Short-Term Bond Fund............................................................... 5
U.S. Government Income Fund........................................................ 7
Municipal Bond Fund................................................................ 8
California Tax-Free Fund........................................................... 9
Bond Fund.......................................................................... 10
Growth & Income Fund............................................................... 12
Growth Fund........................................................................ 13
Non-Fundamental Policies of All Funds................................................ 14
Additional Securities and Investment Practices....................................... 15
Special Factors Affecting the California Tax-Free Fund............................... 42
Portfolio Transactions and Brokerage................................................. 46
Valuation of Portfolio Securities.................................................... 49
Performance.......................................................................... 50
Additional Purchase and Redemption Information....................................... 62
Distributions and Taxes.............................................................. 62
Service Providers.................................................................... 70
Directors and Officers............................................................... 71
Management Contracts................................................................. 73
Distribution and Service Plans....................................................... 78
Description of The Griffin Funds..................................................... 81
Appendix............................................................................. 86
</TABLE>

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

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

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

WM Funds Distributor, Inc. ("WM Distributors")
- ----------------------------------------------
Distributor

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

2
<PAGE>

GENERAL INFORMATION

The Griffin Funds was organized as a Maryland corporation on August 5,
1993. The Griffin Funds is an open-end management investment company currently
consisting of nine series (the "Funds"). As used herein, the "Adviser" or the
"Advisers" shall mean Griffin Advisers, Payden & Rygel, T. Rowe Price and/or
TBCAM as the context may require.

INVESTMENT LIMITATIONS

The following policies and limitations supplement those set forth in the
Prospectuses. 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 (the "1940 Act")) of the Fund.
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. Set forth
below is a description of the fundamental investment policies of each Fund. At
the end of this section, the non-fundamental policies applicable to each Fund
are described.

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%

3
<PAGE>

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;

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.

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

4
<PAGE>

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;

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

10. invest its assets so that less than 80% of its income distributions are
exempt from federal income tax and the federal alternative minimum tax.

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

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

1. purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, any of its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Short-Term
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 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

5
<PAGE>

(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

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

6
<PAGE>

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

7
<PAGE>

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

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.

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

AS A MATTER OF FUNDAMENTAL 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,

8
<PAGE>

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 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.

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 California Tax-Free 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

9
<PAGE>

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;

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

10. invest its assets so that less than 80% of its income distributions are
exempt from federal income tax and the federal alternative minimum tax.

AS A MATTER OF NON-FUNDAMENTAL POLICY:

1 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.

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;

10
<PAGE>

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;

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.

11
<PAGE>

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 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;

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

12
<PAGE>

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

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 SEC rules, regulations or orders;

13
<PAGE>

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

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

NON-FUNDAMENTAL POLICIES OF ALL FUNDS

EXCEPT AS OTHERWISE INDICATED, EACH FUND HAS THE FOLLOWING "CORE" NON-
FUNDAMENTAL POLICIES:

(1) The Fund may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act.
Under the 1940 Act, a Fund's investment in such securities currently is limited
to , subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of such Fund's net assets with respect to any one
investment company, and (iii) 10% of such Fund's net assets in the aggregate.
Other investment companies in which the Funds invest can be expected to charge
fees for operating expenses, such as investment advisory and administration
fees, that would be in addition to those charged by a Fund.

(2) The Fund may not invest more than 15% (10% in the case of a money
market fund) of the Fund's net assets in illiquid securities. For this purpose,
illiquid securities include, among others, (a) securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) fixed time deposits that are subject to withdrawal
penalties and that have maturities of more than seven days, and (c) repurchase
agreements not terminable within seven days.

(3) The Fund may invest up to 25% of its net assets in securities of
foreign governmental and foreign private issuers that are denominated in and pay
interest in U.S. dollars.

(4) The Fund may lend securities from its portfolio to brokers, dealers and
financial institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund's total assets. Any such loans of portfolio securities will be fully
collateralized based on values that are marked to market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year.

14
<PAGE>

ADDITIONAL SECURITIES AND INVESTMENT PRACTICES

ASSET-BACKED SECURITIES. Each of the Funds may invest in asset-backed
securities. Asset-backed securities arise through the grouping by governmental,
government-related, and private organizations of loans, receivables, or other
assets originated by various lenders. Asset-backed securities consist of both
mortgage- and non-mortgage backed securities. Unlike other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal paid at maturity or specified call dates, asset-backed
securities generally provide periodic payments which may consist of both
interest and principal payments.

The life of an asset-backed security varies with the prepayment experience
of the underlying debt instruments. The rate of such prepayments, and hence the
life of an asset-backed security, will be primarily a function of current market
interest rates, although other economic and demographic factors may also effect
the life of an asset-backed security. For example, falling interest rates
generally result in an increase in the rate of prepayments of mortgage loans,
while rising interest rates generally decrease the rate of prepayments. An
acceleration in prepayments in response to sharply falling interest rates will
shorten a security's average maturity and limit the potential appreciation in
the security's value relative to a conventional debt security. Consequently,
asset-backed securities may not be as effective in locking in high, long-term
yields. Conversely, in periods of sharply rising rates, prepayments are
generally slow, increasing the security's average life and its potential for
price appreciation.

Mortgage-backed securities represent an ownership interest in a pool of
mortgage loans. Mortgage pass-through securities may represent participation
interests in pools of residential mortgage loans originated by U.S. governmental
or private lenders and guaranteed, to the extent provided in such securities, by
the U.S. Government or one of its agencies, authorities or instrumentalities.
Such securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans.

The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by Government National Mortgage
Association ("GNMA"), by Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"). Such Certificates are
mortgage-backed securities which represent a partial ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Such mortgage loans may have fixed or
adjustable rates of interest.

Mortgage-backed securities issued by private issuers, whether or not such
obligations are subject to guarantees by the private issuer, may entail greater
risk than obligations directly or

15
<PAGE>

indirectly guaranteed by the U.S. Government. Mortgage-backed securities issued
by private issuers will be purchased for a Fund only when the Adviser determines
that they are readily marketable at the time of purchase. Except as limited by
their respective investment objectives and policies, there is no limit on the
amount or type of mortgage-backed securities the Short-Term Bond Fund, U.S.
Government Income Fund, Municipal Bond Fund, California Tax-Free Fund, Bond Fund
or Growth & Income Fund may purchase, except that the California Tax-Free Fund
will not purchase any mortgage-backed securities issued by private issuers.

The yield which will be earned on mortgage-backed securities may vary from
their coupon rates for the following reasons: (i) Certificates may be issued at
a premium or discount, rather than at par; (ii) Certificates may trade in the
secondary market at a premium or discount after issuance; (iii) interest is
earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each Certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the Certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate may result in a loss to the Fund.

The average life of mortgage-backed securities varies with the maturities
of the underlying mortgage instruments. The average life may be substantially
less than the original maturity of the mortgage pools underlying the securities
as the result of mortgage prepayments, mortgage refinancings or foreclosures,
which in turn may affect Fund performance. The rate of mortgage prepayments, and
hence the average life of the certificates, will be a function of the level of
interest rates, general economic conditions, the location and age of the
mortgage and other social and demographic conditions. These prepayments tend to
increase when interest rates decline, presenting a Fund with more principal to
invest at lower rates. Such prepayments are passed through to the registered
holder with the regular monthly payments of principal and interest and have the
effect of reducing future payments. The converse also tends to be the case when
interest rates rise.

The Short-Term Bond Fund, U.S. Government Income Fund, Municipal Bond
Fund, California Tax-Free Fund and Bond Fund also may invest in collateralized
mortgage obligations ("CMOs") and multi-class pass-through mortgage securities.
Multi-class pass-through mortgage securities are equity interests in a trust
comprised of mortgage loans or other mortgage-backed securities, and all
references herein to CMOs will include multi-class pass-through securities.
Payments of principal and interest on underlying collateral provide the funds to
pay debt service on the CMO or make scheduled distributions on the multi-class
pass-through security. CMO and multi-class pass-through securities may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations.

16
<PAGE>

many ways. One or more tranches of a CMO may have coupon rates which reset
periodically at a specified increment over an index such as the London Interbank
Offered Rate ("LIBOR"). These floating-rate CMOs are typically issued with
lifetime caps on the coupon rate thereon. The Short-Term Bond, U.S. Government
Income, Municipal Bond, California Tax-Free and Bond Funds may also invest in
inverse or reverse floating CMOs. Inverse or reverse floating CMOs constitute a
tranche of a CMO with a coupon rate that moves in the reverse direction to an
applicable index such as LIBOR. Accordingly, the coupon rate thereon will
increase as interest rates decrease. Inverse or reverse floating CMOs are
typically more volatile than fixed- or floating-rate tranches of CMOs.
Investments in inverse or reverse floating CMOs would be purchased to attempt to
protect against a reduction in the income earned on the Fund's investments due
to a decline in interest rates. The Short-Term Bond, U.S. Government Income,
Municipal Bond, California Tax-Free and Bond Funds would be adversely affected
by the purchase of such CMOs in the event of an increase in interest rates since
the coupon rate thereon will decrease as interest rates increase, and, like
other mortgage-backed securities, the value will decrease as interest rates
increase.

The Short-Term Bond, U.S. Government Income, Municipal Bond, California
Tax-Free and Bond Funds may invest in Stripped Mortgage-Backed Securities
("SMBS"), which are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks and special subsidiaries of the
foregoing. The Short-Term Bond Fund may invest up to 10% of its net assets in
SMBS.

There are generally two classes of SMBS, one of which (the "IO class")
entitles the holders thereof to receive distributions consisting solely or
primarily of all or a portion of the interest on the underlying pool of mortgage
loans or mortgage-backed securities ("Mortgage Assets") and the other of which
(the "PO class") entitles the holders thereof to receive distributions
consisting solely or primarily of all or a portion of the principal of the
underlying pool of Mortgage Assets. The cash flows and yields on IO and PO
classes are extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying Mortgage Assets. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, an investor in the
IO class may incur substantial losses. Conversely, if the underlying Mortgage
Assets experience slower than anticipated prepayments of principal, the yield on
a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security.

The Funds also may invest in non-mortgage asset-backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Such securities also
may include instruments issued by certain trusts, partnerships or other special
purpose issuers, including pass-through certificates

17
<PAGE>

representing participations in, or debt instruments backed by, the securities
and other assets owned by such issuers.

Non-mortgage-backed securities are not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution (such as a bank or insurance company) unaffiliated with
the issuers of such securities.

The purchase of non-mortgage-backed securities raises considerations
peculiar to the financing of the instruments underlying such securities. For
example, most organizations that issue asset-backed securities relating to motor
vehicle installment purchase obligations perfect their interests in their
respective obligations only by filing a financing statement and by having the
servicer of the obligations, which is usually the originator, take custody
thereof. In such circumstances, if the servicer were to sell the same
obligations to another party, in violation of its duty not to do so, there is a
risk that such party could acquire an interest in the obligations superior to
that of the holders of the asset-backed securities. Also, although most such
obligations grant a security interest in the motor vehicle being financed, in
most states the security interest in a motor vehicle must be noted on the
certificate of title to perfect such security interest against competing claims
of other parties. Due to the larger number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the obligations
underlying the asset-backed securities, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders of
the asset-backed securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on those securities. In addition, various state and Federal
laws give the motor vehicle owner the right to assert against the holder of the
owner's obligation certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the
related asset-backed securities. Insofar as credit card receivables are
concerned, credit card holders are entitled to the protection of a number of
state and Federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing the amounts paid on such receivables.

The development of non-mortgage backed securities is at an early stage
compared to mortgage-backed securities. While the market for asset-backed
securities is becoming increasingly liquid, the market for mortgage-backed
securities issued by certain private organizations and non-mortgage-backed
securities is not as well developed.

CERTAIN TAXABLE OBLIGATIONS. The Tax-Free Money Market Fund and the
California Tax-Free Fund each 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. Each Fund will purchase taxable obligations only if such
obligations meet the quality requirements as set forth in its Prospectus.

18
<PAGE>

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 and the
California Tax-Free Fund's distributions. If such proposals were enacted, the
availability of municipal obligations and the value of the Tax-Free Money Market
Fund's and the California Tax-Free Fund's holdings would be affected and the
Board of Directors would reevaluate the Funds' investment objectives and
policies.

The Tax-Free Money Market Fund and the California Tax-Free Fund each
anticipates being as fully invested as practicable in municipal securities.
However, there may be occasions when, as a result of the maturity of portfolio
securities, sales of fund shares, or in order to meet redemption requests, the
Tax-Free Money Market Fund and 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 Tax-Free Money Market or the California Tax-
Free Fund may be required to sell securities at a loss.

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.

COMMON STOCKS. The Growth & Income Fund's and the Growth 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. Throughout most of
1998, common stocks, as measured by the S&P 500 Index and other commonly used
indices of common stock performance, were trading at or close to record levels.
There can be no guarantee that such performance will continue.

Under normal market conditions, at least 90% of the Growth & Income 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

19
<PAGE>

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 medium and smaller
companies because their shares tend to be less liquid than securities of larger
companies. Further, shares of medium and 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. The Growth & Income Fund's
investments in medium and smaller companies is not expected to exceed 10% of the
Fund's investment in equity securities.

CONVERTIBLE BONDS. The Bond 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 bonds, while usually subordinate to similar non-convertible
bonds, are senior to common stocks in an issuer's capital structure. Convertible
bonds 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 bond'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 bonds that are
either rated in one of the four highest rating categories by a Nationally
Recognized Statistical Rating Organization ("NRSRO"), or are unrated securities
determined by the Adviser, under the direction of the Board of Directors, to be
of comparable quality.

CONVERTIBLE SECURITIES. The Growth & Income Fund and the Growth 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. These Funds
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 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.

CORPORATE BONDS AND NOTES. All of the Funds (except the U.S. Government
Income Fund, the Municipal Bond Fund and the California Tax-Free Fund) may
invest in corporate bonds and notes, which may 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.

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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 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.

DERIVATIVE MUNICIPAL OBLIGATIONS. The Municipal Bond Fund and the
California Tax-Free Fund may invest in more recently developed municipal
financing instruments,

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including (i) custodial receipts or certificates evidencing ownership of future
interest payments, principal payments, or both, on underlying municipal
securities and (ii) 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 these Funds 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. 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 and Poor's Corporation ("S&P") or Moody's
Investor Service, Inc. ("Moody's"), comparably rated by any other nationally
recognized statistical rating organization or, if unrated, of comparable quality
as determined by the Adviser.

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.

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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 they 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 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.

FOREIGN INDEX LINKED INSTRUMENTS. The U.S. Government Income Fund and the
Bond Fund may invest up to 10% of their total assets in Foreign Index Linked
Instruments. Foreign Index Linked Instruments are fixed income securities which
are issued by U.S. issuers (including U.S. subsidiaries of foreign issuers) and
are denominated in U.S. dollars, but return principal and/or pay interest to
investors in amounts which are linked to the level of a particular foreign

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index. A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries or the differential in
interest rates between particular countries. In the case of Foreign Index Linked
Instruments linking the principal component to a foreign index, the amount of
principal payable by the issuer at maturity will increase or decrease in
response to changes in the level of the foreign index during the term of the
Foreign Index Linked Instrument. In the case of Foreign Index Linked Instruments
linking the interest component to a foreign index, the amount of interest
payable will adjust periodically in response to changes in the level of the
foreign index during the term of the Foreign Index Linked Instrument. Foreign
Index Linked Instruments may be issued by a U.S. governmental agency or
instrumentality or by a private issuer.

Generally, the Foreign Index Linked Instruments which have been issued to
date have been debt instruments closely resembling corporate debt securities,
U.S. Government Obligations or zero-coupon bonds ("Debt Securities") except for
the benchmark to which payments of principal or interest are tied. In the
future, other Foreign Index Linked Instruments may be created backed by
mortgages or other assets which closely resemble mortgage-backed securities or
asset-backed securities. Therefore, the risks described in the Prospectus and in
this Statement of Additional Information with respect to mortgage-backed
securities, asset-backed securities or Debt Securities, as the case may be, may
be equally applicable to a given Foreign Index Linked Instrument.

Foreign Index Linked Instruments present certain risks not applicable to
mortgage-backed securities, asset-based securities or Debt Securities. Such
Foreign Index Linked Instruments may offer higher yields than comparable
securities linked to purely domestic indices but also may be more volatile.
Foreign Index Linked Instruments are relatively recent innovations for which the
market has not yet been fully developed and, accordingly, they typically are
less liquid than comparable securities linked to purely domestic indices. In
addition, the value of Foreign Index Linked Instruments will be affected by
fluctuations in foreign exchange rates or foreign interest rates. If the Adviser
is incorrect in its prediction as to movements in the direction of particular
foreign currencies or foreign interest rates, the return realized by a Fund on a
Foreign Index Linked Instrument may be lower than if the Fund had invested in a
similarly rated domestic security. Foreign currency gains and losses with
respect to Foreign Index Linked Instruments may affect the amount and timing of
income recognized by the Funds.

FOREIGN SECURITIES. The Short-Term Bond Fund, the U.S. Government Income
Fund, the Bond Fund, the Growth & Income Fund and the Growth 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. 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 American
Depositary Receipts ("ADRs"), among other securities. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. Designed for use in U.S. securities markets, ADRs
are an alternative to the purchase of the underlying securities in their
national markets and currencies. Most ADRs are traded on U.S. stock exchanges.
Purchases of ADRs by the Funds will be limited to sponsored ADRs. The

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<PAGE>

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.

Certain Risks Associated with Foreign Investments. Foreign investments can
involve significant risks in addition to the risks inherent in U.S. investments.
There may be less publicly available information about a foreign issuer than
about a domestic issuer. The value of securities denominated in or indexed to
foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those applicable to U.S. companies, and it may be more
difficult to obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial costs, are generally
higher than for U.S. investments.

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

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.
Taxes may be withheld at the source under foreign income tax laws. Investments
in foreign countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments. Any
such development could have a material adverse effect on a Fund's investments
in, or the liquidity of, securities of issuers located in such countries. There
is no assurance that the Adviser will be able to anticipate these potential
events or counter their effects.

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

FUTURES TRANSACTIONS. As their Prospectus provides, each of the Non-Money
Market Funds may engage in transactions in futures contracts and options on
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

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<PAGE>

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."

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. At any time
prior to the expiration of a futures contract, however, 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 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 may be closed out only on the exchange or board of trade where the
contracts were initially traded.

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.

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.

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

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<PAGE>

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.

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.

Limitations on Purchase and Sale of Futures Contracts and Options on
Futures Contracts. In general, the Non-Money Market Funds will engage in
transactions in futures contracts and related options only for bona fide hedging
and other appropriate risk management purposes, and not for speculation. In
addition, with respect to positions in futures and related options that do not
constitute bona fide hedging positions, a Non-Money Market Fund will not enter
into a futures contract or futures option contract if, immediately thereafter,
the aggregate initial margin deposits relating to such positions plus premiums
paid by it for open futures option positions, less the amount by which any such
options are "in-the-money," would exceed 5% of the Fund's total assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-
money" if the exercise price exceeds the value of the futures contract that is
the subject of the option.

The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures or futures options.
See "Distributions and Taxes."

Risks Associated With Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund's securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets,

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causing a given hedge not to achieve its objectives. The degree of imperfection
of correlation depends on circumstances such as variations in speculative market
demand for futures and futures options on securities, including technical
influences in futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. 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. Accordingly, a decision as to whether, when and
how to hedge involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.

Successful use of futures contracts and related options by the Non-Money
Market Funds for hedging purposes is also subject to the ability of the Funds'
adviser and/or 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.

Futures exchanges may limit the amount of fluctuation permitted in certain
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 the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.

While a Fund will establish a futures or futures 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. In addition, certain of the
contracts discussed above are relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.

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,

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<PAGE>

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, for
example, 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.
In this regard, 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. Certain Hedging Transactions that a Fund may use are described under
"Futures Transactions," "Options" and "Interest Rate Transactions." 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.

HIGH YIELD, HIGH RISK SECURITIES. The Short-Term Bond Fund and the Bond
Fund may each invest up to 5% of their respective net assets in securities that
are rated below investment grade by an NRSRO (e.g., lower than Baa by Moody's or
lower than BBB by S&P's) (or, if not rated, of comparable quality), provided
that any such securities also are rated investment grade by at least one other
NRSRO. Securities rated below investment grade by an NRSRO are sometimes
referred to as "high yield" or "junk" bonds. Investors should consider the
following risks associated with high yield securities before investing in these
Funds.

Investing in high yield securities involves special risks in addition to
the risks associated with investments in higher rated securities. High yield
securities may be regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis
of the creditworthiness of issuers of high yield securities may be more complex
than for issuers of high quality debt securities, and the ability of a Fund to
achieve its investment objective may, to the extent of its investments in high
yield securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher quality securities.

High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield
securities defaults, a Fund may incur additional expenses to

29
<PAGE>

seek recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically in cash.

The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of a Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly-traded
market.

The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last rated.
The Adviser does not rely solely on credit ratings when selecting securities for
a Fund, it develops its own independent analysis of issuer credit quality. If a
credit rating agency changes the rating of a portfolio security held by a Fund,
the Fund may retain the portfolio security if the Adviser deems it to be in the
best interest of shareholders.

ILLIQUID INVESTMENTS. Illiquid instruments 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, the Adviser determines the liquidity of each Fund's
investments and, through reports from the Adviser, the Board monitors
investments in illiquid instruments. In determining the liquidity of a Fund's
investments, the Adviser may consider various factors including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features) 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
currently considered by the Money Market Funds, 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 the Adviser 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 the Adviser
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.

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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 and decrease the proportion of illiquid securities in its
portfolio. Similarly, if through a change in values, net assets or other
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 and decrease the proportion of illiquid
securities in its portfolio. However, there can be no assurance that any steps
taken will be successful. Accordingly, the level of illiquidity of a Fund
holding such securities may increase during any such period.

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 and decrease the proportion of illiquid securities in its
portfolio. 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 net asset value
("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 S & P or
Moody's or comparably rated by any nationally recognized statistical rating
organization. The Adviser 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

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<PAGE>

banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. The Adviser 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 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.

Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on Griffin Advisers' or the sub-adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other types of investments. Because they are two-
party contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. Certain
restrictions imposed on the Funds by the Internal Revenue Code may limit the
Funds ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
a Fund's ability to terminate existing swap agreements or to realize amounts to
be received under such agreements.

Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the
Commodity Futures Trading Commission ("CFTC"). To qualify for this exemption, a
swap agreement must be entered into by "eligible participants," which include
the following, provided the participants' total assets exceed established
levels: a bank or trust company, savings association or credit union, insurance
company, investment company subject to regulation under the 1940 Act, commodity
pool, corporation, partnership, proprietorship, organization, trust or other
entity, employee benefit plan, governmental entity, broker-dealer, futures
commission merchant, natural person, or regulated foreign person. To be
eligible, natural persons and most other entities must have total assets
exceeding $10 million; commodity pools and employee benefit plans must have
total assets exceeding $5 million. In addition, an eligible swap transaction
must meet three conditions. First, the swap agreement may not be part of a
fungible class of agreements that are standardized as to their material economic
terms. Second, the creditworthiness of parties with actual or potential
obligations under the swap agreement must be a material consideration in
entering into or determining the terms of the swap

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<PAGE>

agreement, including pricing, cost or credit enhancement terms. Third, swap
agreements may not be entered into and traded on or through a multilateral
transaction execution facility.

This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.

LETTERS OF CREDIT. The Tax-Free Money Market Fund and 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 the Adviser, are
of investment quality comparable to other permitted investments of the Fund may
be used for letter of credit-backed investments.

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), or 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 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,

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<PAGE>

the Funds rely on the Adviser's 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 compliance with applicable diversification
requirements. 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.

MUNICIPAL BONDS. The Money Market Fund, the Municipal Bond, and the
California Tax-Free 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

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<PAGE>

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 LEASE OBLIGATIONS AND CERTIFICATES OF PARTICIPATION. The Tax-Free
Money Market Fund, 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.

MUNICIPAL NOTES. The California Tax-Free Fund, the Municipal Bond Fund and
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.

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<PAGE>

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.

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 NAV per share of the Fund.

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

MUNICIPAL SECURITIES. The Money Market Funds, 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.

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.

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<PAGE>

Some of these instruments may be unrated, but unrated instruments purchased
by a Fund will be determined by the Adviser to be of comparable quality at the
time of purchase to instruments rated "investment grade" by any major rating
service. Where necessary to ensure that an instrument is of comparable "high
quality," a Fund may 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 the
Adviser 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, the Adviser
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.

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.

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<PAGE>

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 write
(i.e., sell) covered put and call options in an amount not exceeding 5% of a
Fund's total assets. 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
written by a Fund 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 such Fund's 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.

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<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. The Adviser 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.

Risks Associated with Options Transactions. The purchase and writing of
options involve certain risks. During the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity to profit
from a price increase in the underlying securities above the exercise price,
but, as long as its obligation as a writer continues, has retained the risk of
loss should the price of the underlying security decline. The writer of an
option has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price. If a put or call option purchased by a Fund is
not sold when it has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the exercise
price or, in the case of a call, remains less than or equal to the exercise
price, the Fund will lose its entire investment in the option. Also, where a put
or call option on a particular security is purchased to hedge against price
movements in a related security, the price of the put or call option may move
more or less than the price of the related security. There can be no assurance
that a liquid market will exist when a Fund seeks to close out an option
position. Furthermore, if trading restrictions or suspensions are imposed on the
options markets, a Fund may be unable to close out a position.

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

39
<PAGE>

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

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.

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 the Adviser to be of good standing. Furthermore, they
will only be made if, in the Adviser's judgment, the consideration to be earned
from such loans would justify the risk.

The Adviser 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).

STANDBY COMMITMENTS. The Tax-Free Money Market Fund and the Municipal Bond
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.
These Funds may acquire standby commitments to

40
<PAGE>

enhance the liquidity of portfolio securities, but only when the issuers of the
commitments are deemed to present minimal risk of default.

Ordinarily, the Funds may not transfer a standby commitment to a third
party, although a Fund could sell the underlying municipal security to a third
party at any time. The Funds may purchase standby commitments separate from, or
in conjunction with, the purchase of securities subject to such commitments. In
the latter case, the Funds 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 Funds, 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
Funds; 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 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

41
<PAGE>

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.

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.

SPECIAL FACTORS AFFECTING THE CALIFORNIA TAX-FREE FUND

The concentration of the California Tax-Free Fund in obligations issued by
governmental units of only one state exposes the Fund to risks greater than
those of a more diversified portfolio holding securities issued by governmental
units of different states and different regions of the country. Certain
California constitutional amendments, legislative measures, executive orders,
civil actions and voter initiatives, as well as the general financial condition
of the state, could adversely affect the ability of issuers of California
municipal obligations to pay interest and principal on such obligations and
could affect the Fund's ability to meet its investment objective. The following
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information drawn from official statements relating
to securities offerings of the State of California and various local agencies,
available as of the date of this SAI. While The Griffin Funds has not
independently verified such information, it has no reason to believe that such
information is incorrect in any material respect.

The California Economy and General Information. From mid-1990 to early
----------------------------------------------
1994, the state suffered a recession with the worst economic, fiscal and budget
conditions since the 1930s. Construction, manufacturing (particularly that
related to defense), exports and financial services, among others, were all
severely affected. Job losses had been the worst of any post-war recession.
Unemployment reached 10.1% in January 1994, but fell sharply to 7.7% in October
and November 1994, reflecting the state's recovery from the recession. The
unemployment rate, as measured by several commonly used sources, was
approximately 6.0% in December 1997.

42
<PAGE>

The recession seriously affected California tax revenues, which basically
mirror economic conditions. It also caused increased expenditures for health
and welfare programs. In addition, the state had been facing a structural
imbalance in its budget with the largest programs supported by the General Fund
(e.g., K-12 schools and community colleges--also known as "K-14 schools," health
and welfare, and corrections) growing at rates higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the state
experienced recurring budget deficits in the late 1980s and early 1990s. The
state's Controller reported that expenditures exceeded revenues for four of the
five fiscal years ending with 1991-92. Moreover, California accumulated and
sustained a budget deficit in its Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak on June 30, 1993.

The accumulated budget deficits during the early 1990's, together with
expenditures for school funding which are not reflected in the state's budget,
and reduction of available internal borrowable funds, combined to significantly
deplete the state's cash resources to pay its ongoing expenses. In order to
meet its cash needs, the state has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. Such
borrowings are expected to continue in future fiscal years. To meet its cash
flow needs in the 1995-96 fiscal year, California issued $2 billion of revenue
anticipation warrants which matured on June 28, 1996. Because of the state's
deteriorating budget and cash situation, the rating agencies reduced the state's
credit ratings between October 1991 and July 1994. Moody's lowered its rating
from "Aa" to "A1," S&P lowered its rating from "AAA" to "A" and termed its
outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to
"A."

However, since the start of 1994, California's economy has been recovering
steadily. Employment has grown in excess of 500,000 during 1994 and 1995, and
400,000 additional jobs were created between the fourth quarter of 1996 and the
fourth quarter of 1997. This trend is projected by some analysts to continue
through the rest of the decade. Unemployment, while remaining higher than the
national average has come down from is 10% recession peak to under 6% in the
Sping of 1998. Because of the improving economy and California's fiscal
austerity, the state has had operating surpluses for its past five consecutive
fiscal years through 1996-97. In addition, the SFEU is projected to have a
positive balance of approximately $553 million as of June 30, 1998. S&P
upgraded its rating of California municipal obligations back to "A+" on July 30,
1996. As of the date of this SAI, the rating remains "A+." However, the Asian
economic difficulties since mid-1997 are expected to have a moderate dampening
effect on California's economy.

Local Governments. On December 6, 1994, Orange County, California, became
-----------------
the largest municipality in the United States to file for protection under the
Federal Bankruptcy laws. The filing stemmed from approximately $1.7 billion in
losses suffered by the county's investment pool because of investments in high
risk "derivative" securities. In September 1995, California's legislature
approved legislation permitting the county to use for bankruptcy recovery $820
million over 20 years in sales taxes previously earmarked for highways, transit,
and development. In June 1996, the county completed an $880 million bond
offering secured by real property owned by the county. In June 1996, the county
emerged from bankruptcy. As of October 31, 1997, the county's investment rating
by S&P was "B".

43
<PAGE>

On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles County, California, causing significant
damage to public and private structures and facilities. While county residents
and businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the county's and California's economy is not
expected to be serious. However, Los Angeles County is experiencing financial
difficulty due in part to the severe operating deficits for the county's health
care system. In August 1995, the credit rating of the county's long-term bonds
was downgraded for the third time since 1992. Although the county has received
federal and state assistance, it is still facing a potential budget gap of
approximately $460 million in the 1997-98 fiscal year.

Even though the state has no existing obligations with respect to either
Orange County or Los Angeles County, the state may be required to intervene and
provide funding if the counties cannot maintain certain programs because of
insufficient resources.

State Finances. California tax revenues and other income are segregated
--------------
into the General Fund and approximately 800 Special Funds. The General Fund
consists of the revenues received by the state's Treasury and not required by
law to be credited to any other fund, as well as earnings from state moneys not
allocable to another fund. The General Fund is the principal operating fund for
the majority of governmental activities and is the depository of most major
revenue sources of the state. The General Fund may be expended as the result of
appropriation measures by California's Legislature approved by the Governor, as
well as appropriations pursuant to various constitutional authorizations and
initiative statutes.

The SFEU is funded with General Fund revenues and was established to
protect California from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the state's
Controller to meet cash needs of the General Fund. The Controller is required to
return moneys so transferred without payment of interest as soon as there are
sufficient moneys in the General Fund. Any appropriation made from the SFEU is
deemed, for budgeting and accounting purposes, an appropriation from the General
Fund. For year-end reporting purposes, the Controller is required to add the
balance in the SFEU to the balance in the General Fund to show the total moneys
then available for General Fund purposes.

Inter-fund borrowing has been used for several years to meet temporary
imbalances of receipts and disbursements in the General Fund. The 1998-999
Executive Budget projections submitted to the State Legislaure in February 1998,
forecast a 1999-00 General Fund budget gap of approximately $1.7 billion and a
2000-01 gap of $3.1 billion. As a result of changes made in the 1998-99 enacted
budget, the 1999-00 gap is now expected to be roughly $1.3 billion or about
$400 less than previously projected, after application of reserves created as
part of the 1998-99 budget process. Such reserves will not be available against
subsequent year imbalances.

Changes in California Constitutional and Other Laws. In 1978, California
---------------------------------------------------
voters approved an amendment to the California Constitution known as
"Proposition 13," which added Article XIIIA to the California Constitution.
Article XIIIA limits ad valorem taxes on real

44
<PAGE>

property and restricts the ability of taxing authorities to increase real
property taxes. However, legislation passed subsequent to Proposition 13
provided for the redistribution of California's General Fund surplus to local
agencies, the reallocation of revenues to local agencies and the assumption of
certain local obligations by the state to assist California municipal issuers to
raise revenue to pay their bond obligations. It is unknown whether additional
revenue redistribution legislation will be enacted in the future and whether, if
enacted, such legislation will provide sufficient revenue for such California
issuers to pay their obligations. California is also subject to another
Constitutional Amendment, Article XIIIB, which may have an adverse impact on
California state and municipal issuers. Article XIIIB restricts the state from
spending certain appropriations in excess of an appropriation's limit imposed
for each state and local government entity. If revenues exceed such
appropriation's limit, such revenues must be returned either as revisions in the
tax rates or fee schedules.

In 1988, California voters approved "Proposition 98," which amended Article
XIIIB and Article XVI of the state's Constitution. Proposition 98 (as modified
by "Proposition 111," which was enacted in 1990), changed state funding of
public education below the university level and the operation of the state's
appropriations limit, primarily by guaranteeing K-14 schools a minimum share of
General Fund revenues. In 1986, California voters approved "Proposition 62,"
which requires in part that any tax for general governmental purposes imposed by
a local government be approved by a two-thirds vote of the governmental entity's
legislative body and by a majority of its electorate, and that any special tax
imposed by a local government be approved by a two-thirds vote of the
electorate. In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by nonchartered cities in California without voter
approval. In 1996, California voters approved "Proposition 218," which added
Articles XIIIC and XIIID to the state's Constitution. Proposition 218 generally
requires voter approval of most tax or fee increases by local governments and
curtails local government use of benefit assessments to fund certain property-
related services to finance infrastructure. Proposition 218 also limits the use
of special assessments or "property-related" fees to services or infrastructure
that confer a "special benefit" to specific property; police, fire and other
services are now deemed to benefit the public at large and, therefore, could not
be funded by special assessments. Finally, the amendments enable the voters to
use their initiative power to repeal previously-authorized taxes, assessments,
fees and charges. It remains to be seen what impact these Articles will have on
the ability of obligors to make payments on existing and future California
security obligations.

Other Information. Certain debt obligations held by the Fund may be
-----------------
obligations payable solely from lease payments on real or personal property
leased to the state, cities, counties or their various public entities.
California law provides that a lessor may not be required to make payments
during any period that it is denied use and occupancy of the property in
proportion to such loss. Moreover, the lessor only agrees to appropriate
funding for lease payments in its annual budget for each fiscal year. In case
of a default under the lease, the only remedy available against the lessor is
that of reletting the property; no acceleration of lease payments is permitted.
Each of these factors presents a risk that the lease financing obligations held
by the Fund would not be paid in a timely manner.

45
<PAGE>

Certain debt obligations held by the Fund may be obligations payable solely
from the revenues of health care institutions. The method of reimbursement for
indigent care, California's selective contracting with health care providers for
such care and selective contracting by health insurers for care of its
beneficiaries now in effect under California and federal law may adversely
affect these revenues and, consequently, payment on those debt obligations.

There can be no assurance that general economic difficulties or the
financial circumstances of California or its towns and cities or its trading
partners in Asia, where California exports nearly half of $105 billion in total
exports, will not adversely affect the market value of California municipal
securities or the ability of obligors to continue to make payments on such
securities.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions. Other than listed securities,
securities purchased and sold by the Funds generally will be traded on a net
basis (i.e., without commission). Purchases and sales of securities on a
securities exchange are effected through brokers who charge a commission for
their services. Brokerage commissions on United States securities exchanges are
subject to negotiation between the Advisers and the broker. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Fixed income securities and securities traded in the over-the-
counter market are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.

The Advisers place all orders for the purchase and sale of portfolio
securities, options and futures contracts for the Funds and buys and sells such
securities, options and futures for the Funds through a number of broker-
dealers. In so doing, the Advisers use their best efforts to obtain for the
Funds the most favorable price and execution available, except to the extent it
may be permitted to pay higher brokerage commissions as further described below.
Subject to applicable limitations of the federal securities laws, the 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 Funds and other accounts over
which an Adviser or its affiliates exercise investment discretion. Such services
may include advice concerning the value of

46
<PAGE>

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). The Advisers maintain listings 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 lists) 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 an Adviser (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 an 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 an Adviser may be useful to the Adviser in carrying
out its obligations to one or more Funds. The receipt of such research enables
the Advisers to avoid the additional expenses that could be incurred if the
Advisers tried to develop comparable information through their own efforts.

As permitted by Section 28(e) of the Securities Exchange Act of 1934, an
Adviser may cause a Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in such Act) to the Adviser an amount of
commission for effecting a securities transaction for the Fund that is in excess
of the commission that another broker-dealer would have charged for effecting
the transaction. In order to cause the Funds to pay such higher commissions, an
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 the Adviser to the Fund(s) and their other clients.
In reaching this determination, an 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 Advisers and their affiliates manage several other investment accounts,
some of which may have investment objectives similar to those of one or more
Funds. It is possible that, at times, identical securities will be appropriate
for investment by one or more Funds and by one or more of such investment
accounts. The position of each account, however, in the securities of the same
issuer may vary and the length of time that each account may choose to hold its
investment in the securities of the same issuer likewise may vary. The timing
and amount of purchase by each account will also be determined by its cash
position. If the purchase or sale of securities consistent with the investment
policies of a Fund and one or more of these accounts is considered at or about
the same time, transactions in such securities will be allocated among the
accounts in a manner deemed equitable by the Adviser. There may be
circumstances under which purchases or sales of portfolio securities by an
Adviser for one or more clients will have an adverse effect on other clients of
the Adviser.

47
<PAGE>

During the fiscal year ended September 30, 1998, The Griffin Funds, on
behalf of the Growth & Income Fund and the Growth Fund and pursuant to
agreements or understandings, directed $___________ and $_______, respectively,
in aggregate brokerage transactions to brokers due to research and brokerage
services they provided, and such brokers received related commissions of
approximately $736,001 from the Growth & Income Fund and $42,270 from the Growth
Fund.

The Board of Directors periodically review the performance of the Advisers
regarding their responsibilities in connection with the placement of portfolio
transactions on behalf of 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 received by each Fund.

Brokerage Commissions. During the fiscal years ended September 30, 1996,
---------------------
1997 and 1998, the Growth and Income Fund and the Growth Fund paid the brokerage
commissions listed below. The other Funds did not pay brokerage commissions
during these periods.

<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Fund 9/30/96 9/30/97 9/30/98
---- ----------- ----------- -----------
<S> <C> <C> <C>
Growth & Income Fund $222,021* $556,079* $736,001
Growth Fund $ 18,727* $ 37,929* $ 42,270
</TABLE>

_________________
* The increase in the brokerage commissions paid by the Fund is primarily the
result of the Fund's growth in assets.

Securities of Regular Broker-Dealers. In addition, as of the close of The
------------------------------------
Griffin Funds' fiscal year on September 30, 1998, the Funds held securities of
their regular broker-dealers (or the parents thereof) as follows:

<TABLE>
<CAPTION>
FUND BROKER-DEALER AMOUNT
- ---- ------------ ------
<S> <C> <C>
Money Market Merrill Lynch $10,822,000

Bond Merrill Lynch $ 3,215,000
Paine Webber $ 2,525,000
Donaldson, Lufkin & Jenrette $ 1,844,000
Salomon Smith Barney $ 416,000
Bear Stearns $ 486,000
Lehman Brothers $ 2,087,000
Morgan Stanley $ 331,000
Salomon Incorporated $ 2,003,000

Short-Term Bond Lehman Brothers $ 1,152,000
Paine Webber $ 802,000
Bear Stearns $ 1,029,000
</TABLE>

48
<PAGE>

<TABLE>
<S> <C> <C>
Salomon Smith Barney $ 1,019,000
Donaldson, Lufkin & Jenrette $ 1,020,000

Growth State Street Boston Corporation $ 507,000
Investment Technology Group $ 368,000
Raymond James Financial $ 345,000
Schwab (Charles) Corp. $ 543,000
</TABLE>

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 the Adviser's
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 Board of 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
Board of 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.

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.

49
<PAGE>

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 latest
quoted 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. From time to time, the "yield" and "effective yield" of
the shares of the Money Market Fund and the Tax-Free Money Market Fund may be
presented in advertisements, sales literature and in reports to shareholders.
The "yield" and "effective yield" of shares of the Money Market Fund and the
Tax-Free Money Market Fund are computed separately according to formulas
prescribed by the Securities and Exchange Commission. The standardized seven-day
yield is computed by determining the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account in the particular Fund
involved having a balance of one share at the beginning of the period, dividing
the net change in account value by the value of the account at the beginning of
the base period to obtain the base return, and multiplying the base period
return by (365/7). The net change in the value of an account in each Fund
includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares; and all fees, other than nonrecurring account or sales
charges, that are charged to shareholder accounts in proportion to the length of
the base period and the Fund's average account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The effective annualized yield for shares of a Fund is computed by
compounding the unannualized base period

50
<PAGE>

return (calculated as above) by adding 1 to the base period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result.

Yield and Effective Yield. For the seven-day period ended September 30,
-------------------------
1998, the yield and effective yield of the Money Market Fund and the Tax-Free
Money Market Fund were as follows:

<TABLE>
<CAPTION>
Effective
Yield Yield
----- -----
<S> <C> <C>
Money Market Fund 4.85% 4.97%
Tax-Free Money Market Fund 3.02% 2.85%
</TABLE>

Tax-Equivalent Yield. The Tax-Free Money Market Fund also may quote "tax-
--------------------
equivalent yield." 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 yield is 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, 1998, THE TAX-
EQUIVALENT YIELD OF THE TAX-FREE MONEY MARKET FUND (ASSUMING A 39.6% FEDERAL TAX
RATE) WAS 5.39%.

The table below shows the effect of a shareholder's tax status on effective
yield under the federal income tax laws for 1998. 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.

51
<PAGE>

1997 FEDERAL TAX RATES AND TAX-EQUIVALENT YIELDS]
-------------------------------------------------

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

OVER BUT OVER OVER BUT OVER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 $ 24,650 $ 0 $ 41,200 15.0% 2.94% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%

$ 24,651 $ 59,750 $ 41,201 $ 99,600 28.0% 3.47% 4.17% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%

$ 59,751 $124,650 $ 99,601 $151,750 31.0% 3.62% 4.35% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%

$124,651 $271,050 $151,751 $271,050 36.0% 3.91% 4.69% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%

OVER $271,050 OVER $271,050 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 1997 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.

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. From time to time, the standardized 30-day yield of
Class A and Class B Shares of the Non-Money Market Funds may be presented in
advertisements, sales literature and in reports to shareholders. The yield of
the Class A and Class B Shares of the Non-Money Market Funds is a measure of the
net investment income per share (as defined) earned over a 30-day period
expressed as a percentage of the maximum offering price of a share of such
classes at the end of the period. Yield figures are determined by dividing the
net investment income per share earned during the specified 30-day period by the
maximum offering price per share on the last day of the period, according to the
following formula:

52
<PAGE>

Yield = 2[(a-b + 1)/6/ - 1]
-------
cd

Where: a = dividends and interest earned during the period

b = expenses accrued for the period (net of reimbursements)

c = average daily number of shares outstanding during the period
that were entitled to receive dividends

d = maximum offering price per share on the last day of the
period

For purposes of yield quotations, income is calculated in accordance with
standardized methods applicable to all stock and bond mutual funds. In general,
interest income is reduced with respect to bonds trading at a premium over their
par value by subtracting a portion of the premium from income on a daily basis,
and is increased with respect to bonds trading at a discount by adding a portion
of the discount to daily income. Capital gains and losses are excluded from the
calculation.

Income calculated for the purposes of calculating 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, the yield quoted for a Fund may differ from the rate of
distributions a Fund paid over the same period or the rate of income reported in
the Funds' 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.

Yield. For the 30-day period ended September 30, 1998, the standardized
-----
yields of the Class A Shares and Class B Shares of the following Non-Money
Market Funds were as follows:

<TABLE>
<CAPTION>
Fund Class A Shares Class B Shares(1)
---- -------------- -----------------
<S> <C> <C>

U.S. Government Income Fund 4.96%(2) 4.42%
Bond Fund 5.08%(2) 4.56%
California Tax-Free Fund 3.82%(2) 3.26%
Municipal Bond Fund 3.77%(2) 3.22%
Short-Term Bond Fund 4.78%(3) 4.19%
</TABLE>

_______________
(1) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.
(2) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).
(3) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (3.50%).

53
<PAGE>

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 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.

Tax Equivalent Yield. Tax-equivalent yield is the rate an investor would
have to earn from a fully taxable investment after taxes to equal the tax-free
yield of either the California Tax-Free Fund or the Municipal Bond Fund. 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 thirty-day period ended September 30, 1998, the tax-equivalent
yield (based on an assumed federal tax rate of 39.60%) for the Municipal Bond
Fund and the California Tax-Free Fund were as follows:

<TABLE>
<CAPTION>
Fund Class A Shares(1) Class B Shares(2)
---- ----------------- -----------------
<S> <C> <C>
Municipal Bond Fund % %
California Tax-Free Fund % %
</TABLE>

___________________
(1) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).
(2) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.

CALIFORNIA TAX-FREE FUND. The tables below show the effect of a
shareholder's tax status on the effective yield under federal and state income
tax laws for 1997. 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>
1997 Combined
California and
1997 California 1997 Federal Federal Effective
Single Return Joint Return Marginal Tax Marginal Tax Marginal Tax
Taxable Income* Taxable Income* Bracket Bracket Bracket**
- ----------------------- ------------------------- ----------------------- ------------------------ ----------------------
<S> <C> <C> <C> <C>
$ 18,761 - $ 24,650 $ 37,522 - $ 41,200 6% 15% 20.10%
$ 24,651 - $ 26,045 $ 41,201 - $ 52,090 6% 28% 32.32%
$ 26,046 - $ 32,916 $ 52,091 - $ 65,832 8% 28% 33.76%
$ 32,917 - $ 59,750 $ 65,833 - $ 99,600 9.30% 28% 34.70%
$ 59,751 - $124,650 $ 99,601 - $151,750 9.30% 31% 37.42%
$124,651 - $271,050 $151,751 - $271,050 9.30% 36% 41.95%
over $271,050 over $271,050 9.30% 39.6% 45.22%
</TABLE>

54
<PAGE>

* Net taxable income after all exemptions, adjustments and deductions.
** Based on rates applicable in 1997 for single filers and married couples
filing jointly (except that marginal rates may be higher for some
individuals due to phase out of exemptions and elimination of deductions).

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

IF YOUR EFFECTIVE COMBINED FEDERAL AND CALIFORNIA INCOME TAX RATE IN 1997
IS:

<TABLE>
<CAPTION>
20.10% 32.32% 33.76% 34.70% 37.42% 41.95% 45.22%
To match
these tax-free
rates Your taxable investment would have to earn the following yield:
- ------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2% 2.5% 2.96% 3.02% 3.06% 3.20% 3.45% 3.65%

3% 3.75% 4.43% 4.53% 4.59% 4.79% 5.17% 5.48%

4% 5.01% 5.91% 6.04% 6.13% 6.39% 6.89% 7.30%

5% 6.26% 7.39% 7.55% 7.66% 7.99% 8.61% 9.13%

6% 7.51% 8.87% 9.06% 9.19% 9.59% 10.34% 10.95%

7% 8.76% 10.34% 10.57% 10.72% 11.19% 12.06% 12.78%
</TABLE>

The California income tax rates are those in effect for 1997. The rates
listed reflect the 1997 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. From time to time, the average annual and
cumulative total return of Class A and Class B shares of the Non-Money Market
Funds over stated periods may be presented in advertisements, sales literature
and in reports to shareholders. Total return measures both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of the underlying investments in a Fund. The Funds' average
annual and cumulative total return figures are computed in accordance with the
standardized methods prescribed by the SEC.

Average annual total return is computed by determining the average annual
---------------------------
compounded rates of return over the periods indicated in the advertisement,
sales literature or shareholders' report that would equate the initial amount
invested to the ending redeemable value, according to the following formula:

55
<PAGE>

<TABLE>
P(1 + T)/n/ = ERV

<S> <C>
Where: P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period (or fractional portion thereof)
</TABLE>

This calculation (i) assumes all dividends and distributions are reinvested at
NAV on the appropriate reinvestment dates as described in the Prospectus, and
(ii) deducts (a) the maximum sales charge from the hypothetical initial $1,000
investment, and (b) all recurring fees, such as advisory and administrative
fees, charged as expenses to all shareholder accounts.

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.

Cumulative total return is computed by finding the cumulative compounded
-----------------------
rate of return over the period indicated in the advertisement, sales literature
and in reports to shareholders that would equate the initial amount invested to
the ending redeemable value, according to the following formula:

CTR = (ERV-P) 100
-----
P

Where: CTR = cumulative total return

ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period

P = a hypothetical initial payment of $1,000.

This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and (ii) deducts (a) the maximum sales charge from the hypothetical
initial $1,000 investment, and (b) all recurring fees, such as advisory and
administrative fees, charged as expenses to all shareholder accounts.

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,

56
<PAGE>

yields, and other performance information may be quoted numerically or in a
table, graph, or similar illustration.

Average Annual Total Return. For the indicated periods ended September 30,
---------------------------
1998, 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 10/19/93 Year Ended Since 11/1/94(1)
Fund 9/30/98 Inception(1) 9/30/98 Inception
---- ------- ----------- ------- ---------
<S> <C> <C> <C> <C>
U. S. Government Income Fund 12.20% 7.12% 11.35% 9.13%
Bond Fund 10.50% 6.01% 9.67% 8.74%
California Tax-Free Fund 8.37% 5.13% 7.55% 8.52%
Municipal Bond Fund 8.13% 5.19% 7.36% 8.23%
Growth & Income Fund (8.32%) 15.57% (8.94%) 18.02%
</TABLE>

<TABLE>
<CAPTION>
Class A Class B
------- -------

Year Ended Since 6/12/95 Year Ended Since 6/12/95
Fund 9/30/98 Inception(1) 9/30/98 Inception(1)
---- ------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund 8.46% 6.80% 7.69% 6.27%
Growth Fund (11.71%) 12.64% (12.36%) 12.04%
</TABLE>

_______________
(1) These figures have been annualized.

For the indicated periods ended September 30, 1998, the 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(2) Class B(3)
---------- ----------

Year Ended Since 10/19/93 Year Ended Since 11/1/94(1)
Fund 9/30/98 Inception(1) 9/30/98 Inception (1)
---- ------- --------- ------- -------------
<S> <C> <C> <C> <C>
U. S. Government Income Fund 7.15% 6.13% 6.35% 8.53%
Bond Fund 5.53% 5.02% 4.67% 8.14%
California Tax-Free Fund 3.49% 4.16% 2.55% 7.91%
Municipal Bond Fund 3.26% 4.21% 2.36% 7.62%
Growth & Income Fund (12.44%) 14.50% (13.94%) 17.54%
</TABLE>

<TABLE>
<CAPTION>
Class A Class B(3)
------- ----------

Year Ended Since 6/12/95 Year Ended Since 6/12/95
Fund 9/30/98 Inception(1) 9/30/98 Inception(1)
---- ------- ------------ ------- -------------
<S> <C> <C> <C> <C>
Short-Term Bond Fund 4.66% 5.66%(4) 3.69% 6.01%
Growth Fund (15.68%) 11.08%(2) (17.36%) 11.34%
</TABLE>

_____________________
(1) These figures have been annualized.

(2) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).

(3) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.

(4) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (3.50%).

57
<PAGE>

For the three-year period ended December 31, 1997, the average annual
total returns for the Class A and Class B Shares of the following Non-Money
Market Funds, before deducting applicable sales charges, were:

Fund Class A Class B
---- -------- -------
<S> <C> <C>
U.S. Government Income Fund 9.26% 8.72%
Bond Fund 9.48% 8.85%
California Tax-Free Fund 9.77% 9.23%
Municipal Bond Fund 9.44% 8.90%
Growth & Income Fund 28.26% 27.60%
</TABLE>

FOR THE YEAR TO DATE PERIOD FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998 THE
AVERAGE ANNUAL TOTAL RETURNS FOR THE CLASS A AND CLASS B SHARES OF THE FOLLOWING
NON-MONEY MARKET FUNDS, BEFORE DEDUCTING APPLICABLE SALES CHARGES, WERE:

<TABLE>
<CAPTION>
FUND CLASS A CLASS B
- ---- -------- --------
<S> <C> <C>

U.S. GOVERNMENT INCOME FUND 8.98% 8.36%
BOND FUND 7.55% 6.94%
CALIFORNIA TAX-FREE FUND 5.89% 5.16%
MUNICIPAL BOND FUND 5.29% 4.71%
GROWTH & INCOME FUND -6.67% -7.14%

</TABLE>

For the three year period ended December 31, 1997, the average annual
total returns for the Class A and Class B Shares of the following Non-Money
Market Funds, after deducting applicable sales charges, were:

<TABLE>
<CAPTION>
Fund Class A(1) Class B(2)
---- --------- ---------
<S> <C>
U.S. Government Income Fund 7.59% 7.86%
Bond Fund 7.81% 8.00%
California Tax-Free Fund 8.10% 8.38%
Municipal Bond Fund 7.78% 8.05%
Growth & Income Fund 26.31% 26.99%
</TABLE>

(1) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).

(2) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.

Cumulative Total Return. For the periods ended September 30, 1998, the
--------------------
cumulative total returns of the Class A and Class B Shares of the Non-Money
Market Funds, before deducting applicable sales charges, were as follows:

58
<PAGE>

<TABLE>
<CAPTION>
Class A Class B
------ -------

Six Months Since Six Months Since
Ended Year Ended 10/19/93 Ended Year Ended 11/1/94
Fund 9/30/98 9/30/98 Inception(1) 9/30/98 9/30/98 Inception(1)
---- ------- ------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Government Income Fund 7.29% 12.20% 40.62% 6.99% 11.35% 40.83%
Bond Fund 5.94% 10.50% 33.49% 5.94% 9.67% 38.85%
California Tax-Free Fund 4.92% 8.37% 28.13% 4.40% 7.55% 37.74%
Municipal Bond Fund 4.54% 8.13% 28.46% 4.15% 7.36% 36.33%
Growth & Income Fund (16.23%) (8.32%) 104.75% (16.54%) (8.94%) 91.36%
</TABLE>

<TABLE>
<CAPTION>
Class A(2) Class B(3)
--------- ----------
Since Six Months
Six Months Year Ended 10/19/93 Ended Year Ended Since 6/12/95
Fund Ended 9/30/98 9/30/98 Inception(1) 9/30/98 9/30/98 Inception(1)
---- ------------- ------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>

Short-Term Bond Fund 5.25% 8.46% 24.30% 4.85 % 7.69% 22.27%
Growth Fund (19.76%) (11.71%) 48.22% (20.07%) (12.36%) 45.65%
</TABLE>

For the periods ended September 30, 1998, the cumulative 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(2) Class B(3)
--------- ---------
Since Six Months Since
Six Months Year Ended 10/19/93 Ended Year Ended 11/1/94
Fund Ended 9/30/98 9/30/98 Inception(1) 9/30/98 9/30/98 Inception(1)
---- ------------- ------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Government Income Fund 2.46% 7.15% 34.29% 1.99% 6.35% 37.83%
Bond Fund 1.17% 5.53% 27.49% 0.54% 4.67% 35.85%
California Tax-Free Fund 0.20% 3.49% 22.37% (0.60%) 2.55% 34.74%
Municipal Bond Fund (0.16%) 3.26% 22.68% (0.85%) 2.36% 33.33%
Growth & Income Fund (20.00%) (12.44%) 95.53% (21.54%) (13.94%) 88.36%
</TABLE>

<TABLE>
<CAPTION>
Class A Class B(3)
------- ---------

Six Months Since Six Months
Ended Year Ended 10/19/93 Ended Year Ended Since 6/12/95
Fund 9/30/98 9/30/98 Inception(1) 9/30/98 9/30/98 Inception(1)
---- ------- --------- ------------ ----------- --------- ------------
<S> <C> <C> <C>
Short-Term Bond Fund 1.57% (4) 4.66% (4) 19.95%(4) 0.85% 3.69% 19.27%
Growth Fund (23.37%)(2) (15.68%)(2) 41.55%(2) (25.07%) (17.36%) 42.65%
f</TABLE>

_________________
(1) These figures have been annualized.
(2) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).
(3) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.
(4) These figures reflect the deduction of the maximum initial sales charge of
with respect to Class A Shares (3.50%).

59
<PAGE>

For the three year period ended December 31, 1997, the cumulative total
returns for the Class A and Class B Shares of the following Non-Money Market
Funds, before deducting applicable sales charges, were:

<TABLE>
<CAPTION>
Fund Class A Class B
---- ------- -------
<S> <C> <C>
U.S. Government Income Fund 30.42% 28.50%
Bond Fund 31.20% 28.99%
California Tax-Free Fund 32.26% 30.32%
Municipal Bond Fund 31.09% 29.14%
Growth & Income Fund 111.02% 107.77%
</TABLE>

FOR THE PERIOD FROM JANUARY 31, 1998 TO SEPTEMBER 30 ,1998, THE CUMULATIVE
TOTAL RETURNS FOR THE CLASS A AND CLASS B SHARES OF THE FOLLOWING NON-MONEY
MARKET FUNDS, BEFORE DEDUCTING APPLICABLE SALES CHARGES, WERE:

<TABLE>
<CAPTION>
FUND CLASS A CLASS B
---- ------- -------
<S> <C> <C>
U.S. GOVERNMENT INCOME FUND 40.62% 40.83%
BOND FUND 33.49% 38.85%
CALIFORNIA TAX-FREE FUND 28.13% 37.74%
MUNICIPAL BOND FUND 28.46% 36.33%
GROWTH & INCOME FUND 104.75% 91.36%
</TABLE>

For the three year period ended December 31, 1997, the cumulative total
returns for the Class A and Class B Shares of the following Non-Money Market
Funds, after deducting applicable sales charges, were:

<TABLE>
<CAPTION>
Fund Class A(1) Class B(2)
---- ---------- ----------
<S> <C> <C>
U.S. Government Income Fund 24.55% 25.50%
Bond Fund 25.30% 25.99%
California Tax-Free Fund 26.31% 27.32%
Municipal Bond Fund 25.20% 26.14%
Growth & Income Fund 101.52% 104.77%
</TABLE>

____________________
(1) These figures reflect the deduction of the maximum initial sales charge
with respect to Class A Shares (4.50%).

(2) These figures reflect the deduction of the maximum applicable contingent
deferred sales charge.

FOR THE PERIOD FROM JANUARY 31, 1998 TO SEPTEMBER 30, 1998, THE CUMULATIVE
TOTAL RETURNS FOR THE CLASS A AND CLASS B SHARES OF THE FOLLOWING NON-MONEY
MARKET FUNDS, AFTER DEDUCTING APPLICABLE SALES CHARGES, WERE:

FUND CLASS A(1) CLASS B(2)
---- ---------- ----------

60
<PAGE>

<TABLE>
<S> <C> <C>
U.S. GOVERNMENT INCOME FUND 34.29% 37.83%
BOND FUND 27.49% 35.85%
CALIFORNIA TAX-FREE FUND 22.37% 34.74%
MUNICIPAL BOND FUND 22.68% 33.33%
GROWTH & INCOME FUND 95.53% 88.36%
</TABLE>

__________________
(1) THESE FIGURES REFLECT THE DEDUCTION OF THE MAXIMUM INITIAL SALES CHARGE WITH
RESPECT TO CLASS A SHARES (4.50%).

(2) THESE FIGURES REFLECT THE DEDUCTION OF THE MAXIMUM APPLICABLE CONTINGENT
DEFERRED SALES CHARGE.

A Fund's performance may be compared in advertising and sales literature 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") or Morningstar, Inc. ("Morningstar") or other independent
services that monitor 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. Morningstar
rates mutual funds on the basis of risk-adjusted performance.

A Fund's performance also may be compared in advertising and other sales
literature to the performance of other mutual funds tracked by financial or
business publications and periodicals. In addition, each Fund may quote
financial or business publications and periodicals as they relate to Fund
management, investment philosophy, and investment techniques.

From time to time, The Griffin Funds may quote the performance or price-
earning ratio of a Fund or Class in advertising and other types of literature as
compared to the performance of the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Donoghue's Money Fund Averages, Real Estate Investment Averages (as
reported by the National Association of Real Estate Investment Trusts), Gold
Investment Averages (provided by World Gold Council), Bank Averages (which are
calculated from figures supplied by the U.S. League of Savings Institutions
based on effective annual rates of interest on both passbook and certificate
accounts), average annualized certificate of deposit rates (from the Federal
Reserve G-13 Statistical Releases or the Bank Rate Monitor), the Salomon One
Year Treasury Benchmark Index, the Consumer Price Index (as published by the
U.S. Bureau of Labor Statistics), other managed or unmanaged indices or
performance data of bonds, municipal securities, stocks or government securities
(including data provided by Ibbotson Associates), or by other services,
companies, publications or persons who monitor mutual funds on overall
performance, risk-adjusted performance, volatility or other criteria. The S&P
Index and the Dow Jones Industrial Average are unmanaged indices of selected
common stocks.

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<PAGE>

The Funds may use the long-term performance of these capital markets as
published by Ibbotson or similar companies in order to demonstrate general long-
term risk-versus-reward investment scenarios or for other appropriate
comparisons. 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 performance of these capital markets is based on
the returns of several different indices and their respective returns. Ibbotson
calculates standardized performance figures using the same general methods as
the Funds. Performance comparisons could also include the value of a
hypothetical investment in any of the capital markets.

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

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

If the Board of 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 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, the Advisers may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested until you
provide the Advisers with alternative instructions.

TAXES. The following information supplements and should be read in
conjunction with the Prospectus section entitled "Taxes." The Prospectus
describes generally the tax treatment of distributions by the Funds. This
section of the SAI includes additional information concerning income taxes.

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<PAGE>

General. Each Fund intends to qualify as a regulated investment company
-------
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, each Fund will not be taxed on its
net investment income and capital gains distributed to its shareholders.

Qualification as a regulated investment company under the Code requires,
among other things, that (a) each Fund derive at least 90% of its annual gross
income from dividends, interest, certain payments with respect to securities
loans, gains from the sale or other disposition of stock or securities or
foreign currencies (to the extent such currency gains are directly related to
the regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; and (b) 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
obligations and the securities of other regulated investment companies), or in
two or more issuers which the Fund controls and which are determined to be
engaged in the same or similar trades or businesses.

The Funds must also distribute or be deemed to distribute to their
shareholders at least 90% of their net investment income earned in each taxable
year. In general, these distributions must actually or be deemed to be made in
the taxable year. However, in certain circumstances, such distributions may be
made in the 12 months following the taxable year. The Funds intend to pay out
substantially all of their net investment income and net realized capital gains
(if any) for each year.

In addition, a regulated investment company must, in general, derive less
than 30% of its gross income from the sale or other disposition of securities or
options thereon held for less than three months. However, this restriction has
been repealed with respect to a regulated investment company's taxable years
beginning after August 5, 1997.

Excise Tax. A 4% nondeductible excise tax will be imposed on each Fund
----------
(other than to the extent of its tax-exempt interest income) to the extent it
does not meet certain minimum distribution requirements by the end of each
calendar year. Each Fund intends to actually or be deemed to distribute
substantially all of its net investment income and net capital gains by the end
of each calendar year and, thus, expects not to be subject to the excise tax.

Taxation of Fund Investments. Except as provided herein, gains and
----------------------------
losses on the sale of portfolio securities by a Fund will generally be capital
gains and losses. Such gains and losses will ordinarily be long-term capital
gains and losses if the securities have been held by the Fund for more than one
year at the time of disposition of the securities.

63
<PAGE>

Gains recognized on the disposition of a debt obligation (including tax-
exempt obligations purchased after April 30, 1993) purchased by the 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 market discount which
accrued, but was not previously recognized pursuant to an available election,
during the term the Fund held the debt obligation.

If an option granted by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. Some realized capital losses may be deferred if they result
from a position which is part of a "straddle," discussed below. If securities
are sold by a Fund pursuant to the exercise of a call option written by it, the
Fund will add the premium received to the sale price of the securities delivered
in determining the amount of gain or loss on the sale.

Under Section 1256 of the Code, a Fund will be required to "mark to market"
its positions in "Section 1256 contracts," which generally include regulated
futures contracts and listed options. In this regard, Section 1256 contracts
will be deemed to have been sold at market value. Sixty percent (60%) of any net
gain or loss realized on all dispositions of Section 1256 contracts, including
deemed dispositions under the mark-to-market regime, will generally be treated
as long-term capital gain or loss, and the remaining forty percent (40%) will be
treated as short-term capital gain or loss. Transactions that qualify as
designated hedges are excepted from the mark-to-market and 60%/40% rules.

Under Section 988 of the Code, a Fund will generally recognize ordinary
income or loss to the extent gain or loss realized on the disposition of
portfolio securities is attributable to changes in foreign currency exchange
rates. In addition, gain or loss realized on the disposition of a foreign
currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, will generally be treated as ordinary
income or loss. The Funds will attempt to monitor Section 988 transactions,
where applicable, to avoid adverse tax impact.

Offsetting positions held by a regulated investment company involving
certain financial forward, futures or options contracts may be considered, for
tax purposes, to constitute "straddles." "Straddles" are defined to include
"offsetting positions" in actively traded personal property. The tax treatment
of "straddles" is governed by Section 1092 of the Code which, in certain
circumstances, overrides or modifies the provisions of Section 1256. If a
regulated investment company were treated as entering into "straddles" by
engaging in certain financial forward, futures or option contracts, such
straddles could be characterized as "mixed straddles" if the futures, forwards,
or options comprising a part of such straddles were governed by Section 1256 of
the Code. The regulated investment company may make one or more elections with
respect to "mixed straddles." Depending upon which election is made, if any, the
results with respect to the regulated investment company may differ. Generally,
to the extent the straddle rules apply to positions established by the regulated
investment company, losses realized by the regulated investment company may be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle and the conversion transaction rules, short-term

64
<PAGE>

capital loss on straddle positions may be recharacterized as long-term capital
loss, and long-term capital gain may be characterized as short-term capital gain
or ordinary income.

If a Fund enters into a "constructive sale" of any appreciated position in
stock, a partnership interest, or certain debt instruments, the Fund must
recognize gain (but not loss) with respect to that position. For this purpose, a
constructive sale occurs when the Fund enters into one of the following
transactions with respect to the same or substantially identical property: (i) a
short sale; (ii) an offsetting notional principal contract; (iii) a futures or
forward contract; or (iv) other transactions designated by the Internal Revenue
Service ("IRS").

If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or the Fund's
disposition of its PFIC shares. If the Fund invests in a PFIC, the Fund intends
to make an available election to mark-to-market its interest in PFIC shares.
Under the election, the Fund will be treated as recognizing at the end of each
taxable year the difference, if any, between the fair market value of its
interest in the PFIC shares and its basis in such shares. In some circumstances,
the recognition of loss may be suspended. The Fund will adjust its basis in the
PFIC shares by the amount of income (or loss) recognized. Although such income
(or loss) will be taxable to the Fund as ordinary income (or loss)
notwithstanding any distributions by the PFIC, the Fund will not be subject to
federal income tax or the interest charge with respect to its interest in the
PFIC pursuant to the election.

Capital Gain Distributions. Distributions which are designated by a Fund
--------------------------
as capital gain distributions will be taxed to shareholders as long-term capital
gain (to the extent such dividends do exceed the Fund's actual net capital gain
for the taxable year), regardless of how long a shareholder has held Fund
shares. Such distributions will be designated as capital gain distributions in a
written notice mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.

Other Distributions. With respect to the Money Market Funds, Short-Term
-------------------
Bond Fund, U.S. Government Income Fund, Municipal Bond Fund, California Tax-Free
Fund, and Bond Fund, although dividends will be declared daily based on each
Fund's daily earnings, for federal income tax purposes, the Fund's earnings and
profits will be determined at the end of each taxable year and will be allocated
pro rata over the entire year. For federal income tax purposes, only amounts
paid out of earnings and profits will qualify as dividends. Thus, if during a
taxable year a Fund's declared dividends (as declared daily throughout the year)
exceed the Fund's net income (as determined at the end of the year), only that
portion of the year's distributions which equals the year's earnings and profits
will be deemed to have constituted a dividend. It is expected that each Fund's
net income, on an annual basis, will equal the dividends declared during the
year.

Disposition of Fund Shares. A disposition of Fund shares pursuant to
--------------------------
redemption (including a redemption in-kind) or exchanges will ordinarily result
in a taxable capital gain or loss, depending on the amount received for the
shares (or are deemed to receive in the case of an exchange) and the cost of the
shares.

65
<PAGE>

If a shareholder exchanges or otherwise disposes of Fund shares 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 on a new
purchase of shares of the Fund or a different regulated investment company, 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 on the new purchase) for the purpose of determining
the amount of gain or loss on the disposition, but will be treated as having
been incurred in the acquisition of such other shares. Also, any loss realized
on a redemption or exchange of shares of the Fund will be disallowed to the
extent that substantially identical shares are acquired within the 61-day period
beginning 30 days before and ending 30 days after the shares are disposed of.

If a shareholder receives a designated capital gain distribution (to be
treated by the shareholder as long-term capital gain) with respect to any Fund
share and such Fund share is held for six months or less, then (unless otherwise
disallowed) any loss on the sale or exchange of that Fund share will be treated
as long-term capital loss to the extent of the designated capital gain
distribution. In addition, if a shareholder holds Fund shares for six months or
less, any loss on the sale or exchange of those shares will be disallowed to the
extent of the amount of exempt-interest dividends received with respect to the
shares. The Treasury Department is authorized to issue regulations reducing the
six-month holding requirement to a period of not less than the greater of 31
days or the period between regular dividend distributions where a Fund regularly
distributes at least 90% of its net tax-exempt interest, if any. No such
regulations had been issued as of the date of this SAI. The loss disallowance
rules described in this paragraph do not apply to losses realized under a
periodic redemption plan.

Federal Income Tax Rates. As of the printing of this SAI, the maximum
------------------------
individual tax rate applicable to ordinary income is 39.6% (marginal tax rates
may be higher for some individuals to reduce or eliminate the benefit of
exemptions and deductions); the maximum individual marginal tax rate applicable
to net capital gain is 20% and the maximum corporate tax rate applicable to
ordinary income and net capital gain is 35% (marginal tax rates may be higher
for some corporations to reduce or eliminate the benefit of lower marginal
income tax rates). Naturally, the amount of tax payable by an individual or
corporation will be affected by a combination of tax laws covering, for example,
deductions, credits, deferrals, exemptions, sources of income and other matters.

Backup Withholding. The Griffin Funds may be required to withhold,
------------------
subject to certain exemptions, at a rate of 31% ("backup withholding") on
dividends, capital gain distributions, and redemption proceeds (including
proceeds from exchanges and redemptions in-kind) paid or credited to an
individual Fund shareholder unless the shareholder certifies that the Taxpayer
Identification Number ("TIN") provided is correct and that the shareholder is
not subject to backup withholding. The Griffin Funds may also withhold if the
IRS notifies The Griffin Funds that the shareholder's TIN is incorrect or that
the shareholder is otherwise subject to backup withholding. Such tax withheld
does not constitute any additional tax imposed on the shareholder, and may be
claimed as a credit or refund on the shareholder's federal income tax return. An
investor must provide a valid TIN upon opening or reopening an account. Failure
to

66
<PAGE>

furnish a valid TIN to The Griffin Funds could subject the investor to penalties
imposed by the Internal Revenue Service. Foreign shareholders of the Funds
(described below) are generally not subject to backup withholding.

Foreign Shareholders. Under the Code, distributions of net investment
--------------------
income by a Fund to a nonresident alien individual, foreign trust (i.e., trust
over which administration a U.S. court is able to exercise primary supervision
and substantial decisions of which one or more U.S. persons have authority to
control), foreign estate (i.e., the income of which is not subject to U.S. tax
regardless of source), foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. income tax withholding (at a rate of 30%
or a lower treaty rate, if applicable). Withholding will not apply if a dividend
distribution paid by a Fund to a foreign shareholder is "effectively connected"
with a U.S. trade or business (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the foreign shareholder), in
which case the reporting and withholding requirements applicable to U.S.
residents will apply. Distributions of net capital gain generally are not
subject to U.S. income tax withholding.

New Regulations. On October 6, 1997, the Treasury Department issued new
---------------
regulations (the "New Regulations") which make certain modifications to the
backup withholding, U.S. income tax withholding and information reporting rules
applicable to foreign shareholders. The New Regulations will generally be
effective for payments made after December 31, 1999, subject to certain
transition rules. Among other things, the New Regulations will permit the Funds
to estimate the portion of their distributions qualifying as capital gain
distributions for purposes of determining the portion of such distributions paid
to foreign shareholders which will be subject to U.S. income tax withholding.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.

Corporate Shareholders. Corporate shareholders of the Growth & Income
----------------------
Fund or the Growth Fund may be eligible for the dividends-received deduction on
dividends distributed out of the Fund's net investment income attributable to
dividends received from domestic corporations, which, if received directly by
the corporate shareholder, would qualify for such deduction. 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 during the 90-day period that begins 45 days prior to the date upon which
the shareholder became entitled to the distribution, and the Fund must have held
the shares of corporate stock giving rise to the dividend for at least 46 days
during a 90-day period that begins 45 days prior to the date upon which the Fund
became entitled to the dividend.

TAX-FREE MONEY MARKET FUND, MUNICIPAL BOND FUND AND CALIFORNIA TAX-FREE
FUND (THE "TAX-FREE FUNDS"). The Tax-Free Funds intend that at least 50% of the
value of their total assets at the close of each quarter of their taxable years
will consist of obligations the interest on which is exempt from federal income
tax, so that they will qualify under the Code to pay "exempt-interest
dividends." The portion of total dividends paid by a Tax Free Fund with respect
to any taxable year that constitutes exempt-interest dividends will be the same
for all shareholders receiving dividends during such year. Long-term and/or
short-term capital gain distributions will not constitute exempt-interest
dividends and will be taxed as capital gain or

67
<PAGE>

ordinary income dividends, respectively. The exemption of interest income
derived from investments in tax-exempt obligations for federal income tax
purposes may not result in a similar exemption under the laws of a particular
state or local taxing authority.

Not later than 60 days after the close of its taxable year, a Tax-Free Fund
will notify its shareholders of the portion of the dividends paid with respect
to such taxable year which constitutes exempt-interest dividends. The aggregate
amount of dividends so designated cannot exceed the excess of the amount of
interest excludable from gross income under Section 103 of the Code received by
the Fund during the taxable year over any amounts disallowed as deductions under
Sections 265 and 171(a)(2) of the Code. Finally, interest on indebtedness
incurred to purchase or carry shares of a Tax-Free Fund will not be deductible
to the extent that the Fund's distributions are exempt from federal income tax.

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.
Furthermore, any loss realized by a shareholder upon the sale or redemption of
shares of a Tax-Free Fund held less than six months is disallowed to the extent
of any exempt-interest dividends received by the shareholder.

In addition, the federal alternative minimum tax ("AMT") rules ensure that
at least a minimum amount of tax is paid by taxpayers who obtain significant
benefit from certain tax deductions and exemptions. Some of these deductions and
exemptions have been designated "tax preference items" which must be added back
to taxable income for purposes of calculating AMT. Among the tax preference
items is tax-exempt interest from "private activity bonds" issued after August
7, 1986. To the extent that a Tax-Free Fund invests in private activity bonds,
its shareholders who pay AMT will be required to report that portion of Fund
dividends attributable to income from the bonds as a tax preference item in
determining their AMT. Shareholders will be notified of the tax status of
distributions made by the Fund. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisors before purchasing shares in a
Tax-Free Fund. Furthermore, shareholders will not be permitted to deduct any of
their share of a Tax-Free Fund's expenses in computing their AMT. With respect
to a corporate shareholder of such Funds, exempt-interest dividends paid by a
Fund is included in the corporate shareholder's "adjusted current earnings" as
part of its AMT calculation, and may also affect its federal "environmental tax"
liability. As of the printing of this SAI, individuals are subject to an AMT at
a maximum rate of 28% and corporations at a maximum rate of 20%. Shareholders
with questions or concerns about AMT should consult their own tax advisors.

Shares of a Tax-Free Fund would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs since such plans and accounts are generally tax-
exempt and, therefore, would not benefit from the exempt status of dividends
from such Funds. Such dividends would be ultimately taxable to the beneficiaries
when distributed to them.

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<PAGE>

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.

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. The California Tax-Free Fund
--------------------------------------------
expects to be relieved of liability for federal income tax to the extent its net
investment income and capital gains are distributed annually in accordance with
the Code. The California Tax-Free Fund expects to be exempt from tax in
California on the same basis as it expects under the Code. Moreover, if at the
close of each quarter of the California Tax-Free Fund's taxable year, at least
50% of the value of its total assets consists of obligations the interest on
which, if such obligations were held by an individual, would be exempt from
California personal income tax (under either the laws of California or of the
United States), the California Tax-Free Fund will be entitled to pay dividends
to its shareholders which will be exempt from California personal income tax
(referred to herein as "California exempt-interest dividends"). Under normal
market conditions, the California Tax-Free Fund will invest primarily in
municipal securities of the State of California, its cities, municipalities and
other political authorities so that it can pay California exempt-interest
dividends.

Not later than 60 days after the close of its taxable year, the California
Tax-Free Fund will notify its shareholders of the portion of the dividends paid
which constitutes California exempt-interest dividends with respect to such
taxable year. The total amount of California exempt-interest dividends paid by
the California Tax-Free Fund to all of its shareholders with respect to any
taxable year cannot exceed the amount of interest received by the California
Tax-Free Fund during such year on California municipal securities and other
obligations the interest on which is tax exempt, less any expenses or
expenditures (including any expenditures attributable to the acquisition of
securities of other investment companies). Dividends paid by the California Tax-
Free Fund in excess of this limitation will be treated as ordinary dividends
subject to California personal income tax at ordinary rates.

Long-term and/or short-term capital gain distributions will not constitute
California exempt-interest dividends and will be taxed as capital gains and
ordinary income dividends, respectively. Moreover, interest on indebtedness
incurred by a shareholder to purchase or carry shares of the California Tax-Free
Fund is not deductible for California personal income tax purposes to the extent
the shareholder receives California exempt-interest dividends during his or her
taxable year. Exempt-interest dividends will be tax exempt for purposes of the
California

69
<PAGE>

personal income tax. For corporate shareholders, dividends will be subject to
the corporate franchise taxes in California.

Other Considerations. Investors should be aware that the investments to be
--------------------
made by the Funds may involve sophisticated tax rules that may result in income
or gain recognition by the Funds without corresponding current cash receipts.
Although the Funds will seek to avoid significant noncash income, such noncash
income could be recognized by the Funds, in which case the Funds may distribute
cash derived from other sources in order to meet the minimum distribution
requirements described above.

The foregoing discussion and the discussions in the Prospectus address only
some of the federal tax considerations generally affecting investments in a
Fund. Each investor is urged to consult his or her tax advisor regarding
specific questions as to federal, state or local taxes and foreign taxes.

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 investment 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, an indirect wholly owned 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 prior to this time did not have any 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 September 30, 1998
managed assets of approximately $27 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 $132 billion as of September 30, 1998.

TBCAM, which is located at One Boston Place, Boston, Massachusetts 02108,
was established in 1970 and as of September 30, 1998 managed assets of
approximately $22.1 billion.

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

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<PAGE>

Distributor. WM Distributors, a registered broker-dealer, is the
-----------
distributor of the Funds. In this capacity, WM Distributors has the exclusive
right to distribute shares of the Funds. WM Distributors is a subsidiary of
Washington Mutual, Inc. a publicly owned financial services company.

Custodian and Transfer Agent. IFTC is the Funds' custodian and the Funds'
----------------------------
transfer, shareholder service, and dividend-paying agent. IFTC is located at 801
Pennsylvania, Kansas City, Missouri 64105.

Administrator and Sub-Administrator. Griffin Financial Administrator is the
-----------------------------------
administrator of the Funds 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: 73; Retired; Former Director of
--------
Investments, Home Savings of America.

VINCENT F. COVIELLO, Director. Age: 59; Turnberry Capital Corporation,
--------
President, since 1993. Prior thereto, Chairman & CEO, GNA Corp. from January
1980 to March 1993.

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

CARROL R. MCGINNIS, Director. Age: 54; 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: 45; 4535 Lennox Avenue, Sherman Oaks,
--------
California 91423. Dean of the College of Letters, Arts and Sciences and
Professor of Economics, University of Southern California, since 1991. Prior
thereto, Professor of Economics, Williams College, 1980-1991.

71
<PAGE>

RICHIE D. ROWSEY, Senior Vice President. Age: 43; 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: 36; Senior Vice
---------------------------------
President & Treasurer, Griffin Financial Services. Senior Vice President &
Treasurer, Griffin Financial Administrators. Senior Vice President & Treasurer,
Griffin Financial Investment Advisers.

DARLENE SPEARS, Vice President. Age: 36; Vice President and Compliance
--------------
Administrator, Griffin Financial Services, since June 1996. From 11/92 to 6/96,
Assistant Vice President, Compliance, Great Western Financial Securities; from
March 1992 to November 1992, Compliance Officer, Yaeger Securities, Inc.; and
from May 1985 to March 1992, Senior Compliance Analyst, Sentra Securities
Corporation.

HERBERT L. BOTTS, Assistant Secretary. Age: 40; Vice President & Assistant
-------------------
Secretary, 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 Directors from The Griffin Funds during
the fiscal year ended September 30, 1998.

Compensation Table
------------------

<TABLE>
<CAPTION>
Aggregate Total
Compensation Compensation
Director from The Griffin Funds from The Griffin Funds
-------- ---------------------- ----------------------
<S> <C> <C>
Herschel Cardin $15,000 $15,000
Vincent F. Coviello 15,000 15,000
William A. Hawkins 0 0
Carrol R. McGinnis 15,000 15,000
Morton O. Schapiro 15,000 15,000
</TABLE>

As of November 1, 1998, the Directors and Officers of The Griffin Funds as
a group, owned less than 1% of the outstanding shares of The Griffin Funds.

72
<PAGE>

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, subject to the overall supervision of the Board of Directors of
The Griffin Funds, and in accordance with each Fund's investment objective,
policies and limitations, Griffin Advisers shall provide the Funds with a
continuous investment program, including investment research and management with
respect to all securities and other investments (including cash and cash
equivalents) of the Funds. Griffin Advisers also is obligated to furnish to the
Board of Directors of The Griffin Funds periodic reports on the investment
activity and performance of each Fund (including financial reports and analyses
detailing each Fund's composition, comparative performance and securities
transactions), and such additional reports and information as the Board of
Directors and officers of The Griffin Funds reasonably request. The Advisory
Contract further provides that Griffin Advisers shall, at its own expense,
employ or associate itself with such persons, including such sub-investment
advisers as may be approved by The Griffin Funds, as Griffin Advisers believes
appropriate to assist it in performing its obligations under the Contract.

For the services described above, 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 daily net assets of the Fund. 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 daily net assets of each
Fund.

The Advisory Contract provides that Griffin Advisers shall not be liable
for any action taken or omitted in its reasonable judgment, in good faith and
believed by it to be authorized or

73
<PAGE>

within the discretion conferred on it by the Advisory Contract, provided that
the Contract does not protect Griffin Advisers against any liability to The
Griffin Funds or its shareholders arising by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties under the Contract or
by reason of reckless disregard of its duties under the Contract.

The Advisory Contract provides that it will continue in effect with respect
to a Fund for a period of two years from its effective date only if approved at
least annually by the vote of (a) a majority of the Fund's outstanding voting
securities (as defined in the 1940 Act) or by the Company's Board of Directors,
and (b) by the vote, cast in person at a meeting called for the purpose of
voting on the Contract, of a majority of Directors of The Griffin Funds who are
not parties to the Contract or "interested persons" (as defined in the 1940 Act)
of any such party. The Advisory Contract provides that it will terminate
automatically in the event of its assignment (as defined in the 1940 Act).

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.

Advisory Fees Paid. 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,
1998, 1997 and 1996.

<TABLE>
<CAPTION>
Net
Advisory Fees Paid Advisory Fees Waived
Fund 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund $478,019 $ 25,333 $0 $ 686,020 $995,592 $774,401
Tax-Free Money Market Fund 0 0 0 123,551 68,154 53,309
Short-Term Bond Fund 8,491 0 0 371,535 161,913 57,125
U.S. Government Income Fund 100,161 0 0 408,116 303,786 203,770
Bond Fund 8,575 0 0 389,770 201,308 104,085
Municipal Bond Fund 0 0 0 77,514 39,097 31,724
California Tax-Free Fund 4,178 0 0 193,524 110,625 77,877
Growth & Income Fund 821,363 200,000 0 1,094,281 900,393 485,966
Growth Fund 227,073 50,000 0 259,087 199,984 78,987
</TABLE>

At its own expense, Griffin Advisers has retained Evaluation Associates,
Inc. ("EAI") as an investment advisory consultant. Under Griffin Advisers'
arrangement with EAI, EAI periodically provides reports to management regarding
fund performance, monitors developments at each of the sub-advisers and makes
presentations to the Board of Directors of The Griffin Funds regarding market
developments and sub-adviser performance. When so requested by management, EAI
assists management in identifying and selecting investment sub-advisers for The
Griffin Funds. For its services, EAI receives a fee from Griffin Advisers.

74
<PAGE>

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

Generally, each sub-advisory agreement provides that, subject to the
overall supervision and control of Griffin Advisers and The Griffin Funds, and
in accordance with the respective Fund's investment objective, policies and
limitations, a sub-adviser is obligated to provide a continuous investment
program, including investment research and management with respect to all
securities and other investments (including cash and cash equivalents) of the
Fund. Each sub-adviser also is obligated to furnish to Griffin Advisers and the
Board of Directors of The Griffin Funds periodic reports on the investment
activity and performance of each Fund, and such additional reports and
information as Griffin Advisers and the Board of Directors of The Griffin Funds
reasonably request.

A management fee is calculated and paid by each Fund to Griffin Advisers
every month. Griffin Advisers, in turn, pays Payden & Rygel, T. Rowe Price and
TBCAM for the sub-advisory services they provide to their respective funds.
Specifically, with respect to the Money Market Fund and the Tax-Free Money
Market Fund, Griffin Advisers pays Payden & Rygel fees at an annual rate of
0.25% of the first $25 million of each Fund's average daily net assets, and
0.20% of each Fund's average daily net assets in excess of $25 million. With
respect to the U.S. Government Income Fund, the California Tax-Free Fund and the
Municipal Bond Fund, Griffin Advisers pays Payden & Rygel fees at an annual rate
of 0.30% of the first $50 million of each Fund's average daily net assets, 0.25%
of the next $450 million of each Fund's average daily net assets and 0.20% of
each Fund's average daily net assets in excess of $500 million, with a minimum
annual fee of $25,000 for each Fund. With respect to the Short-Term Bond Fund
and the Growth Fund, Griffin Advisers pays T. Rowe Price fees at an annual rate
of 0.30% of the first $50 million of each Fund's average daily net assets, 0.25%
of the next $450 million of each Fund's average daily net assets and 0.20% of
such Fund's average daily net assets in excess of $500 million, with a minimum
annual fee of $25,000 for each Fund. With respect to the Bond Fund and the
Growth & Income Fund, Griffin Advisers pays TBCAM fees at an annual rate of
0.30% of the first $50 million of each Fund's average daily net assets, 0.25% of
the next $450 million of each Fund's average daily net assets and 0.20% of such
Fund's average daily net assets in excess of $500 million. The fees paid to the
sub-advisers are not reduced by any voluntary or mandatory expense
reimbursements that may be put into effect by Griffin Advisers from time to
time.

75
<PAGE>

Generally, each sub-advisory agreement provides that a sub-adviser will not
be liable for any action taken or omitted in its reasonable judgment, in good
faith and believed by it to be authorized or within the discretion conferred on
the sub-adviser by its sub-advisory agreement, provided that the agreement does
not protect a sub-adviser against any liability to Griffin Advisers, The Griffin
Funds or their shareholders arising by reason of willful misfeasance, bad faith
or gross negligence in the performance by the sub-adviser of its duties under
the agreement or by reason of reckless disregard by the sub-adviser of its
duties under the agreement.

Each sub-advisory agreement provides that it will continue in effect with
respect to a Fund for a period of two years from its effective date only if
approved at least annually by the vote of (a) a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by The Griffin
Funds' Board of Directors, and (b) by the vote, cast in person at a meeting
called for the purpose of voting on the agreement, of a majority of Directors of
The Griffin Funds who are not parties to the agreement or "interested persons"
(as defined in the 1940 Act) of any such party. Each sub-advisory agreement
provides that it will terminate automatically in the event of its assignment (as
defined in the 1940 Act).

Sub-Advisory Fees Paid. The following chart indicates the amount of sub-
----------------------
advisory fees paid by Griffin Advisers to the respective sub-advisers for the
fiscal years ended September 30, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
Sub-Advisory Fees Paid
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Money Market Fund $480,640 $420,259 $322,888
Tax-Free Money Market Fund 61,074 34,054 27,407
Short-Term Bond Fund 215,575 97,434 37,029
U.S. Government Income Fund 281,218 176,906 122,452
Bond Fund 226,977 125,831 62,735
Municipal Bond Fund 47,041 25,686 24,996
California Tax-Free Fund 119,651 78,959 66,351
Growth & Income Fund 832,721 487,870 288,486
Growth Fund 227,717 124,389 41,560
</TABLE>

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

76
<PAGE>

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.

Administration Fees Paid. The following chart indicates, for the fiscal
------------------------
years ended September 30, 1998, 1997 and 1996, the amount of administrative fees
paid by the Funds to Griffin Financial Administrators, the amount of
administrative fees waived by Griffin Financial Administrators, and the amount
of expenses reimbursed by Griffin Financial Administrators:

<TABLE>
<CAPTION>
Net
Administration Administration Expenses Reimbursed
Fees Paid Fees Waived by Administrator
Fund 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- -------- -------- -------- ------- ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market Fund $465,616 $408,370 $309,760 $ 0 $ 0 $ 0 $ 0 $ 0 $ 193
Tax-Free Money Market Fund 49,421 19,088 10,583 0 8,174 10,741 0 0 11,779
Short-Term Bond Fund 152,010 56,099 0 0 8,666 22,850 0 1,484 28,021
U.S. Government Income Fund 203,311 120,675 55,941 0 839 25,567 0 282 4,234
Bond Fund 159,338 79,977 11,474 0 546 30,160 0 1,007 12,544
Municipal Bond Fund 20,626 0 2,573 10,379 15,638 10,116 785 16,629 39,494
California Tax-Free Fund 79,081 47,733 19,720 0 4,971 24,530 0 0 10,516
Growth & Income Fund 638,548 366,798 161,988 0 0 0 0 0 2,961
Growth Fund 162,053 82,820 3,606 0 508 22,723 0 0 23,094
</TABLE>

- ---------------
/*/ For the period from commencement of operations on June 12, 1995 through
September 30, 1995.

IFTC provides certain sub-administrative 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, for which IFTC is entitled to compensation. In this
connection, the Administration Agreement between The Griffin Funds and Griffin
Administrators provides that, at its own expense, Griffin Administrators will
pay all fees due from the Funds to IFTC arising under the Agency Agreement and
the Custody Agreement (except transaction-based fees arising under the Custody
Agreement and out-of-pocket expenses) and otherwise payable by the Funds under
those Agreements. During the fiscal years ended September 30, 1996, 1997 and
1998 the fees paid by Griffin Administrators to IFTC totaled $1,091,694,
$1,501,199 and $1,365,606, respectively.

77
<PAGE>

WM Funds Distributor, Inc. located at 1300 21st Street, Sacramento, California
95814, serves as the exclusive distributor ("Distributor") of shares of the
Funds pursuant to a Distribution Agreement between The Griffin Funds and the
Distributor dated October 1, 1998. Prior to November 1998, Griffin Financial
Services served as distributor to The Griffin Funds. The Distribution Agreement
between WM Funds Distributor, Inc. and The Griffin Funds is identical to the
former distribution agreement with Griffin Financial Services. As Distributor,
WM Funds Distributor, Inc. engages in a continuous offering of shares of the
Funds. 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.

Underwriting Commissions.
------------------------

During the fiscal year ended September 30, 1998, the Griffin Financial
Services, as distributor, received $307,745 in net underwriting discounts and
commissions on sales of Class A Shares, and $175,678 in contingent deferred
sales charges on redemptions of Class B Shares. All underwriting discounts and
commissions and contingent deferred sales charges received by Griffin Financial
Services during the fiscal year ended September 30, 1998 were retained by
Griffin Financial Services.

During the fiscal year ended September 30, 1997, Griffin Financial Services
received $262,631 in net underwriting discounts and commissions on sales of
Class A Shares, and $86,787 in contingent deferred sales charges on redemptions
of Class B Shares. All underwriting discounts and commissions and contingent
deferred sales charges received by Griffin Financial Services during the fiscal
year ended September 30, 1997 were retained by Griffin Financial Services.

During the fiscal year ended September 30, 1996, Griffin Financial received
$294,270 in net underwriting discounts and commissions on sales of Class A
Shares, and $37,853 in contingent deferred sales charges on redemptions of Class
B Shares. All underwriting discounts and commissions and contingent deferred
sales charges received by Griffin Financial Services during the fiscal year
ended September 30, 1996 were retained by Griffin Financial Services.

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.

78
<PAGE>

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 Griffin Funds, 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.

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, 1998, the Money Market Fund paid
$465,616 in distribution and service fees under its Plan to Griffin Financial
Services as compensation for distribution and shareholder services. During the
fiscal year ended September 30, 1998, the Tax-Free Money Market Fund incurred
$49,421 in distribution and service fees under its Plan, $8,570 of which was
waived by Griffin Financial Services.

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.

Class A Distribution Fees. The following table indicates (i) the fees
-------------------------
incurred by the Class A Shares of the Non-Money Market Funds under the Plans,
(ii) the purposes for which such amounts were spent and (iii) the amount of such
fees that was voluntarily waived by Griffin Financial Services during the fiscal
year ended September 30, 1998:

79
<PAGE>

<TABLE>
<CAPTION>
Distribution and
Service Fees Paid
-----------------

Fund Net Compensation to Underwriters Waived Fees
---- -------------------------------- -----------
<S> <C> <C>
Short-Term Bond Fund $178,269 $11,326
U.S. Government Income Fund 243,453 0
Bond Fund 197,703 0
Municipal Bond Fund 858 36,660
California Tax-Free Fund 83,327 0
Growth & Income Fund 680,920 0
Growth Fund 189,199 0
</TABLE>

Class B Distribution Fees. The following table indicates (i) the fees
-------------------------
incurred by the Class B Shares of the Non-Money Market Funds under the Plans,
(ii) the purposes for which such amounts were expended and (iii) the amount of
such fees that was voluntarily waived by Griffin Financial Services during the
fiscal year ended September 30, 1998:

<TABLE>
<CAPTION>
Distribution and
Service Fees Paid
-----------------

Fund Net Compensation to Underwriters Waived Fees
- ---- -------------------------------- -----------
<S> <C> <C>
Short-Term Bond Fund $ 1,572 $ 100
U.S. Government Income Fund 42,743 0
Bond Fund 5,877 0
Municipal Bond Fund 3,567 1,388
California Tax-Free Fund 62,096 0
Growth & Income Fund 469,058 0
Growth Fund 53,471 0
</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 funds of The 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.

80
<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,"

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<PAGE>

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 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.

5% OWNERSHIP AS OF OCTOBER 29, 1998
------------------------------------

As of October 29, 1998, the following persons were known by The Griffin Funds
to own of record or beneficially (as indicated) 5% or more of the outstanding
shares of the following Funds (and classes):

<TABLE>
<CAPTION>
NAME AND TYPE PERCENTAGE
FUND; CLASS ADDRESS OF OWNERSHIP OF CLASS
- ---------------------- -------------------------------------- ----------------- --------------
<S> <C> <C> <C>
Money Market Fund

</TABLE>

82
<PAGE>

<TABLE>
<CAPTION>
Spring Valley, CA 91978

NAME AND TYPE PERCENTAGE
FUND; CLASS ADDRESS OF OWNERSHIP OF CLASS
- ---------------------- -------------------------------------- ----------------- -------------
<S> <C> <C> <C>
Money Market Fund The Northern Trust Company Record Holder 20.20%
Ahmanson Advantage Account
50 S. LaSalle St.
Chicago, Il 60603

Home Savings of America FSB Record Holder 28.28%
4900 Rivergrade Road
Mail Code 3080
Irwindale, CA 91706

Tax-Free Money Home Savings of America FSB Record Holder 15.75%
Market 4900 Rivergrade Road
Mail Code 3080
Irwindale, CA 91706

U.S. Government The Northern Trust Company Beneficial 5.37%
Income Fund Ahmanson Advantage Account Owner
Class A 50 S. LaSalle St.
Chicago, Il 60603

Class B Home Savings of America TTEE Beneficial 7.27%
IRA of Leo Friedman Owner
6436 W. 81st Street
Los Angeles, CA 90045

Municipal Bond Fund Griffin Financial Service of America Beneficial 5.62%
Class A Attn: Finance (Seed Account) Owner
P.O. Box 60070
Industry, CA 91716

Class B Margaret Spears Beneficial 6.23%
MaryAnn Dunning Owner
Leornard Alcomo JTWROS
215 S.E. Third Avenue, Apt. 405B
Hallandale, FL 33009
</TABLE>

83
<PAGE>

<TABLE>
<CAPTION>
Sadie Bach Beneficial 6.94%
Laurence Bach JTWROS Owner
9601 Sunrise Lakes Blvd., #112
Sunrise, FL 33322-1129

NAME AND TYPE PERCENTAGE
FUND; CLASS ADDRESS OF OWNERSHIP OF CLASS
- ---------------------- -------------------------------------- ----------------- -------------
<S> <C> <C> <C>
Municipal Bond Fund John A. Nelson TTEE Beneficial 10.94%
Class B John A. Nelson Living Trust Owner
1009 Blossom River Way
San Jose, CA 95132-2804

Floyd A. Allgaier TTEE Beneficial 19.27%
Floyd O. Allgaier Trust Owner
1025 Glen Echo Avenue
San Jose, CA 95125-4316

Steve J. Bicondova Beneficial 5.50%
Mary R. Bicondova Owner
PO Box 180 Indian Creek Road
Husum, WA 98623

Robert W. Armantrout 9.12%
The Armantrout Family Living Trust Beneficial
17394 Santa Isabel Owner
Fountain Valley, CA 92708

Be-Fong Shih Beneficial 12.45%
4917 Thorntree Owner
Plano, TX 75024-2495

California Tax-Free Louis Singer Beneficial 6.29%
Fund The L and F Singer Fund Owner
Class B 1707 Kelton Avenue
Los Angeles, CA 90024

Bond Fund Kieran H. Angelini Beneficial 6.24%
Class B 6529 Aura Avenue Owner
Reseda, CA 91335

Robert G. Linnabary Beneficial 5.29%
3116 Gingerwood Lane Owner
Lancaster, CA 93536-4797

Short-Term Bond Home Savings of America TTEE Beneficial 11.27%
Fund IRA of Friedel B. Erz Owner
Class B 290 Palisades Street
Pasadena, CA 91103-2140

Home Savings of America TTEE Beneficial 41.18%
IRA of Waddah T. Anani Owner
1930 Curtis Ave.
Redondo Beach, CA 90278

Tamara L. Markey Beneficial 19.62%
1137 S. Cabrillo Drive Owner
</TABLE>

84
<PAGE>

<TABLE>
<CAPTION>
Chula Vista, CA 91910

NAME AND TYPE PERCENTAGE
FUND; CLASS ADDRESS OF OWNERSHIP OF CLASS
- ---------------------- -------------------------------------- ----------------- -------------
<S> <C> <C> <C>
James T. Lockwood Beneficial Owner 7.83%
Donna Lockwood JTWROS
24181 El Tiradore Circle
Mission Viejo, CA 92691

Growth Fund Northern Trust Co. TTEE Beneficial Owner 8.72%
Class A Ahmanson Advantage Account
50 S. LaSalle Street
Chicago, IL 60603

Growth & Income Northern Trust Co. TTEE Beneficial Owner 8.06%
Fund Ahmanson Advantage Account
Class A 50 S. LaSalle Street
Chicago, IL 60603
</TABLE>

CUSTODIAN. IFTC, located at 801 Pennsylvania, 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 AUDITORS. KPMG Peat Marwick LLP, located at 725 South Figueroa
Street, Los Angeles, California 90017, serves as The Griffin Funds' independent
auditors.

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 financial statements for the fiscal year ended
September 30, 1998, and the report thereon of KPMG Peat Marwick LLP included in
the Annual Report 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.

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<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.

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

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<PAGE>

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 IBCA COMMERCIAL PAPER RATINGS:

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

F-1 -- (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 IBCA CORPORATE AND MUNICIPAL BOND RATINGS:

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.

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<PAGE>

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.