OFFITBANK INVESTMENT FUND INC, 485APOS, 1999-03-01

OFFITBANK INVESTMENT FUND INC
485APOS, 1999-03-01

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Registration Nos. 33-70116
811-8036

As filed via EDGAR with the Securities and Exchange Commission on March 1, 1999

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.
Post-Effective Amendment No. 16
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18
(Check appropriate box or boxes)

THE OFFITBANK INVESTMENT FUND, INC.
(Exact name of Registrant as specified in charter)

400 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code: (800) 618-9510

---------------
Stephen Brent Wells, Esq.
OFFITBANK
520 Madison Avenue
New York, New York 10022

---------------
(Name and Address of Agent for Service)

with a copy to:
Carl Frischling, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022

It is proposed that this filing will become effective:

|_| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (a)(i)
|X| 60 days after filing pursuant to paragraph (a)(i) 75 days after
|_| filing pursuant to paragraph (a)(ii) on (date) pursuant to paragraph
|_| (a)(ii) of rule 485.

If appropriate, check the following box:

|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment

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THE OFFITBANK INVESTMENT FUND, INC.

OFFITBANK High Yield Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Latin America Equity Fund
OFFITBANK Total Return Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Global Convertible Fund
OFFITBANK U.S. Government Securities Fund
OFFITBANK Mortgage Securities Fund
OFFITBANK California Municipal Fund
OFFITBANK New York Municipal Fund
OFFITBANK National Municipal Fund

The OFFITBANK Investment Fund, Inc. is an open-end, management investment
company offering eleven separate, no-load, non-diversified investment portfolios
which each have a different investment objective.

PROSPECTUS

APRIL __, 1999

Like all mutual fund shares, these Fund shares have not been approved or
disapproved by the Securities and Exchange Commission (the "SEC") nor has the
SEC determined whether this prospectus is truthful or complete. To state
otherwise is a criminal offense.

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TABLE OF CONTENTS

A Fund-by-Fund look at goals, FUND DESCRIPTION
strategies, risks, expenses OFFITBANK High Yield Fund................. 3
and financial history. OFFITBANK Emerging Markets Fund........... 10
OFFITBANK Latin America Equity Fund....... 17
OFFITBANK Total Return Fund............... 24
OFFITBANK Investment Grade Global Debt Fund 30
OFFITBANK Global Convertible Fund......... 35
OFFITBANK U.S. Government Securities Fund. 41
OFFITBANK Mortgage Securities Fund........ 49
OFFITBANK California Municipal Fund....... 59
OFFITBANK New York Municipal Fund......... 64
OFFITBANK National Municipal Fund......... 69
Risks of Investing in the Funds........... 80

Details on the management MANAGEMENT OF THE FUNDS
and operations of the Funds. Investment Adviser........................ 93
Service Provider Chart.................... 95

Policies and instructions for SHAREHOLDER INFORMATION
opening, maintaining and Pricing of Fund Shares.................... 96
closing an account in any of Purchase of Fund Shares................... 97
the Funds. Redemption of Fund Shares................. 99
Shareholder Services...................... 101
Dividends and Distributions............... 101
Taxes..................................... 102

Details on distribution and DISTRIBUTION ARRANGEMENTS
other shareholder service Multiple Class Structure.................. 106
plans. Rule 12b-1 Distribution Fees.............. 107
Shareholder Serving Fees.................. 107

FOR MORE INFORMATION........... see back cover

2
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OFFITBANK HIGH YIELD FUND

Investment Objectives

The Fund's primary investment objective is high current income. Capital
appreciation is a secondary objective.

Principal Investment Strategies

The Fund invests at least 65% of its total assets in U.S. corporate fixed income
securities that are lower rated or unrated at the time of investment.

Principal Risk Factors

- - All or a substantial portion of the securities purchased by the Fund are
lower rated or unrated debt securities (i.e., high yield, high risk debt
securities). High yield, high risk debt securities have a higher risk of
default in the payment of interest and principal and are subject to
significant changes in price. Investment by the Fund in such securities
involves a high degree of credit risk and such securities are regarded as
speculative by the major rating agencies.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to
invest most of its assets in securities issued by a small number of
companies. This makes the Fund more susceptible to the risks associated
with these particular companies, or to a single economic, political or
regulatory occurrence.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Returns

The bar chart below shows the annual total returns for Select Shares of the Fund
for the last four calendar years. The bar chart provides some indication of the
risks of investing in the Fund by showing changes in the Fund's performance from
year to year. Past performance is not necessarily an indicator of how the Fund
will perform in the future.

3
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[INSERT BAR CHARTS]

1995 - 17.74
1996 - 12.46
1997 - 12.09
1998 - 4.49

Since inception (March 2, 1994), the highest calendar quarter total return for
Select Shares of the Fund was 5.46% (quarter ended June 30, 1995) and the lowest
calendar quarter total return was (3.45%) (quarter ended September 30, 1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
one calendar year and since inception, with respect to Select Shares and Advisor
Shares, compare with the Merrill Lynch All High Yield Bond Index (the "ML High
Yield Index") for the same periods. The table, like the bar chart, provides some
indication of the risks of investing in the Fund by showing how the Fund's
average annual total returns for 1 year and since inception compare with those
of a broad measure of market performance. Past performance is not necessarily an
indicator of how the Fund will perform in the future.

Average Annual Total Returns

1 Year Since Inception
------ ---------------

Select Shares* 4.49% 9.42%

Advisor Shares** Not Applicable Not Applicable

ML High Yield Index 3.66% 9.15%

* Commenced operations on March 2, 1994.
** The average annual total returns are unavailable for the Advisor Shares
because these shares have been operating for less than a full calendar
year (from May 1, 1998 to December 31, 1998).

INVESTOR EXPENSES

Fund investors pay various expenses, either directly or indirectly. The purpose
of the following table and example is to describe the fees and expenses that you
may pay if you buy and hold shares of the Fund.

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Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Maximum sales charge imposed on purchases None None
Maximum deferred sales charge None None
Maximum sales charge imposed on reinvested dividends None None
Redemption Fee None None
Exchange Fee None None

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees.................................................0.72% 0.72%
Distribution (Rule 12b-1) fees (before waivers)(2)............0.00% 0.25%
Other expenses (before waivers/reimbursements)(3).............0.15% 0.49%
----- ----
Total annual Fund operating expenses
(before waivers/reimbursements) (4).........................0.87% 1.46%
===== ====

(1) The Company's Shareholder Servicing Plan permits the Fund to pay fees to
Shareholder Servicing Agents at an annual rate of up to 0.25% of the average
daily net asset value of Advisor Shares of the Fund for which such Shareholder
Servicing Agents provide services for the benefit of customers. Shareholder
Servicing fees are included in the Fund's "Other expenses."

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(3) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges
for Select and Advisor Shares. Taking into account current waivers of
administration fees and/or reimbursements by the Adviser of certain expenses,
the Fund's actual "Other expenses" are 0.12% with respect to Select Shares
and 0.21% with respect to Advisor Shares. Such waivers/reimbursements may be
terminated at any time without shareholder approval at the option of the
Administrator and the Adviser.

(4) Given the waivers/reimbursements discussed in Footnotes (2) and (3)
above, as of December 31, 1998, "Total annual Fund operating expenses" were
0.84% for Select Shares and 0.93% for Advisor Shares. All
waivers/reimbursements may be terminated at any time without shareholder
approval at the option of the Administrator and the Adviser.

Example

This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay if you invested $10,000 in the Fund over the various time periods
indicated. The example assumes that:

- - you reinvested all dividends and distributions

- - the average annual total return was 5%

- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods

- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

5
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1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $89 $278 $482 $1,073

Advisor Shares $149 $462 $797 $1,746

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

6
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FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that a shareholder would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). The information for the year ended December 31, 1998 has been
audited by PricewaterhouseCoopers LLP, whose unqualified report, along with the
Fund's financial statements, is included in the Fund's Annual Report dated
December 31, 1998, which is available without charge upon request. The financial
statements for the Fund for years prior to December 31, 1998 were audited by
Price Waterhouse LLP, whose report expressed an unqualified opinion on those
statements.

[INSERT FINANCIAL HIGHLIGHTS]

7
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ADDITIONAL INFORMATION ON THE FUND

Investment Objectives and Policies

The Fund's primary investment objective is high current income. Capital
appreciation is a secondary objective. The Fund seeks to achieve its objectives
by investing, under normal circumstances, at least 65% of its total assets in
U.S. corporate fixed income securities (including debt securities, convertible
securities and preferred stocks) which are lower rated or unrated at the time of
investment. In addition, the Fund seeks to invest in debt securities which are
(i) "seasoned" senior securities (as defined below) and offer sufficiently high
potential yields to justify the greater investment risk, (ii) judged by the
Adviser to be more creditworthy than generally perceived in the marketplace, or
(iii) issued by once creditworthy companies that are now considered a high risk
investment generally due to changing industry conditions, a change in company
capitalization or a reduction of earning power. The Fund seeks capital
appreciation opportunities in those special situations in which an issuer's
senior securities sell at a substantial discount in relation to their
liquidation value, or in which the creditworthiness of an issuer is believed, in
the judgment of the Adviser, to be improving. For purposes of this Prospectus, a
"senior" security of an issuer is any security entitled to preference over the
issuer's common stock in the distribution of income or assets upon liquidation.

Securities offering the high yield and appreciation potential characteristics
that the Fund seeks are generally found in mature cyclical or depressed
industries and highly leveraged companies. The Adviser attempts to identify
securities which have underlying fundamentals that are improving or are
sufficiently strong to sustain the issuer. The Adviser also attempts to identify
securities in which the asset values ultimately supporting the credit are
sufficient so that attractive returns are achievable in the event of bankruptcy,
reorganization or liquidation of the issuer. Some of the Fund's securities may
be obtained as a result of the issuer's reorganization or may be in default or
arrears.

Through credit analysis, the Adviser seeks to protect principal and to minimize
market and individual credit risk, as well as to identify opportunity for
capital appreciation. In selecting a security for investment by the Fund, the
Adviser considers the following factors, among others: (i) the current yield,
the yield to maturity where appropriate, and the price of the security relative
to other securities of comparable quality and maturity; (ii) the balance sheet
and capital structure of the issuer; (iii) the market price of the security
relative to its face value; (iv) the rating, or absence of a rating, by Standard
& Poor's Ratings Group ("S&P"), Moody's Investors Services, Inc. ("Moody's") or
Duff & Phelps Credit Rating Co. ("D&P"); (v) the variety of issuers and
industries represented in the Fund's portfolio; and (vi) management of the
issuer. Industry trends and fundamental developments that may affect an issuer
are also analyzed, including factors such as liquidity, profitability and asset
quality. The Adviser is free to invest in high yield, high risk debt securities
of any maturity and duration and the interest rates on such securities may be
fixed or floating.

The Fund invests primarily in "seasoned" senior securities. The Fund defines a
"seasoned" security as any security whose issuer has been operating in its
current form for a considerable period of time. The Fund generally does not
invest in original issue high yield securities of newly

8
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formed, highly leveraged corporations but reserves the right to do so. An
additional risk associated with such investments is the unproven credit quality
of newly formed corporations because of the lack of any operating history.

The higher yields sought by the Fund are generally obtainable from
non-investment grade securities (i.e., rated BB or lower by S&P or D&P, or Ba or
lower by Moody's, or if unrated, of equivalent quality as determined by the
Adviser). See Appendix A to this Prospectus for a description of ratings of S&P,
Moody's and D&P. Investments in high yield, high risk debt securities involve
comparatively greater risks, including price volatility and the risk of default
in the timely payment of interest and principal, than higher rated securities.
Some of such investments may be non-performing or in default when purchased. See
"Risks of Investing in the Funds - High Yield, High Risk Debt Securities" below.

Although the Fund's investments are primarily in U.S. corporate securities, it
may also invest in foreign corporate debt securities, sovereign debt and
mortgage-backed debt having many of the characteristics of its corporate
portfolio. In addition, the Fund may invest in U.S. dollar denominated municipal
obligations in seeking to achieve its investment objectives. Such investments
may include municipal bonds issued at a discount, in circumstances where the
Adviser determines that such investments would facilitate the Fund's ability to
achieve its investment objectives. Dividends on shares attributable to interest
on municipal securities held by the Fund will not be exempt from federal income
taxes. The Adviser does not currently anticipate seeking investments in the
common stock of any issuers. However, the Fund may acquire securities
convertible into common stock or receive common stock in lieu of dividends,
interest, or principal.

The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objective, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most of the Fund's investments may be made in the United States and
denominated in U.S. dollars. In addition, pending investment of proceeds from
new sales of Fund shares or to meet ordinary daily cash needs, the Fund may
temporarily hold cash (U.S. dollars, foreign currencies or multinational
currency units) and may invest any portion of its assets in high quality foreign
or domestic money market instruments.

9
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OFFITBANK EMERGING MARKETS FUND

Investment Objective

The Fund's investment objective is to provide investors with a competitive total
return by focusing on current yield and opportunities for capital appreciation.

Principal Investment Strategies

The Fund invests primarily in corporate and sovereign debt securities of
emerging market countries. Under normal circumstances, the Fund will invest at
least 80% of its total assets in debt instruments denominated in any currency,
including U.S. dollars, but may invest up to 20% of its total assets in equity
securities.

Principal Risk Factors

- - There is no limit on the amount of the Fund's total assets that may be
invested in non-U.S. dollar-denominated securities. International
investing is subject to special risks, including, but not limited to,
currency exchange rate volatility, political, social or economic
instability, and differences in taxation, auditing and other financial
practices. These types of risks may lead to greater losses in emerging
markets.

- - Although the Fund will generally be invested in at least three different
countries, it may invest up to 25% of its total assets in any one country.
Concentration in any one country intensifies the international investing
risks related to such country.

- - All or a substantial portion of the securities purchased by the Fund may
be lower rated or unrated debt securities (i.e., high yield, high risk
debt securities). High yield, high risk debt securities have a higher risk
of default in the payment of interest and principal and are subject to
significant changes in price. Investment by the Fund in such securities
involves a high degree of credit risk and such securities are regarded as
speculative by the major rating agencies.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - Since the Fund attempts to benefit from investment opportunities deriving
from long-term improvement in economic and political conditions, and other
positive trends and

10
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developments in emerging market countries, it is intended for long-term
investors. You should consider your ability to buy and hold this Fund for
the long-term.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Returns

[INSERT BAR CHARTS]

1995 - 23.40
1996 - 26.56
1997 - 10.61
1998 - (11.92)

Since inception (March 8, 1994), the highest calendar quarter total return for
Select Shares of the Fund was 17.07% (quarter ended December 31, 1998) and the
lowest calendar quarter total return was (25.92%) (quarter ended September 30,
1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
one calendar year and since inception, with respect to Select Shares, compare
with the Lipper Analytical Emerging Market Debt Index (the "Lipper Emerging
Market Index") for the same periods. No prior performance is available for
Advisor Shares of the Fund as Advisor Shares have not yet commenced investment
operations. The table, like the bar chart, provides some indication of the risks
of investing in the Fund by showing how the Fund's average annual total returns
for 1 year and since inception compare with those of a broad measure of market
performance. Past performance is not necessarily an indicator of how the Fund
will perform in the future.

11
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Average Annual Total Returns

1 Year Since Inception
------ ---------------

Select Shares* (11.92%) 8.16%

Lipper Emerging Market
Index (21.21%) 5.76%

* Commenced operations on March 8, 1994.

INVESTOR EXPENSES

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees.................................................0.90% 0.90%
Distribution (Rule 12b-1) fees (before waivers)(2)............0.00% 0.25%
Other expenses (before waivers/reimbursements)(3).............0.25% 0.50%
----- ----
Total annual Fund operating expenses (before waivers/
reimbursements)(4)..........................................1.15% 1.65%
===== ====

12
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(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(3) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges
for Select and Advisor Shares. Since Advisor Shares of the Fund have not yet
commenced investment operations, the amount set forth above for "Other
expenses" for Advisor Shares is an estimate. Taking into account current
waivers of administration fees and/or reimbursements by the Adviser of
certain expenses, the Fund's actual "Other expenses" are 0.20% with respect
to Select Shares and the expected actual amount of "Other expenses" is 0.20%
with respect to Advisor Shares. Such waivers/reimbrusements may be terminated
at any time at the option of the Administrator and the Adviser.

(4) Given the waivers/reimbursements discussed in Footnotes (2) and (3)
above, as of December 31, 1998, "Total annual Fund operating expenses" were
1.10% for Select Shares and 1.10% for Advisor Shares. All
waivers/reimbursements may be terminated at any time without shareholder
approval at the option of the Administrator and the Adviser.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the
same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $117 $365 $633 $1,398

Advisor Shares $168 $520 $897 $1,955

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

13
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FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions). The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced investment operations as of April
__, 1999, therefore no financial highlights information is available for such
shares.

[INSERT FINANCIAL HIGHLIGHTS]

14
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ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The investment objective of the Fund is to provide a competitive total
investment return by focusing on current yield and opportunities for capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
corporate and sovereign debt instruments of emerging market countries. Under
normal circumstances, the Fund will invest at least 80% of its total assets in
debt instruments, but may invest up to 20% of its total assets in equity
securities. As used in this Prospectus, an "emerging market country" is any
country that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the "World Bank") or the
International Finance Corporation, or is determined by the Adviser to have per
capita gross domestic product below $7,500 (in 1994 dollars). Under normal
circumstances, the Fund will be invested in at least three different countries.
Subject to the restriction that the Fund will not invest 25% or more of its
total assets in obligations issued by any one country, its agencies,
instrumentalities or political subdivisions, there is no limit on the amount the
Fund may invest in issuers located in any one country, or in securities
denominated in the currency of any one country, in order to take advantage of
what the Adviser believes to be favorable yields, currency exchange conditions
or total investment return potential. The Fund's investments may be denominated
in any currency, including U.S. dollars.

The Fund seeks to achieve a competitive U.S. dollar total investment return
while reducing relative volatility. The Fund attempts to benefit from investment
opportunities deriving from long-term improving economic and political
conditions, and other positive trends and developments in emerging market
countries. Accordingly, the Fund is intended for long-term investors and should
not be considered as a vehicle for trading purposes. The continuation of a
long-term international trend encouraging greater market orientation and
economic growth may result in local or international political, economic or
financial developments that could benefit the capital markets in emerging market
countries.

An "emerging market country" debt instrument or equity security, as used in this
Prospectus, means an instrument or security (i) of an issuer organized or with
more than 50% of its business activities in such emerging market country, (ii)
denominated in such country's currency or with a primary trading market in such
emerging market country, (iii) of a company which derives at least 50% of its
gross revenues from goods produced, sales made, services performed or
investments in such emerging market country, or (iv) issued or guaranteed by the
government of such emerging market country, its agencies, political subdivisions
or instrumentalities, or the central bank of such country. Determinations as to
eligibility will be made by the Adviser based on publicly available information
and inquiries made to companies. See "Risks of Investing in the Funds -
Securities of Non-U.S. Issuers" and "Risks of Investing in the Funds - High
Yield, High Risk Debt Securities."

Through credit analysis, the Adviser seeks to protect principal and to minimize
market and individual credit risk, as well as to identify opportunities for
capital appreciation. In selecting particular debt instruments for the Fund, the
Adviser intends to consider factors such as liquidity, price volatility, tax
implications, interest rate sensitivity, foreign currency exchange risks,

15
<PAGE>

counterparty risks and technical market considerations. The Adviser is free to
invest in debt instruments of any maturity and duration and interest rates on
such securities may be fixed or floating. Debt instruments in which the Fund may
invest will not be required to meet a minimum rating standard and a substantial
amount of such instruments are expected to be non-investment grade securities
(i.e., rated BB or lower by S&P or D&P, or Ba or lower by Moody's, or if
unrated, of comparable quality as determined by the Adviser). See Appendix A to
this Prospectus for a description of ratings of S&P, Moody's and D&P.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of interest and principal, than higher rated securities. Some of such
investments may be non-performing securities or securities in default when
purchased. See "Risks of Investing in the Funds - High Yield, High Risk Debt
Securities."

The Fund may invest up to 20% of its total assets in common stocks, preferred
stocks, detachable warrants and other equity securities that may or may not be
listed or traded on a recognized securities exchange. The Fund intends that such
investments in equity securities often will be related to the Fund's investments
in debt instruments, such as those equity securities received upon the exercise
of convertible debt instruments or attached warrants, or those equity securities
acquired pursuant to investment opportunities deriving from the Fund's
activities in emerging market debt markets. The equity securities purchased by
the Fund may include American Depositary Receipts, European Depositary Receipts
and interests in investment companies.

The Fund retains the flexibility to respond promptly to changes in market and
economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy, the
Fund may temporarily hold cash (U.S. dollars, foreign currencies or
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars. In addition, pending investment of proceeds from
new sales of Fund shares or to meet ordinary daily cash needs, the Fund may
temporarily hold cash (U.S. dollars, foreign currencies or multinational
currency units) and may invest any portion of its assets in high quality foreign
or domestic money market instruments.

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OFFITBANK LATIN AMERICA EQUITY FUND

Investment Objectives

The Fund's primary investment objective is capital appreciation. Current income
is a secondary objective.

Principal Investment Strategies

The Fund invests, under normal circumstances, at least 80% of its total assets
in equity securities of Latin American issuers (as defined in this Prospectus).
Up to 20% of the Fund's total assets may be invested in debt securities
(including convertible debt securities) of Latin American issuers.

Principal Risk Factors

- - The Fund is not limited with respect to the proportion of its total assets
that may be invested in the securities of issuers located in any one Latin
American country. Concentration in any one country intensifies the
international investing risks related to such country.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - Since the Fund attempts to benefit from investment opportunities resulting
from long-term improvement in economic and political conditions, and other
positive trends and developments in Latin American countries, it is
intended for long-term investors. You should consider your ability to buy
and hold this Fund for the long-term.

17
<PAGE>

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Returns

The bar chart below shows the annual total returns for Select Shares of the Fund
for the last two calendar years. The bar chart provides some indication of the
risks of investing in the Fund by showing changes in the Fund's performance from
year to year. Past performance is not necessarily an indicator of how the Fund
will perform in the future.

[INSERT BAR CHARTS]

1997 - 24.22
1998 - (46.96)

Since inception (February 13, 1996), the highest calendar quarter total return
for Select Shares of the Fund was 18.04% (quarter ended June 30, 1997) and the
lowest calendar quarter total return was (36.11%) (quarter ended September 30,
1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
calendar year and since inception compare with the ING Barings Emerging Markets
- - Latin America Equity Index (the "Barings Index") for the same periods. The
table, like the bar chart, provides some indication of the risks of investing in
the Fund by showing how the Fund's average annual total returns for 1 year and
since inception compare with that of a broad measure of market performance. Past
performance is not necessarily an indicator of how the Fund will perform in the
future.

Average Annual Total Returns

1 Year Since Inception
------ ---------------

Select Shares* (46.96%) (6.87%)

Advisor Shares** (4.64%) (4.64%)

Barings Index (35.39%) (4.03%)

* Commenced operations on February 13, 1996.
** Commenced operations on June 23, 1997.

18
<PAGE>

INVESTOR EXPENSES

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees.................................................1.00% 1.00%
Distribution (Rule 12b-1) fees (before waivers)(2)............0.00% 0.25%
Other expenses (before waivers/reimbursements)(3).............1.04% 1.29%
----- ----
Total annual Fund operating expenses (before waivers/
reimbursements)(4)..........................................2.04% 2.54%
===== ====

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(3) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges
for Select and Advisor Shares. Taking into account current waivers of
administrative fees and/or reimbursements by the Adviser of certain expenses,
the Fund's actual "Other expenses" are 0.97% with respect to Select Shares
and 0.97% with respect to Advisor Shares. Such waivers/reimbursements may be
terminated at any time without shareholder approval at the option of the
Administrator and the Adviser.

(4) Given the waivers/reimbursements discussed in Footnotes (2) and (3)
above, as of December 31, 1998, "Total annual Fund Operating expenses" were
1.97% for Select Shares and 1.97% for Advisor Shares. All
waivers/reimbursements may be terminated at any time without shareholder
approval at the option of the Administrator and the Adviser.

Example

o you reinvested all dividends and distributions
o the average annual total return was 5%

19
<PAGE>

o the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
o you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $207 $640 $1,098 $2,369
Advisor Shares $257 $791 $1,641 $2,875

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

20
<PAGE>

FINANCIAL HIGHLIGHTS

[INSERT FINANCIAL HIGHLIGHTS]

21
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objectives and Policies

The Fund's investment objective is capital appreciation. Current income is a
secondary objective. The Fund will seek to achieve its objective by investing,
under normal market conditions, at least 80% of its total assets in equity
securities of Latin American issuers, as defined below. Up to 20% of the Fund's
total assets may be invested in debt securities (including convertible debt
securities) of Latin America issuers.

The Fund is actively managed to seek to benefit from investment opportunities
deriving from long-term improvement in economic and political conditions and
other positive trends and developments in Latin American countries. The Fund's
equity strategy is "top down" oriented seeking to invest in those countries that
offer the best economic growth perspectives. Stock selection is designed to
identify companies in high growth industries that are attractively valued based
on their future earnings potential. Accordingly, the Fund is intended for
long-term investors and should not be considered as a vehicle for trading
purposes. The Adviser believes that the continuation of a long-term
international trend encouraging greater market orientation and economic growth
may result in local or international political, economic or financial
developments that could benefit the capital markets in Latin American countries.

For purposes of this Prospectus, Latin American issuers are: (i) companies
organized under the laws of a Latin American country; (ii) companies whose
securities are principally traded in Latin American countries; (iii)
subsidiaries of companies described in clause (i) or (ii) above that issue debt
securities guaranteed by, or securities payable with (or convertible into) the
stock of, companies described in clause (i) or (ii); (iv) companies that derive
at least 50% of their revenues from either goods produced or services performed
in Latin America or sales made in Latin America; and (v) the government of any
Latin American country and its agencies and instrumentalities and any public
sector entity fully or partly owned by any such government, agency or
instrumentality. For purposes of this Prospectus, "Latin America" currently
consists of the countries of Argentina, the Bahamas, Barbados, Belize, Bolivia,
Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El
Salvador, French Guiana, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico,
the Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad
and Tobago, Uruguay and Venezuela.

The Fund's assets will be allocated among the countries in Latin America in
accordance with the Adviser's judgment as to where the best investment
opportunities exist. The Fund is not limited with respect to the proportion of
its total assets that may be invested in the securities of issuers located in
any one Latin American country.

The governments of some Latin American countries, to varying degrees, have been
engaged in programs of selling part or all of their stakes in government-owned
or government-controlled enterprises ("privatizations"). The Adviser believes
that privatizations may offer investors opportunities for significant capital
appreciation and intends to invest assets of the Fund in privatizations in
appropriate circumstances. The ability of foreign persons, such as the Fund, to
participate in privatizations in certain Latin American countries may be limited
by local law, or

22
<PAGE>

the terms on which the Fund may be permitted to participate may be less
advantageous than those for local investors. There can be no assurance that
privatization programs will continue or be successful.

In selecting equity investments for the Fund, the Adviser seeks to identify and
invest in companies it believes offer potential for long-term capital
appreciation. In evaluating prospective investments, the Adviser will utilize
internal financial, economic and credit analysis resources as well as
information obtained from other sources. In selecting industries and companies
for investment, the Adviser will consider factors such as overall growth
prospects, competitive position in domestic and export markets, technology,
research and development, productivity, labor costs, raw material costs and
sources, profit margins, return on investment, capital resources, government
regulation and management.

Up to 20% of the total assets of the Fund may be invested at any one time in
debt securities of Latin American issuers. In selecting particular debt
securities for the Fund, the Adviser intends to consider factors such as
liquidity, price volatility, tax implications, interest rate sensitivity,
foreign currency exchange risks, counterparty risks and technical market
considerations. The Adviser is free to invest in debt instruments of any
maturity and duration and interest rates on such securities may be fixed or
floating. All or a substantial amount of the debt securities in which the Fund
may invest will be high yield, high risk debt securities which are unrated and
comparable in quality to debt securities rated below investment grade (i.e.,
rated BB or lower by S&P and D&P, or Ba or lower by Moody's, or if unrated, of
comparable quality as determined by the Adviser). See Appendix A to this
Prospectus for a description of ratings of S&P, Moody's and D&P. Investments in
high yield, high risk debt securities are considered to be speculative and
involve comparatively greater risks, including price volatility and the risk of
default in the timely payment of interest and principal, than investment grade
securities or securities of comparable value. Some of such investments may be
non-performing securities or securities in default when purchased. See "Risks of
Investing in the Funds-High Yield, High Risk Debt Securities."

23
<PAGE>

OFFITBANK TOTAL RETURN FUND

Investment Objective

The Fund's investment objective is to maximize total return from a combination
of capital appreciation and current income.

Principal Investment Strategies

The Fund seeks to achieve its investment objective by investing primarily in a
portfolio of fixed-income securities of varying maturities and by giving the
Adviser broad discretion to invest the Fund's assets among certain segments of
the fixed-income market that the Adviser believes will best contribute to
achieving the Fund's objective. The Adviser may pursue the Fund's investment
objective through investing directly in securities as well as investing in the
other OFFITBANK Funds offered in this Prospsectus.

Principal Risk Factors

- - Under normal market conditions, the Fund will be invested in a variety of
markets and instruments. However, the Fund may invest without limitation
in any of the securities and markets in which it is authorized to invest,
and the Fund's portfolio holdings will be concentrated, from time to time,
in areas or securities which the Adviser believes to be relatively
undervalued. Concentration in any area or security intensifies the risks
to the Fund related to such area or security.

- - The Fund may invest without limitation in lower rated or unrated debt
securities (i.e., high yield, high risk debt securities). High yield, high
risk debt securities have a higher risk of default in the payment of
interest and principal and are subject to significant changes in price.
Investment by the Fund in such securities involves a high degree of credit
risk and such securities are regarded as speculative by the major rating
agencies.

- - The Fund may invest without limitation in international securities.
International investing is subject to special risks, including, but not
limited to, currency exchange rate volatility, political, social or
economic instability, and differences in taxation, auditing and other
financial practices. These types of risks are intensified in emerging
markets.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

24
<PAGE>

- - In managing the Fund's assets, the Adviser may invest without limitation
in other OFFITBANK Funds. To the extent such a strategy is used, the Fund
will be subject to the risks related to such Funds.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

No prior performance is available as the Fund has not yet commenced investment
operations.

ESTIMATED INVESTOR EXPENSES

The Select Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 0.65% of the average net asset value of Select Shares
of the Fund. This cap consists of 0.50% with respect to "Advisory fees" and
0.15% with respect to "Other expenses." Any expenses in excess of 0.65% of
average net assets will be paid by the Adviser and/or Administrator
indefinitely.

The Advisor Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 1.15% of the average net asset value of Advisor Shares of
the Fund. This cap consists of 0.50% with respect to "Advisory fees," 0.25%
with respect to "Distribution (Rule 12b-1 fees)" and 0.40% with respect to
"Other expenses." Any expenses in excess of 1.15% of average net assets will
be paid by the Adviser and/or Administrator indefinitely.

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

25
<PAGE>

Advisory fees.................................................0.50% 0.50%
Distribution (Rule 12b-1) fees(2).............................0.00% 0.25%
Other expenses(3).............................................0.15% 0.40%
----- ----
Total annual Fund operating expenses..........................0.65% 1.15%
===== ====

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Years 3 Years
------- -------

Select Shares................................... $ 66 $208
Advisor Shares.................................. $117 $365

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

26
<PAGE>

FINANCIAL HIGHLIGHTS

The OFFITBANK Total Return Fund had not commenced investment operations as of
April __, 1999, therefore no financial highlights information is available.

27
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The investment objective of the Fund is to maximize total return from a
combination of capital appreciation and current income. The Fund will seek to
achieve its objective by investing primarily in a portfolio of fixed-income
securities of varying maturities and by giving the Adviser broad discretion to
deploy the Fund's assets among certain segments of the fixed-income market that
the Adviser believes will best contribute to the achievement of the Fund's
objective. At any point in time, the Adviser will deploy the Fund's assets based
on the Adviser's analysis of current economic and market conditions and the
relative risks and opportunities present in the following market segments: U.S.
Government Securities (as described below for the U.S. Government Securities
Fund), foreign sovereign and supranational debt obligations, including
obligations of emerging market and developing countries, and debt instruments,
convertible securities and preferred stocks of domestic and foreign
corporations, including high yield securities. To provide the Adviser with
flexibility in managing the Fund's assets, the Fund may invest directly in the
securities in these market segments or indirectly through investing in other
OFFITBANK Funds.

In evaluating proposed investments, the Adviser will seek to maximize the total
return on the Fund's portfolio in terms of U.S. dollars. In this regard, the
Adviser will consider factors that relate both to various securities markets and
to specific securities traded in those markets. Portfolio holdings will be
concentrated from time to time in areas of the fixed income markets which the
Adviser believes to be relatively undervalued. In evaluating markets, the
Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, economic and political factors.

The "total return" sought by the Fund will consist of interest from underlying
securities, capital appreciation reflected in increases in the value of
portfolio securities or from the purchase and sale of securities, and use of
futures and options, or gains from favorable changes in foreign currency
exchange rates. Under normal market conditions, the Fund will invest its assets
in a variety of markets and instruments, including U.S. Government Securities,
investment grade fixed income securities (including asset-backed and
mortgage-backed securities), high yield securities, international fixed income
securities including corporate and sovereign debt instruments of developed and
emerging market issuers, convertible securities, loan participations and
assignments, certificates of deposit and cash equivalents.

The Fund may invest in any country where the Adviser sees potential investment
opportunities, and the percentage of the Fund's assets in any particular country
and currency, including U.S. dollars, will vary. In making foreign fixed income
investments, the Adviser may consider, among other things, the relative growth
and inflation rates of different countries. The Adviser may also consider
expected changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of securities
denominated in foreign currencies. The Adviser may further evaluate, among other
things, foreign yield curves and regulatory and political factors, including the
fiscal and monetary policies of such countries.

28
<PAGE>

The Fund may invest without limit in any of the securities in which it is
authorized to invest, including in lower quality and unrated fixed income
securities of the type described above for the High Yield Fund. Securities rated
in the medium to lower rating categories of nationally recognized statistical
rating organizations and unrated securities of comparable quality are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price and risk of default than securities in higher rating
categories. In purchasing such securities, the Fund will rely on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. The Adviser will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters. See Appendix A to this Prospectus for a description of
ratings of S&P, Moody's and D&P, and "Risks of Investing in the Funds-High
Yield, High Risk Debt Securities" below. The Fund may also invest without limit
in corporate and sovereign debt instruments of the type described for the
Emerging Markets Fund, which involve special risks. See "Risks of Investing in
the Funds."

29
<PAGE>

OFFITBANK INVESTMENT GRADE GLOBAL DEBT FUND

Investment Objective

The Fund's investment objective is to achieve a competitive fixed income total
return.

Principal Investment Strategies

The Fund invests, under normal circumstances, at least 75% of its total assets
in a wide range of investment grade global debt securities issued anywhere in
the world, including the U.S., and denominated in any currency, including U.S.
dollars. Up to 25% of the Fund's total assets may be invested in below
investment grade (i.e., high yield, high risk) debt securities.

Principal Risk Factors

- - At least 65% of the Fund's total assets will be invested in non-U.S.
dollar-denominated securities. International investing is subject to
special risks, including, but not limited to, currency exchange rate
volatility, political, social or economic instability, and differences in
taxation, auditing and other financial practices. These types of risks are
intensified in emerging markets.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund may invest up to 25% of its total assets in lower rated or
unrated debt securities (i.e., high yield, high risk debt securities).
High yield, high risk debt securities have a higher risk or default in the
payment of interest and principal and are subject to significant changes
in price. Investment by the Fund in such securities involves a high degree
of credit risk and such securities are regarded as speculative by the
major rating agencies.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

No prior performance is available as the Fund has not yet commenced investment
operations.

30
<PAGE>

ESTIMATED INVESTOR EXPENSES

The Select Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 1.30% of the average net asset value of Select Shares of
the Fund. This cap consists of 0.80% with respect to "Advisory fees" and
0.50% with respect to "Other expenses." Any expenses in excess of 1.30% of
average net assets will be paid by the Adviser and/or Administrator
indefinitely.

The Advisor Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 1.80% of the average net asset value of Advisor Shares of
the Fund. This cap consists of 0.80% with respect to "Advisory fees," 0.25%
with respect to "Distribution (Rule 12b-1 fees)" and 0.75% with respect to
"Other expenses." Any expenses in excess of 1.80% of average net assets will
be paid by the Adviser and/or Administrator indefinitely.

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees(2)..............................................0.80% 0.80%
Distribution (Rule 12b-1) fees(3).............................0.00% 0.25%
Other expenses(4).............................................0.50% 0.75%
----- ----
Total annual Fund operating expenses..........................1.30% 1.80%
===== ====

(2) "Advisory fees" are currently reduced by voluntary fee waivers which may be
terminated at any time without shareholder approval at the option of the
Adviser.

31
<PAGE>

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges
for Select and Advisor Shares. Since the Fund has not yet commenced investment
operations, the amount set forth above for "Other expenses" are estimates.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years
------ -------

Select Shares........................................ $132 $412
Advisor Shares....................................... $183 $566

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

FINANCIAL HIGHLIGHTS

The OFFITBANK Investment Grade Global Debt Fund had not commenced investment
operations as of April ___, 1999, therefore no financial highlights information
is available.

32
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The Fund's investment objective is to achieve a competitive fixed income total
return combining capital appreciation and current income. The Fund's portfolio
will consist primarily of investment grade debt securities issued by issuers
located anywhere in the world, including the United States and denominated in
any currency, including U.S. dollars. Under normal circumstances, at least 75%
of the Fund's total assets will be invested in investment grade debt securities,
or if unrated, of comparable quality in the judgment of the Adviser. Up to 25%
of the Fund's total assets may be invested in debt securities rated below
investment grade, or if unrated, of comparable quality in the judgment of the
Adviser. Debt securities rated below investment grade are high yield, high risk
securities and may include non-performing securities or securities in default.
The asset mix will be selected to take advantage of inter- and intra-market
yield spreads, market sector opportunities, and potential currency appreciation
consistent with the Fund's total investment return objective.

The Fund intends to invest in a wide range of debt securities including, but not
limited to, bonds, convertible securities, debentures, notes, commercial paper,
mortgage-backed securities, asset-backed securities, loan participations and
assignments, certificates of deposit and cash equivalents. The issuers of such
securities may be corporations, supranational agencies, or governments,
including their political subdivisions, agencies, or instrumentalities. The
percentage of the Fund's total assets in any particular currency, including the
U.S. dollar, will vary depending upon the economics of the respective countries,
trade flows, capital market trends, yield spreads and political risks, among
other factors.

Although the Fund is not limited to any region, country or currency, the Adviser
currently expects to invest the Fund's assets primarily within the major markets
of Europe, Asia, Australia, Canada, Latin America and the United States, and in
securities denominated in the currencies of those countries or regions or
denominated in multinational currency units such as the European Currency Unit.
Under normal circumstances, the Fund will be invested in at least three
different countries, one of which may be the United States. Subject to the
requirement that the Fund may not invest 25% or more of its total assets in
obligations issued by the government of any one country, its agencies or
instrumentalities (other than the United States) , there is no limit on the
amount the Fund may invest in issuers located in any one country, or in
securities denominated in the currency of any one country. The Fund's
investments may be denominated in any currency, including U.S. dollars. Under
normal circumstances, the Fund will invest at least 65% of its total assets in
non-U.S. dollar-denominated securities. The Fund also may invest up to 15% of
its total assets in sovereign and corporate debt securities of emerging market
countries that are rated below investment grade or if unrated, of comparable
quality in the judgment of the Adviser.

The following factors, among others, will be considered by the Adviser in
selecting portfolio securities for the Fund: (i) the quality of the debt
securities and specifically, whether such securities are rated at least BBB by
S&P or D&P, or Baa by Moody's, or if unrated, are of comparable quality as
determined by the Adviser; (ii) the yield relative to other debt securities of

33
<PAGE>

comparable quality and maturity in the same currency; (iii) the likelihood, in
the opinion of the Adviser, that the currencies in which the debt securities are
payable will strengthen against other currencies in the intermediate term,
taking into account the yield and price of such securities in each particular
currency; (iv) the diversification of the portfolio, taking into account the
availability in the market of securities of international issuers which meet the
Fund's quality, rating, yield and price criteria; and (v) whether any foreign
withholding taxes are applicable with respect to the securities. See Appendix A
to this Prospectus for a description of ratings of S&P, Moody's and D&P. The
Adviser will be free to invest in debt securities of any maturity and duration
and the interest rates on such securities may be fixed or floating.

The Fund will purchase securities denominated in the currency of countries where
the Adviser believes that the interest rate environment, as well as the general
economic climate, provide investment opportunities consistent with the Fund's
total investment return objective. Investments are evaluated primarily on the
strength of the issuer, the relevant currency and the interest rate climate of
the particular country. Currency is judged on the basis of fundamental economic
criteria (e.g., inflation levels and trends, growth rate forecasts, balance of
payment status and economic policies) as well as technical and political data.
In addition, interest rates are evaluated on the basis of differentials or
anomalies that may exist between different countries.

34
<PAGE>

OFFITBANK GLOBAL CONVERTIBLE FUND

Investment Objective

The Fund's investment objective is to maximize total return from a combination
of capital appreciation and investment income.

Principal Investment Strategies

The Fund seeks to achieve its investment objective by investing primarily in a
portfolio of convertible debt securities, convertible preferred stocks and
"synthetic" convertible securities consisting of a combination of debt
securities or preferred stock and warrants or options. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
traditional convertible securities and may invest up to 35% of its total assets
in synthetic convertible securities. The Fund may invest anywhere in the world,
including the United States, and its investments may be denominated in any
currency, including U.S. dollars. All or a portion of the Fund's total assets
may be invested in below investment grade debt securities.

Principal Risk Factors

- - Under normal circumstances, at least 65% of the Fund's total assets will
be invested in traditional convertible securities and up to 35% of the
Fund's total assets may be invested in "synthetic" convertible securities.
Investment by the Fund in such securities involves interest rate risk
because the value of a convertible security is influenced by changes in
interest rates and market risk because the conversion value of a
convertible security is influenced by changes in the market price of the
underlying stock.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund may invest all or a substantial portion of its total assets in
lower rated or unrated debt securities (i.e., high yield, high risk debt
securities) . High yield, high risk debt securities have a higher risk of
default in the payment of interest and principal and are subject to
significant changes in price. Investment by the Fund in such securities
involves a high degree of credit risk and such securities are regarded as
speculative by the major rating agencies.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

35
<PAGE>

PRIOR PERFORMANCE

No prior performance is available as the Fund has not yet commenced investment
operations.

ESTIMATED INVESTOR EXPENSES

The Select Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 1.50% of the average net asset value of Select Shares of
the Fund. This cap consists of 0.90% with respect to "Advisory fees" and
0.60% with respect to "Other expenses." Any expenses in excess of 1.50% of
average net assets will be paid by the Adviser and/or Administrator
indefinitely.

The Advisor Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 2.00% of the average net asset value of Advisor Shares of
the Fund. This cap consists of 0.90% with respect to "Advisory fees," 0.25%
with respect to "Distribution (Rule 12b-1 fees) " and 0.85% with respect to
"Other expenses." Any expenses in excess of 2.00% of average net assets will
be paid by the Adviser and/or Administrator indefinitely.

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are deducted from Fund assets,
shown as a percentage of average net assets)

Advisory fees(2) .............................................0.90% 0.90%
Distribution (Rule 12b-1) fees(3) ............................0.00% 0.25%
Other expenses(4) ............................................0.60% 0.85%
----- -----
Total annual Fund operating expenses..........................1.50% 2.00%
===== =====

36
<PAGE>

(2) "Advisory fees" are currently reduced by voluntary fee waivers which may be
terminated at any time without shareholder approval at the option of the
Adviser.

(3) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

(4) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges
for Select and Advisor Shares. Since the Fund has not yet commenced investment
operations, the amounts set forth above for "Other expenses" are estimates.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years
------ -------

Select Shares........................................ $153 $474
Advisor Shares....................................... $203 $628

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

37
<PAGE>

FINANCIAL HIGHLIGHTS

The OFFITBANK Global Convertible Fund had not commenced investment operations as
of April ___, 1999, therefore no financial highlights information is available.

38
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The investment objective of the Fund is to maximize total return from a
combination of capital appreciation and investment income. The Fund will seek to
achieve its objective by investing primarily in an international portfolio of
convertible debt securities, convertible preferred stocks and "synthetic"
convertible securities consisting of a combination of debt securities or
preferred stock and warrants or options. Under normal circumstances, the Fund
will invest at least 65% of its total assets in traditional convertible
securities and may invest up to 35% in synthetic convertible securities. All or
a portion of the Fund's total assets may be invested in below investment grade
debt securities. Under normal circumstances, the Fund will be invested in at
least three different countries, one of which may be the United States. Subject
to the restriction that the Fund will not invest 25% or more of its total assets
in obligations issued by any one country, its agencies, instrumentalities or
political subdivisions, there is no limit on the amount the Fund may invest in
issuers located in any one country, or in securities denominated in the currency
of any one country. The Fund's investments may be denominated in any currency,
including U.S. dollars.

In evaluating proposed investments the Adviser will seek to maximize the total
return on the Fund's portfolio in terms of U.S. dollars. In this regard, the
Adviser will consider factors that relate both to various securities markets and
to specific securities traded in those markets. In evaluating markets, the
Adviser will consider such factors as the condition and growth potential of
various economies and securities markets, currency and taxation factors
(including the applicability and rate of withholding taxes) and other pertinent
financial, social, national and political factors. In analyzing convertible
securities, the Adviser will consider both the yield on the convertible security
and the potential capital appreciation that is offered by the underlying common
stock. There can be no assurance that the Fund will achieve its investment
objective.

The convertible securities to be held by the Fund include any corporate debt
security or preferred stock that may be converted into underlying shares of
common stock and include both traditional convertible securities and synthetic
convertible securities. The common stock underlying convertible securities may
be issued by a different entity than the issuer of the convertible securities.
Convertible securities entitle the holder to receive interest payments paid on
corporate debt securities or the dividend preference on a preferred stock until
such time as the convertible security matures or is redeemed or until the holder
elects to exercise the conversion privilege. "Synthetic" convertible securities,
as such term is used herein, are created by combining separate securities which
possess the two principal characteristics of a true convertible security, fixed
income and the right to acquire equity securities. See "Risks of Investing in
the Funds-Convertible Securities" below for additional information concerning
traditional convertible securities and synthetic convertible securities eligible
for purchase by the Fund.

The Adviser believes that the characteristics of convertible securities make
them appropriate investments for an investment company seeking a high total
return from capital appreciation and investment income. These characteristics
include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend

39
<PAGE>

or interest payments as compared to common stock dividends and decreased risk of
decline in value relative to the underlying common stock due to their fixed
income nature. As a result of the conversion feature, however, the interest rate
or dividend preference on a convertible security is generally less than would be
the case if the securities were issued in nonconvertible form.

Although the Fund may invest in securities denominated in any currency that are
convertible into common stocks of companies located throughout the world, it is
expected that a majority of its assets will be invested in securities
denominated in U.S. dollars, or currencies of Pacific Basin or Western European
countries and convertible into equity securities of United States, Pacific Basin
or Western European corporations. To the extent the Fund acquires synthetic
convertible securities, it is expected that the debt securities or preferred
stock will principally be denominated in U.S. dollars, or Pacific Basin or
Western European currencies and the warrants or options will principally be
exercisable to purchase equity securities of U.S., Pacific Basin or Western
European issuers.

Under normal circumstances, the Fund may invest up to 20% of its assets in other
types of securities, including equity securities and nonconvertible debt
securities of U.S. and non-U.S. issuers.

The Fund has established no rating criteria for the debt securities in which it
may invest and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price and risk of default than
securities in higher rating categories. See "Risks of Investing in the
Funds-High Yield, High Risk Debt Securities." In purchasing such securities, the
Fund will rely on the Adviser's judgment, analysis and experience in evaluating
the creditworthiness of an issuer of such securities. The Adviser will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters. The Fund does not
intend to purchase debt securities that are in default or which the Adviser
believes will be in default. See Appendix A to this Prospectus for a description
of ratings of S&P, Moody's and D&P.

<PAGE>

OFFITBANK U.S. GOVERNMENT SECURITIES FUND

Investment Objective

The Fund's investment objective is to seek current income.

Principal Investment Strategies

The Fund seeks to achieve its investment objective by investing, under normal
circumstances, at least 80% of its total assets in U.S. Government Securities
(as defined in this Prospectus) . In addition, the Fund may invest up to 20% of
its total assets in other fixed income securities rated AAA by Standard & Poor's
Rating Group or Duff & Phelps Credit Rating Co., or Aaa by Moody's Investors
Services, Inc., or securities deemed to be of comparable quality by the Adviser,
including: debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
the agencies or instrumentalities of Australia, Canada, Denmark, France,
Germany, Japan, New Zealand and the United Kingdom; debt obligations of
supranational entities; non-U.S. dollar denominated debt obligations of the U.S.
Government; and corporate obligations including asset-backed securities.

Principal Risk Factors

- - A substantial portion of the securities purchased by the Fund may be
mortgage-backed and/or asset-backed securities, the value of which may be
highly sensitive to interest rate changes.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

- - The Fund is a "non-diversified" mutual fund. This permits the Fund to
invest most of its assets in the securities of a small number of issuers.
This makes the Fund more susceptible to the risks associated with these
particular issuers, or to a single economic, political or regulatory
occurrence.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Return

The bar chart below shows the annual total return for Select Shares of the Fund
for the last calendar year. Past performance is not necessarily an indicator of
how the Fund will perform in the future.

41
<PAGE>

[INSERT BAR CHARTS]

1998 - 9.82

Since inception (July 1, 1997) , the highest calendar quarter total return for
Select Shares of the Fund was 6.26% (quarter ended September 30, 1998) and the
lowest calendar quarter total return was (0.10%) (quarter ended December 31,
1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
calendar year and since inception, with respect to Select Shares, compare with
the Merrill Lynch 5 Year U.S. Treasury Index (the "ML Treasury Index") for the
same periods. No prior performance is available for Advisor Shares of the Fund
as Advisor Shares have not yet commenced investment operations. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for 1 year and since inception compare
with that of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

Average Annual Total Returns
----------------------------
1 Year Since Inception
------ ---------------

Select Shares*............................ 9.82% 9.76%
ML Treasury Index......................... 9.81% 10.15%

* Commenced operations on July 1, 1997.

INVESTOR EXPENSES

The Select Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 0.50% of the average net asset value of Select Shares of
the Fund. This cap consists of 0.35% with respect to "Advisory fees" and 0.15%
with respect to "Other expenses." Any expenses in excess of 0.50% of average net
assets will be paid by the Adviser and/or Administrator indefinitely.

The Advisor Shares of the Fund have contractually capped "Total annual Fund
operating expenses" at 1.00% of the average net asset value of Advisor Shares of
the Fund. This cap consists of 0.35% with respect to "Advisory fees," 0.25% with
respect to "Distribution (Rule 12b-1 fees) " and 0.40% with respect to "Other
expenses." Any expenses in excess of 1.00% of average net assets will be paid by
the Adviser and/or Administrator indefinitely.

42
<PAGE>

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees.................................................0.35% 0.35%
Distribution (Rule 12b-1) fees(2) ...........................0.00% 0.25%
Other expenses(3) ............................................0.15% 0.40%
----- ----
Total annual Fund operating expenses..........................0.50% 1.00%
===== ====

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

43
<PAGE>

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $ 51 $160 $280 $ 628
Advisor Shares $102 $318 $552 $1,225

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

44
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions) . The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced operations as of April __, 1999,
therefore no financial highlights information is available for such shares.

[INSERT FINANCIAL HIGHLIGHTS]

45
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The Fund's investment objective is to seek current income. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 80% of
its total assets in U.S. Government Securities (as defined below) . In addition,
the Fund may invest up to 20% of its total assets in sovereign obligations of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom, and in other fixed income securities as described below. Any Fund
investments denominated in any foreign currency will be hedged against
fluctuations in value versus the U.S. dollar.

Obligations of the U.S. Government in which the Fund may invest are in two broad
categories and include the following: (i) direct obligations of the U.S.
Treasury, which differ only in their interest rates, maturities and times of
issuance, including U.S. Treasury Bills (maturities of one year or less) , U.S.
Treasury Notes (maturities of one to ten years) , and U.S. Treasury Bonds
(generally, maturities greater than ten years) ; and (ii) obligations, including
mortgage-backed securities, issued or guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by: (a) the full
faith and credit of the U.S. Government (e.g., Government National Mortgage
Association ("GNMA") Certificates) ; (b) the right of the issuer to borrow an
amount limited to a specific amount of credit from the U.S. Government; (c) the
credit of the instrumentality (e.g., bonds issued by the Federal National
Mortgage Association ("FNMA") ) ; or (d) the discretionary authority of the U.S.
Government to purchase certain obligations of U.S. Government agencies or
instrumentalities (collectively, "U.S. Government Securities") .

The agencies and instrumentalities that issue U.S. Government Securities
include, among others, Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Farm Credit
Banks, Student Loan Marketing Association and U.S. Maritime Administration.

Securities issued by the U.S. Government differ with respect to maturity and
mode of payment. The modes of payment are coupon paying and capital
appreciation. Coupon paying bonds and notes pay a periodic interest payment,
usually semi-annually, and a final principal payment at maturity. Capital
appreciation bonds and Treasury bills accrue a daily amount of interest income,
and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payments. This is referred to as "stripping." The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon bonds." Current federal tax law
requires the Fund to accrue as income daily a portion of the original issue
discount at which each zero coupon bond was purchased. See "Non-Primary
Investment Strategies and Related Risks-Zero Coupon Securities, Pay-in-Kind
Bonds and Discount Obligations" in the Statement of Additional Information.

At any given time, there is a relationship between the yield of a particular
U.S. Government Security and its maturity. This is called the "yield curve."
Since U.S. Government Securities are

46
<PAGE>

assumed to have relatively low credit risks, the main determinant of yield
differential between individual securities is maturity. When the yield curve is
such that longer maturities correspond to higher yields, the yield curve has a
positive slope and is referred to as a "normal" yield curve. At certain times
shorter maturities have high yields and the yield curve is said to be
"inverted." Even when the yield curve is "normal" (i.e., has a positive slope) ,
the relationship between yield and maturity for some U.S. Government stripped
securities is such that yields increase with maturity up to some point, and then
after peaking, decline so that the longest maturities are not the highest
yielding.

U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of principal if held to maturity. Any
guarantee of the securities in the Fund, however, does not guarantee the net
asset value of the shares of the Fund. Normally, the value of the Fund's
investments varies inversely with changes in interest rates. For example, as
interest rates rise, the value of the Fund's investments will tend to decline
and as interest rates fall, the value of the Fund's investments will tend to
increase. The magnitude of these fluctuations generally will be greater when the
average maturity of the Fund's portfolio securities is longer.

From time to time, a significant portion of the Fund's assets may be invested in
mortgage-related (including mortgage-backed) securities, representing
participation interests in pools of fixed rate and adjustable rate residential
mortgage loans issued or guaranteed by agencies or instrumentalities of the U.S.
Government. As described below with respect to the Mortgage Securities Fund,
mortgaged-backed securities generally provide monthly payments which are, in
effect, a "pass through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans. The yield on mortgage-backed securities is based on the
prepayment rates experienced over the life of the security, which tend to
increase during periods of falling interest rates. The Fund may also invest in
collateralized mortgage obligations ("CMOs") , which are debt obligations
collateralized by mortgage loans or mortgage pass-through certificates. Only
CMOs issued or guaranteed by agencies or instrumentalities of the U.S.
Government will be included for purposes of the Fund's policy of investing 80%
of its assets in U.S. Government Securities. For a further description of CMOs,
see the Mortgage Securities Fund below.

The Fund is not limited to the maturities of the securities in which it may
invest. Debt securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities.

The Adviser seeks an enhanced fixed income return through the active management
of portfolio duration and sector allocation. Investment decisions are based on a
continual evaluation of the supply and demand for capital, the current and
future shape of the yield curve, underlying trends in the direction of interest
rates and relative value among market sectors. The selection of individual
investments reflects the Adviser's view of relative value within and among
market sectors. The Adviser manages duration and maturity to take advantage of
interest rates and yield curve trends.

Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated AAA by S&P or D&P, or Aaa by Moody's or
will be deemed of comparable

47
<PAGE>

quality by the Adviser, including: debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities of Australia, Canada,
Denmark, France, Germany, Japan, New Zealand and the United Kingdom; debt
obligations of supranational entities; non-U.S. dollar denominated debt
obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.

The obligations of foreign governmental entities and supranational issuers have
various kinds of government support. Obligations of foreign governmental
entities include obligations issued or guaranteed by national, provincial, state
or other governments with taxing power or by their agencies. These obligations
may or may not be supported by the full faith and credit of a foreign
government. Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank) , the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions, if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call) , reserves and net income.

48
<PAGE>

OFFITBANK MORTGAGE SECURITIES FUND

Investment Objective

The Fund's investment objective is to maximize total return from a combination
of investment income and capital appreciation.

Principal Investment Strategies

The Fund seeks to achieve its investment objective by investing at least 80% of
its total assets in a portfolio of investment grade or comparable
mortgage-related securities issued by U.S. entities. Up to 20% of the Fund's
assets may be invested in investment grade or comparable fixed income securities
of U.S. and non-U.S. issuers, including mortgage related securities of issuers
in Canada, the United Kingdom, Denmark or other countries which may develop
mortgage securities markets in the future.

Principal Risk Factors

- - Under normal circumstances at least 80% of the Fund's net assets will be
invested in mortgage related securities issued by U.S. entities, which are
inversely affected by changes in interest rates (increasing in value
during periods of declining interest rates and decreasing in value during
periods of increasing interest rates) .

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Return

49
<PAGE>

[INSERT BAR CHARTS]

1998 - 7.26

Since inception (July 1, 1997) , the highest calendar quarter total return for
Select Shares of the Fund was 2.95% (quarter ended September 30, 1998) and the
lowest calendar quarter total return was 0.63% (quarter ended December 31,
1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
calendar year and since inception, with respect to Select Shares, compare with
the Merrill Lynch Mortgage Master Index (the "ML Master Index") for the same
periods. No prior performance is available for Advisor Shares of the Fund as
Advisor Shares have not yet commenced investment operations. The table provides
some indication of the risks of investing in the Fund by showing how the Fund's
average annual total returns for 1 year and since inception compare with that of
a broad measure of market performance. Past performance is not necessarily an
indicator of how the Fund will perform in the future.

Average Annual Total Returns
----------------------------
1 Year Since Inception
------ ---------------

Select Shares*...................... 7.26% 8.30%
ML Master Index..................... 7.19% 8.20%

* Commenced operations on July 1, 1997.

INVESTOR EXPENSES

50
<PAGE>

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

Example

o you reinvested all dividends and distributions
o the average annual total return was 5%
o the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
o you redeemed all of your investment at the end of the time period.

51
<PAGE>

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $ 51 $160 $280 $ 628

Advisor Shares $102 $318 $552 $1,225

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

52
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions) . The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced operations as of April __, 1999,
therefore no financial highlights information is available for such shares.

[INSERT FINANCIAL HIGHLIGHTS]

53
<PAGE>

ADDITIONAL INFORMATION ON THE FUND

Investment Objective and Policies

The investment objective of the Fund is to maximize total return from a
combination of current income and capital appreciation. The Fund seeks to
achieve its investment objective by investing at least 80% of the value of its
assets in a portfolio of investment grade or comparable mortgage-related
securities.

Mortgage-related securities are securities that, directly or indirectly,
represent participations in, or are secured by and payable from, loans secured
by residential or commercial property. Mortgage-related securities include
mortgage pass-through securities, adjustable rate mortgage securities, CMOs and
stripped mortgage-backed securities. These mortgage-related securities include
derivative mortgage securities.

The Fund's primary emphasis will be on mortgage-related securities representing
interests in residential property. Residential mortgage-related securities in
the U.S. fall into three categories: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
Federal Home Loan Mortgage Corporation ("FHLMC") ; (ii) those issued by
non-governmental issuers that represent interests in, or are collateralized by,
mortgage-related securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (iii) those issued by non-governmental
issuers that represent an interest in, or are collateralized by, whole mortgage
loans or mortgage-related securities without a government guarantee but usually
with over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (ii) and (iii) above include originators
of and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.

The residential mortgage pass-through securities in which the Fund will invest
provide for the pass-through to investors of their pro-rata share of monthly
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 Fund invests both in U.S.
Government pass-through securities issued by GNMA, FNMA and FHLMC, and in
pass-through securities issued by non-governmental issuers. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to certificate holders.
GNMA and FNMA guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only ultimate collection of principal of the underlying
mortgage loans.

The Fund may also invest in adjustable rate mortgage securities ("ARMS") . ARMS
are pass-through mortgage securities collateralized by residential mortgages
with interest rates that are adjusted from time to time. The adjustments usually
are determined in accordance with a predetermined interest rate index and may be
subject to certain limits. While the values of ARMS, like other debt securities,
generally vary inversely with changes in market interest rates (increasing in
value during periods of declining interest rates and decreasing in value during
periods of increasing interest rates) , the values of ARMS should generally be
more resistant to price swings than other debt securities because the interest
rates of ARMS move with market

54
<PAGE>

interest rates. The adjustable rate feature of ARMS will not, however, eliminate
fluctuations in the prices of ARMS, particularly during periods of extreme
fluctuations in interest rates. Also, since many adjustable rate mortgages only
reset on an annual basis, it can be expected that the prices of ARMS will
fluctuate to the extent that changes in prevailing interest rates are not
immediately reflected in the interest rates payable on the underlying adjustable
rate mortgages.

Commercial mortgage-related securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals and senior
living centers. The commercial loans underlying these securities are generally
not amortizing or not fully amortizing. At their maturity date, repayment of the
remaining principal balance or "balloon" is due and is repaid through the
attainment of an additional loan or the sale of the property. Unlike most single
family residential mortgages, commercial real property loans often contain
provisions which substantially reduce the likelihood that such securities will
be prepaid.

The market for commercial mortgage-related securities developed more recently
and in terms of total outstanding principal amount of issues is relatively small
compared to the market for residential mortgage-related securities. Many of the
risks of investing in commercial mortgage-related securities reflect the risks
of investing in real estate securing the underlying mortgage loans. These risks
reflect the effect of local and other economic conditions such as real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-related securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related securities.

Mortgage-related securities issued by private issuers in the U.S. may entail
greater risk than mortgage-related securities that are guaranteed by the U.S.
Government, its agencies or instrumentalities. Privately-issued mortgage
securities are issued by private originators of, or investors in, mortgage
loans, including mortgage bankers, commercial banks, investment banks, savings
and loan associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.

The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could

55
<PAGE>

be subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class) , creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments of, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees) . The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.

The Fund may invest in CMOs issued by U.S. entities. CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. CMOs may
be collateralized by GNMA, FNMA or Freddie Mac Certificates, but also may be
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as "Mortgage Assets") . Multiclass pass-
through securities are interests in a trust composed of Mortgage Assets. Unless
the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal and of interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs 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 banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.

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 specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. The
Fund has no present intention to invest in CMO residuals.

The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds") . Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other

56
<PAGE>

CMO structures, must be retired by its stated maturity date or a final
distribution date but may be retired earlier. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payment of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-related securities.

The Fund may purchase stripped mortgage securities which are derivative
multiclass mortgage securities. Stripped mortgage securities 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 banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid and to such extent, together with any other
illiquid investments, will be subject to the Fund's applicable restriction on
investments in illiquid securities.

Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only) , while the other class will receive all of the
principal ("PO" or principal-only class) . The yield to maturity on IOs, POs and
other mortgage securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization.

In addition to the stripped mortgage securities described above, the Fund may
invest in similar securities such as Super POs and Levered IOs which are more
volatile than POs and IOs. Risks associated with instruments such as Super POs
are similar in nature to those risks related to investments in POs. Risks
connected with Levered IOs are similar in nature to those associated with IOs.
The Fund may also invest in other similar instruments developed in the future
that are deemed consistent with its investment objective, policies and
restrictions. POs may generate taxable income from the current accrual of
original issue discount, without a corresponding distribution of cash to the
Fund.

57
<PAGE>

Up to 20% of the Fund's total assets may be allocated to other fixed income
securities, each of which will be rated investment grade by S&P, Moody's or D&P
will be deemed of comparable quality by the Adviser, including: mortgage related
securities of issuers in Canada, Denmark, the United Kingdom or other countries
which may develop mortgage securities markets in the future; debt obligations
issued or guaranteed by foreign national, provincial, state, municipal or other
governments with taxing authority or by their agencies or instrumentalities of
Australia, Canada, Denmark, France, Germany, Japan, New Zealand and the United
Kingdom; debt obligations of supranational entities; non-U.S. dollar denominated
debt obligations of the U.S. Government; and corporate obligations including
asset-backed securities. Any Fund investment denominated in a foreign currency
will be hedged against fluctuations in value versus the U.S. dollar.

58
<PAGE>

OFFITBANK CALIFORNIA MUNICIPAL FUND

Investment Objective

The Fund's investment objective is to maximize total after-tax return for
California residents, consistent with a prudent level of credit risk.

Principal Investment Strategies

The Fund invests, under normal circumstances, at least 65% of its total assets
in a portfolio of municipal obligations, the interest from which is exempt from
California State and local personal income taxes, at least 80% of its total
assets in obligations, the interest from which is exempt from regular federal
income taxes. In addition, at least 80% of the Fund's total assets will be
invested in investment grade securities and at least 50% of the Fund's total
assets will be invested in "high quality" securities (as defined in this
Prospectus) . The Fund may invest up to 20% of its total assets in non-municipal
obligations and all or a portion of the Fund's dividends may be subject to the
federal alternative minimum tax.

Principal Risk Factors

- - To the extent that the Fund deviates from its principal investment
strategies, either as a result of the unavailability of suitable
tax-exempt obligations or for other defensive purposes, its investment
objective may not be achieved.

- - Because the Fund invests primarily in obligations issued by a single state
(California) and such state's various subdivisions, it is more susceptible
to factors adversely affecting issuers of such obligations than a
comparable municipal securities fund that is not so concentrated.

- - The Fund is subject to income risk, which is the possibility that the
Fund's dividends (income) will decline due to falling interest rates.

- - The Fund is subject to interest rate risk, which is the risk of market
losses attributable to changes in interest rates.

- - The Fund is subject to prepayment risk, which is the risk that a debt
security may be paid off and proceeds must be reinvested earlier than
anticipated. Depending on market conditions, the new investments may or
may not carry the same interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

59
<PAGE>

- - The Fund may invest up to 20% of its total assets at the time of purchase
(but never more than 35% of its total net assets) in lower rated or
unrated debt securities (i.e., high yield, high risk debt securities) .
High yield, high risk debt securities have a higher risk of default in the
payment of interest and principal and are subject to significant changes
in price. Investment by the Fund in such securities involves a high degree
of credit risk and such securities are regarded as speculative by the
major rating agencies.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Return

[INSERT BAR CHARTS]

1998 - 6.14

Since inception (April 2, 1997) , the highest calendar quarter total return for
Select Shares of the Fund was 3.43% (quarter ended September 30, 1998) and the
lowest calendar quarter total return was 0.43% (quarter ended December 31,
1998).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
calendar year and since inception, with respect to Select Shares, compare with
the Lehman Brothers 5 Year Municipal Bond Index (the "Lehman Index") for the
same periods. No prior performance is available for Advisor Shares of the Fund
as Advisor Shares have not yet commenced investment operations. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for 1 year and since inception compare
with that of a broad measure of market performance. Past performance is not
necessarily an indicator of how the Fund will perform in the future.

60
<PAGE>

Average Annual Total Returns
----------------------------
1 Year Since Inception
------ ---------------

Select Shares*...................... 6.14% 7.63%

Lehman Index........................ 5.84% 7.04%

* Commenced operations on April 2, 1997.

INVESTOR EXPENSES

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

61
<PAGE>

Advisory fees.................................................0.35% 0.35%
Distribution (Rule 12b-1) fees(2) ............................0.00% 0.25%
Other expenses(3).............................................0.15% 0.40%
----- ----
Total annual Fund operating expenses..........................0.50% 1.00%
===== ====

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $ 51 $160 $280 $ 628

Advisor Shares $102 $318 $552 $1,225

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

62
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions) . The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced investment operations as of April
__, 1999, therefore no financial highlights information is available for such
shares.

[INSERT FINANCIAL HIGHLIGHTS]

63
<PAGE>

OFFITBANK NEW YORK MUNICIPAL FUND

Investment Objective

The Fund's investment objective is to maximize total after-tax return for New
York residents, consistent with a prudent level of credit risk.

Principal Investment Strategies

The Fund invests, under normal circumstances, at least 65% of its total assets
in a portfolio of municipal obligations, the interest from which is exempt from
New York State, New York City and City of Yonkers personal income taxes and at
least 80% of its total assets in obligations, the interest from which is exempt
from regular federal income taxes. In addition, at least 80% of the Fund's total
assets will be invested in investment grade securities and at least 50% of the
Fund's total assets will be invested in "high quality" securities. The Fund may
invest up to 20% of its total assets in non-municipal obligations and all or a
portion of the Fund's dividends may be subject to the federal alternative
minimum tax.

Principal Risk Factors

- - Because the Fund invests primarily in obligations issued by a single state
(New York) and such state's various subdivisions, it is more susceptible
to factors adversely affecting issuers of such obligations than a
comparable municipal securities fund that is not so concentrated.

- - The Fund is subject to income risk, which is the possibility that the
Fund's dividends (income) will decline due to falling interest rates.

- - The Fund is subject to interest rate risk, which is the risk of market
losses attributable to changes in interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

64
<PAGE>

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Returns

The bar chart below shows the annual total returns for Select Shares of the Fund
for the last three calendar years. The bar chart provides some indication of the
risks of investing in the Fund by showing changes in the Fund's performance from
year to year. Past performance is not necessarily an indicator of how the Fund
will perform in the future.

[INSERT BAR CHARTS]

1996 - 3.73
1997 - 7.84
1998 - 6.03

Since inception (April 3, 1995) , the highest calendar quarter total return for
Select Shares of the Fund was 2.94% (quarter ended September 30, 1998) and the
lowest calendar quarter total return was (0.59%) (quarter ended March 31, 1996).

Average Annual Total Returns - Comparison

The table below shows how the Fund's average annual total returns for the past
calendar year and since inception, with respect to Select Shares, compare with
the Lehman Brothers 5 Year Municipal Bond Index (the "Lehman Index") for the
same periods. No prior performance is available for Advisor Shares of the Fund
as Advisor Shares have not yet commenced investment operations. The table, like
the bar chart, provides some indication of the risks of investing in the Fund by
showing how the Fund's average annual total returns for 1 year and since
inception compare with that of a broad measure of market performance. Past
performance is not necessarily an indicator of how the Fund will perform in the
future.

65
<PAGE>

Average Annual Total Returns
----------------------------
1 Year Since Inception
------ ---------------

Select Shares*............................ 6.03% 6.86%

Lehman Index.............................. 5.84% 6.34%

* Commenced operations on April 3, 1995.

INVESTOR EXPENSES

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

Advisory fees.................................................0.35% 0.35%
Distribution (Rule 12b-1) fees(2)............................0.00% 0.25%
Other expenses(3).............................................0.15% 0.40%
----- ----
Total annual Fund operating expenses..........................0.50% 1.00%
===== ====

66
<PAGE>

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
for Select and Advisor Shares remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $ 51 $160 $280 $ 628

Advisor Shares $102 $318 $552 $1,225

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

67
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions) . The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced investment operations as of April
__, 1999, therefore no financial highlights information is available for such
shares.

[INSERT FINANCIAL HIGHLIGHTS]

68
<PAGE>

OFFITBANK NATIONAL MUNICIPAL FUND

Investment Objective

The Fund's investment objective is to maximize total after-tax return,
consistent with a prudent level of credit risk.

Principal Investment Strategies

The Fund invests, under normal circumstances, at least 80% of its total assets
in a portfolio of municipal obligations, the interest from which is exempt from
regular federal income taxes. In addition, at least 80% of the Fund's total
assets will be invested in investment grade securities and at least 50% of the
Fund's total assets will be invested in "high quality" securities (as defined in
this Prospectus) . The Fund may invest up to 20% of its total assets in taxable
obligations and all or a portion of the Fund's dividends may be subject to the
federal alternative minimum tax.

Principal Risk Factors

- - The Fund is subject to income risk, which is the possibility that the
Fund's dividends (income) will decline due to falling interest rates.

- - The Fund is subject to interest rate risk, which is the risk of market
losses attributable to changes in interest rates.

- - The Fund is subject to credit risk, which is the risk that the issuer of a
security will fail to repay interest and principal in a timely manner.

- - The Fund's yield will change with changes in interest rates.

- - The net asset value ("NAV") of the Fund will change with changes in the
market value of its portfolio positions.

69
<PAGE>

by the Fund in such securities involves a high degree of credit risk and
such securities are regarded as speculative by the major rating agencies.

Because investing in the Fund involves certain risks, you could lose money. For
further information on the risks associated with the Fund, please see "Risks of
Investing in the Funds" below.

PRIOR PERFORMANCE

Annual Total Return

[INSERT BAR CHARTS]

1998 - 6.91

Since inception (October 20, 1997) , the highest calendar quarter total return
for Select Shares of the Fund was 3.17% (quarter ended September 30, 1998) and
the lowest calendar quarter total return was 0.75% (quarter ended December 31,
1998).

Average Annual Total Returns - Comparison

Average Annual Total Returns
----------------------------
1 Year Since Inception
------ ---------------

Select Shares*............................ 6.91 8.13
Lehman Index.............................. 5.84 6.38%

* Commenced operations on October 20, 1997.

70
<PAGE>

INVESTOR EXPENSES

Select Advisor
Shares Shares(1)
------ ---------

Shareholder Fees (fees paid directly from your
investment, shown as a percentage of average net assets)

Annual Fund Operating Expenses (expenses that are
deducted from Fund assets, shown as a percentage of
average net assets)

(2) The Rule 12b-1 fees for Advisor Shares of the Fund are being waived
indefinitely. This waiver may be terminated at any time without shareholder
approval at the option of the Distributor.

71
<PAGE>

Example

- - you reinvested all dividends and distributions
- - the average annual total return was 5%
- - the percentage amounts charged in "Total annual Fund operating expenses"
in the "Gross Expenses" columns for Select and Advisor Shares remain the
same over the time periods
- - you redeemed all of your investment at the end of the time period.

Although your actual cost may be higher or lower, based on these assumptions
your costs would be:

1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------

Select Shares $ 51 $160 $280 $ 628
Advisor Shares $102 $318 $552 $1,225

The above example is for comparison purposes only and is not a representation of
the Fund's actual expenses and returns, either past or future.

72
<PAGE>

FINANCIAL HIGHLIGHTS

The financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. This information reflects
financial results for a single Select Share of the Fund. The total returns in
the table represent the rate that a shareholder would have earned (or lost) on
an investment in Select Shares of the Fund (assuming reinvestment of all
dividends and distributions) . The information for the year ended December 31,
1998 has been audited by PricewaterhouseCoopers LLP, whose unqualified report,
along with the Fund's financial statements, is included in the Fund's Annual
Report dated December 31, 1998, which is available without charge upon request.
The financial statements for the Fund for years prior to December 31, 1998 were
audited by Price Waterhouse LLP, whose report expressed an unqualified opinion
on those statements.

Advisor Shares of the Fund had not commenced investment operations as of April
__, 1999, therefore no financial highlights information is available for such
shares.

[INSERT FINANCIAL HIGHLIGHTS]

73
<PAGE>

ADDITIONAL INFORMATION ON THE CALIFORNIA, NEW YORK AND NATIONAL MUNICIPAL FUNDS

Investment Objectives and Policies

The California Municipal Fund's investment objective is to maximize total
after-tax return for California residents, consistent with a prudent level of
credit risk. The California Municipal Fund intends to invest, under normal
market conditions, at least 65% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from California State and local
personal income taxes ("California Municipal Securities") and at least 80% of
its total assets in obligations the interest on which is exempt from regular
federal income taxes. California Municipal Securities are securities issued by
the State of California and its various political subdivisions along with its
agencies and instrumentalities and their various political subdivisions, and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands, and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to the federal alternative
minimum tax.

The New York Municipal Fund's investment objective is to maximize total
after-tax return for New York residents, consistent with a prudent level of
credit risk. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in a portfolio
of municipal obligations, the interest on which is exempt from New York State,
New York City and City of Yonkers personal income taxes ("New York Municipal
Securities") and at least 80% of its total assets in obligations the interest on
which is exempt from regular federal income taxes. New York Municipal Securities
are securities issued by the State of New York and its various political
subdivisions along with its agencies and instrumentalities and their various
political subdivisions, and by possessions and territories of the United States,
such as Puerto Rico, the Virgin Islands, and Guam and their various political
subdivisions. All or a portion of the Fund's dividends may be subject to federal
alternative minimum tax. "Municipal Securities" as used in this Prospectus shall
be used as a general reference to California and New York Municipal Securities.

The National Municipal Fund's investment objective is to maximize total
after-tax return, consistent with a prudent level of credit risk. The Fund seeks
to achieve its investment objective by investing, under normal market
conditions, at least 80% of its total assets in a portfolio of municipal
obligations, the interest from which is exempt from regular federal income taxes
("Municipal Securities") . Municipal Securities are securities issued by states
and their various political subdivisions along with agencies and
instrumentalities of states and their various political subdivisions and by
possessions and territories of the United States, such as Puerto Rico, the
Virgin Islands, and Guam and their various political subdivisions. All or a
portion of the Fund's dividends may be subject to federal alternative minimum
tax. See "Taxes". (Unless specifically referring to California Municipal
Securities or New York Municipal Securities (as these terms are defined below) ,
the term "Municipal Securities" shall be used as a general reference to
Municipal, California Municipal and New York Municipal Securities.)

Each such Fund intends that, under normal market conditions, at least 50% of its
total assets will be invested in "high quality" securities. For purposes of this
Prospectus, high quality securities

74
<PAGE>

are those which are rated AA or better by S&P or by Fitch Investors Service,
Inc. ("Fitch") , or Aa or better by Moody's or, if unrated, are determined by
the Adviser to be of comparable quality, at the time of investment. Furthermore,
under normal market conditions, at least 80% of each Fund's total assets will be
invested in securities that are rated investment grade or better, or, if
unrated, are determined by the Adviser to be of comparable quality, at the time
of investment. Therefore, a Fund may invest up to 20% of its total assets in
securities that are rated below investment grade, or which are unrated and
determined by the Adviser to be of quality comparable to non-investment grade,
at the time of investment. A Fund may retain in its portfolio any security whose
rating (or quality as determined by the Adviser if such security is unrated) is
downgraded after its acquisition by the Fund if the Adviser considers the
retention of such security advisable. At no time, however, will more than 35% of
a Fund's net assets consist of securities rated below investment grade or
unrated securities determined by the Adviser to be of comparable quality.
Investments in high yield, high risk debt securities involve comparatively
greater risks, including price volatility and the risk of default in the timely
payment of principal and interest, than higher rated securities. See "Risks of
Investing in the Funds-High Yield, High Risk Debt Securities."

Investment grade ratings in the case of municipal bonds are the four highest
rating categories assigned by Moody's, S&P or Fitch, or determined by the
Adviser to be of comparable quality. The four highest rating categories
currently assigned by Moody's to municipal bonds are "Aaa", "Aa", "A" and "Baa";
the four highest rating categories assigned by S&P and Fitch to municipal bonds
are "AAA", "AA", "A" and "BBB". A more complete description of the debt security
ratings categories assigned by Moody's, S&P and Fitch is included in Appendix A
to this Prospectus.

Although municipal obligations rated in the fourth highest rating category by
Moody's (i.e., "Baa") or S&P or Fitch (i.e., "BBB") are considered investment
grade, they may be subject to greater risks than other higher rated investment
grade securities. Municipal obligations rated "Baa" by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
obligations rated "BBB" by S&P and Fitch are regarded as having an adequate
capacity to pay principal and interest. Obligations rated BBB by Fitch are
deemed to be subject to an increased likelihood that their rating will fall
below investment grade than higher rated bonds.

Each such Fund's dollar-weighted average maturity is not expected to exceed ten
years. Each Fund seeks to increase income and preserve or enhance total return
by actively managing the average Fund maturity in light of market conditions and
trends. Length of maturity influences sensitivity to interest rate changes, with
the value of longer-maturity securities being generally more volatile than that
of shorter-term securities. A Fund also may seek to hedge all or part of its
assets against changes in securities prices by buying or selling interest rate
futures contracts and options. The average portfolio maturity and duration,
however, may be shortened from time to time depending on market conditions.

MUNICIPAL SECURITIES. Municipal Securities are debt obligations issued by or on
behalf of states, cities, municipalities and other public authorities. The two
principal classifications of Municipal Securities that may be held by each such
Fund are "general obligation" securities and

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"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 a facility being financed. Revenue securities may include private
activity bonds. Such bonds may be issued by or on behalf of public authorities
to finance various privately operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of private
activity bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Funds will not be restricted with respect to the proportion of their
assets that may be invested in private activity obligations. Accordingly, the
Funds may not be a suitable investment vehicle for individuals or corporations
that are subject to the federal alternative minimum tax.

Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from regular federal income tax are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the Funds nor the
Adviser will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.

The types of Municipal Securities in which each such Fund may invest include the
following:

Municipal Bonds. Municipal bonds are debt obligations that are typically issued
to obtain funds for various public purposes, such as construction of public
facilities (e.g., airports, highways, bridges and schools) . Municipal bonds at
the time of issuance are generally long-term securities with maturities of as
much as twenty years or more, but may have remaining maturities of shorter
duration at the time of purchase by the Funds Municipal bonds that may be
purchased by the Funds include, but are not limited to:

Moral Obligation Securities. Moral obligation securities are normally issued by
special purpose public authorities. If the issuer of moral obligation securities
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 that created that issuer.

Pre-Refunded Municipal Securities. The principal of and interest on pre-refunded
Municipal Securities are no longer paid from the original revenue source for
such securities. Instead, the source of such payments is typically an escrow
fund consisting of U.S. Government securities. The assets in the escrow fund are
derived from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded Municipal Securities.

Insured Bonds. Insured Municipal Securities are those for which scheduled
payments of interest and principal are guaranteed by a private
(non-governmental) insurance company. The insurance entitles a Fund to receive
only the face or par value of the securities held by such Fund. The insurance
does not guarantee the market value of the Municipal Securities or the value of
the shares of a Fund.

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Resource Recovery Bonds. Resource recovery bonds may be general obligations of
the issuing municipality or supported by project revenues or corporate or bank
guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.

Municipal Notes. Municipal notes are issued to meet the short-term funding
requirements of local, regional and state governments. Municipal notes generally
have maturities at the time of issuance of three years or less. Municipal notes
are generally secured by the anticipated revenues from taxes, grants or bond
financing. Municipal notes that may be purchased by the Funds include, but are
not limited to:

Tax Anticipation Notes. Tax anticipation notes ("TANs") are sold as interim
financing in anticipation of collection of taxes. An uncertainty in a municipal
issuer's capacity to raise taxes as a result of such factors 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.

Bond Anticipation Notes. Bond anticipation notes ("BANs") are sold as interim
financing in anticipation of a bond sale. The ability of a municipal issuer to
retire 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.

Revenue Anticipation Notes. Revenue anticipation notes ("RANs") are sold as
interim financing in anticipation of receipt of other revenues. 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.

TANs, BANs and RANs may be general obligations of the issuer.

Floating or Variable Rate Obligations. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by
the Funds may carry a demand feature that would permit the holder to tender them
back to the issuer at par value prior to maturity. Such obligations include
variable rate master demand notes, which are unsecured instruments issued
pursuant to an agreement between the issuer and the holder that permit the
interest rate thereunder to vary and provide for periodic adjustments in the
interest rate. The Adviser will monitor on an ongoing basis the ability of an
issuer of a demand instrument to pay principal and interest on demand.

Custodial Receipts or Certificates. Custodial receipts or certificates are
undivided interests in underlying securities issued by a bank, insurance company
or other financial institution which possesses such underlying securities. The
issuer of the custodial receipts or certificates typically deposits the
underlying securities in an irrevocable trust or custodial account with a
custodian bank. The Funds may purchase participation certificates that represent
interests in obligations that may otherwise be purchased by the Funds. A Fund's
undivided interest in the underlying obligations is the proportion that the
Fund's interest bears to the total principal amount of such

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obligations. Certain of such participation certificates, sometimes called tender
option bonds, may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity.

Municipal Lease Obligations. Municipal lease obligations are entered into by a
State or a political subdivision to finance the acquisition or construction of
equipment, land or facilities. Municipal lease obligations do not constitute
general obligations of the issuer and the interest on a municipal lease
obligation may become taxable if the lease is assigned. If the governmental user
does not appropriate sufficient funds for the following year's lease payments,
the lease will terminate, with the possibility of default on the lease
obligations and loss to the Funds. Disposition of the property in the event of
foreclosure may prove difficult. The Funds may purchase unrated municipal lease
obligations. In such case, the Company's Board of Directors will be responsible
for determining the credit quality of such leases on an ongoing basis, including
the assessment of the likelihood that the lease will not be canceled. These
securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
securities.

Variable Rate Auction Securities and Inverse Floaters. Variable rate auction
securities and inverse floaters are instruments created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable rate instruments. The interest rate on the variable rate
auction portion reflects short-term interest rates, while the interest rate on
the inverse floater portion is typically higher than the rate available on the
original fixed-rate bond. Changes in the interest rate paid on the portion of
the issue relative to short-term interest rates inversely affect the interest
rate paid on the latter portion of the issue. The latter portion therefore is
subject to greater price volatility than the original fixed-rate bond. Since the
market for these instruments is new, the holder of one portion may have
difficulty finding a ready purchaser. Depending on market availability, the two
portions may be recombined to form a fixed-rate municipal bond.

Municipal Commercial Paper. Municipal commercial paper that may be purchased by
the Funds includes short-term obligations of a state, regional or local
governmental entity. Such paper is likely to be issued to meet seasonal working
capital needs of a municipality or as interim construction financing. Municipal
commercial paper, which may be unsecured, may be backed by a letter of credit
lending agreement, note repurchase agreement or other credit facility agreement
offered by banks or other institutions.

From time to time, each such Fund may invest 25% or more of its assets in any
obligations whose debt service is paid from revenues of similar projects (such
as utilities or hospitals) or whose issuers share the same geographic location.
As a result, a Fund may be more susceptible to a single economic, political or
regulatory development than would a portfolio of securities with a greater
variety of issuers. These developments include proposed legislation or pending
court decisions affecting the financing of such projects and market factors
affecting the demand for their services or products.

In California, municipal bonds may also be secured by property taxes in
specially created districts (Mello-Roos bonds or Special Assessment bonds) , tax
allocations based on increased

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property tax assessments over a specified period, frequently for redevelopment
projects, or specified redevelopment area sales tax allocations.

Because the California Municipal and New York Municipal Funds will invest
primarily in obligations issued by a single state (i.e., California and New
York, respectively) and such state's counties, municipalities and other public
authorities and their agencies and instrumentalities and their various political
subdivisions, they are more susceptible to factors adversely affecting issuers
of such obligations than a comparable municipal securities fund that is not so
concentrated. See "Risks of Investing in the Funds-Municipal Securities" in this
Prospectus, and "Appendix A: Special Factors Affecting the California Municipal
Fund" and "Appendix B: Special Factors Affecting the New York Municipal Fund" in
the Statement of Additional Information for further information.

Other Permitted Investments. Each such Fund may invest up to 35% of its assets
in taxable obligations, including taxable high-quality short-term money market
instruments in the following circumstances: (a) when, in the opinion of the
Adviser, the inclusion of taxable securities will enhance the expected after-tax
return of a Fund; (b) pending investment of the proceeds of sales of shares of a
Fund or sales of portfolio securities; (c) pending settlement of purchases of
portfolio securities; or (d) to maintain liquidity for the purpose of meeting
anticipated redemptions or exchanges.

Each Fund may invest in the following taxable high-quality short-term money
market instruments: (i) obligations of the U.S. Government and its agencies and
instrumentalities ("U.S. Government Securities") ; (ii) commercial paper of
issuers rated, at the time of purchase, "A-1" by S&P, "P-1" by Moody's, or "F-1"
or better by Fitch or which if unrated, in the opinion of the Adviser, are of
comparable quality; (iii) certificates of deposit, bankers' acceptances or time
deposits of any bank whose long-term debt obligations have been rated "AAA" by
S&P or "Aaa" by Moody's; and (iv) repurchase agreements with respect to such
obligations.

In addition, the California Municipal and New York Municipal Funds may, during
seasonal variations or other shortages in the supply of suitable California
Municipal Securities or New York Municipal Securities, as the case may be,
invest more than 35% of its total assets in Municipal Securities issued by other
states, their agencies or instrumentalities the interest on which is exempt from
federal income tax, but not California or New York State and local personal
income taxes, as the case may be, if, in the opinion of the Adviser, adverse
conditions prevail in the market for California Municipal Securities or New York
Municipal Securities (including conditions under which such obligations are
unavailable for investment) .

Each Fund may, for temporary defensive purposes, invest without limitation in
taxable, high quality short term money market instruments if, in the opinion of
the Adviser, adverse conditions prevail in the markets for municipal securities
(including conditions under which such obligations are unavailable for
investment) . Any net interest income derived from taxable securities and
distributed by a Fund will be taxable as ordinary income when distributed. In
addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, the Funds may temporarily hold cash (U.S.
dollars, foreign currencies or

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multinational currency units) and may invest any portion of its assets in high
quality foreign or domestic money market instruments.

To the extent that the Funds deviate from their investment policies as a result
of the unavailability of suitable obligations or for other defensive purposes,
their investment objectives may not be achieved.

RISKS OF INVESTING IN THE FUNDS

General

Each Fund's NAV will fluctuate, reflecting fluctuations in the market value of
its portfolio positions and its net currency exposure. The value of the
securities held by each Fund generally fluctuates, to varying degrees and
depending on the objectives and policies of the Fund, based on, among other
things, (i) interest rate movements and, for debt securities, their duration,
(ii) changes in the actual and perceived creditworthiness of the issuers of such
securities, (iii) changes in any applicable foreign currency exchange rates,
(iv) social, economic or political factors, (v) factors affecting the industry
in which the issuer operates, such as competition or technological advances, and
(vi) factors affecting the issuer directly, such as management changes or labor
relations. There is no assurance that any Fund will achieve its investment
objectives.

Securities of Non-U.S. Issuers

Each of the Funds (other than the Municipal Funds) may invest all or some
portion of its assets in securities of non-U.S. issuers. You should recognize
that investing in securities of non-U.S. issuers involves certain risks and
special considerations, including those set forth below, which are not typically
associated with investing in securities of U.S. issuers. Further, certain
investments of these Funds, and investment techniques in which they may engage
involve risks, including those set forth below. There is generally no limit on
the amount that the Emerging Markets or Total Return Funds may invest in issuers
located in any one country, or in securities denominated in the currency of any
one country. Therefore, to the extent the Fund concentrates its investments in
only a few countries, it may be more susceptible to factors adversely affecting
particular countries than comparable funds that are not so concentrated.

Social, Political and Economic Factors. Many countries in which the High Yield,
Emerging Markets, Latin America Equity, Total Return, Global Debt and Global
Convertible Funds will invest, and the Latin American and other emerging market
countries in particular, may be subject to a substantially greater degree of
social, political and economic instability than is the case in the United
States, Japan and Western European countries. Such instability may result from,
among other things, some or all of the following: (i) authoritarian governments
or military involvement in political and economic decision-making, and changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved political, economic and social conditions; (iii)
internal insurgencies and terrorist activities; (iv) hostile relations with
neighboring countries; and (v) drug trafficking. Social, political and economic

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instability could significantly disrupt the principal financial markets in which
the Funds invest and adversely affect the value of the Funds' assets.

Individual foreign economies in general and those of Latin American and other
emerging market countries in particular, may differ favorably or unfavorably and
significantly from the U.S. economy in such respects as the rate of growth of
gross domestic product or gross national product, rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, structural
unemployment and balance of payments position. Governments of many of these
countries have exercised and continue to exercise substantial influence over
many aspects of the private sector. In some cases, the government owns or
controls many companies, including some of the largest in the country.
Accordingly, government actions in the future could have a significant effect on
economic conditions in many countries, including Latin American and other
emerging market countries, which could affect private sector companies and the
Funds, and on market conditions, prices and yields of securities in the Funds'
portfolios. There may be the possibility of nationalization or expropriation of
assets, or future confiscatory levels of taxation affecting the Funds. In the
event of nationalization, expropriation or other confiscation, a Fund may not be
fairly compensated for its loss and could lose its entire investment in the
country involved.

Investment And Repatriation Restrictions. Investment by the Funds in non-U.S.
issuers may be restricted or controlled to varying degrees. These restrictions
may limit or preclude investment in certain of such issuers or countries and may
increase the costs and expenses of the Funds. For example, certain countries
require governmental approval prior to investments by foreign persons in the
country or in a particular company or industry sector or limit investment by
foreign persons to only a specific class of securities of a company which may
have less advantageous terms (including price) than securities of the company
available for purchase by nationals. Certain countries may also restrict or
prohibit investment opportunities in issuers or industries deemed important to
national interests. As a result of investment restrictions the Funds may, in
certain countries, such as Mexico, invest through intermediary vehicles or
trusts. In addition, the repatriation of both investment income and capital from
some of these countries requires governmental approval and if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose temporary restrictions on foreign capital remittances abroad. Even
where there is no outright restriction on repatriation of capital, the mechanics
of repatriation may affect certain aspects of the operation of the Funds.

The Funds could be adversely affected by delays in, or a refusal to grant any
required governmental approval for repatriation of capital, as well as by the
application to a Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, a Fund was unable to distribute
substantially all of its net investment income and net capital gain within
applicable time periods, the Fund could be subject to U.S. federal income and
excise taxes which would not otherwise be incurred and may cease to qualify for
the favorable tax treatment afforded to regulated investment companies under
Internal Revenue Code of 1986, as amended ("the Code) , in which case it would
become subject to U.S. federal income tax on all of its income and gains. See
"Taxes" below.

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Currency Fluctuations. To the extent that a Fund invests in the securities of
non-U.S. issuers which are denominated in foreign currencies, the strength or
weakness of the U.S. dollar against such foreign currencies will account for
part of the Fund's investment performance. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of each Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's NAV and any net
investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Fund.

The rate of exchange between the U.S. dollar and other currencies is determined
by several factors including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the pace of business activity in certain other countries and the United
States, and other economic and financial conditions affecting the world economy.

Although the Funds value their assets daily in terms of U.S. dollars, the Funds
do not intend to convert their holdings of foreign currencies into U.S. dollars
on a daily basis. A Fund will do so from time to time, and you should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
("spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to sell
that currency to the dealer.

Euro Risk. The securities of European issuers may be adversely affected by the
introduction of the new European common currency, the euro. On January 1, 1999,
eleven of the fifteen member countries of the European Monetary Union (Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands,
Portugal and Spain) adopted the euro as their common legal currency.
Consequently, some European holdings of the Funds, particularly government
securities, will be redenominated in euros. The face value of other investments
might remain in the existing national currencies for a time, but they will be
priced, settled, and valued in euros by stock exchanges and other agencies.
Thus, some of the European holdings of the Funds will be valued in euros. This
will not affect the investment value of the Funds in U.S. dollar terms, since
the euro will be converted into the dollar in the same way deutschemarks,
francs, lire and other European currencies are currently converted at the
prevailing exchange rates. However, the Funds' service providers, as well as
businesses in Europe, may incur increased costs to conduct transactions in their
former currencies during the transition to the euro, and be compelled to allot
capital resources to update information systems necessary for the euro
conversion.

Upon the euro's introduction, the participating countries ceased to retain
control of their respective monetary policies and agreed to follow a single
monetary policy established by the European Central Bank. For participating
countries, adopting the same monetary policy, regardless of the conditions of
their domestic economies, could have a negative impact on those economies. Some
of the economic criteria for the participating countries include the following:
a sustainable budget deficit less than 3% of Gross Domestic Product (GDP) ,
public debt less than 60% of GDP, low inflation and interest rates and no
currency devaluations within two years of application. Some of the original
participating countries are not fully compliant with these terms

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but are expected to embrace them by 2002. Countries joining later may have to be
in strict accord before entering the European Monetary Union, or at least be
well along the path to achieving them. So far, the transition seems to be
progressing smoothly, but there has been resistance to some of the more
stringent terms. Therefore, it is unclear whether complete economic and monetary
convergence will be attained as planned.

Inflation. Many countries have experienced substantial, and in some periods
extremely high and volatile, rates of inflation. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of these countries and Latin
American and other emerging market countries in particular. In an attempt to
control inflation, wage and price controls have been imposed at times in certain
countries.

Market Characteristics; Differences in Securities Markets. The securities
markets in many countries, and in Latin American and other emerging market
countries in particular, generally have substantially less volume than the New
York Stock Exchange, and equity securities of most companies listed on such
markets may be less liquid and more volatile than equity securities of U.S.
companies of comparable size. Some of the stock exchanges outside of the United
States and in Latin American and other emerging market countries, to the extent
that established securities markets even exist, are in the earlier stages of
their development. A high proportion of the shares of many foreign companies may
be held by a limited number of persons, which may limit the number of shares
available for investment by the Funds. A limited number of issuers in most, if
not all, of these securities markets may represent a disproportionately large
percentage of market capitalization and trading volume. In addition, the
application of certain Investment Company Act of 1940 ("1940 Act") provisions
may limit the Funds' ability to invest in certain non-U.S. issuers and to
participate in public offerings in these countries. The limited liquidity of
certain non-U.S. securities markets may also affect the Funds' ability to
acquire or dispose of securities at the price and time it wishes to do so.

Many companies traded on securities markets in foreign countries are smaller,
newer and less seasoned than companies whose securities are traded on securities
markets in the United States. Investments in smaller companies involve greater
risk than is customarily associated with investing in larger companies. Smaller
companies may have limited product lines, markets or financial or managerial
resources and may be more susceptible to losses and risks of bankruptcy.
Additionally, market making and arbitrage activities are generally less
extensive in such markets and with respect to such companies, which may
contribute to increased volatility and reduced liquidity of such markets or such
securities. Accordingly, each of these markets and companies may be subject to
greater influence by adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual in the United
States. To the extent that any of these countries experience rapid increases in
their money supplies and investment in equity securities for speculative
purposes, the equity securities traded in any such country may trade at
price-earning multiples higher than those of comparable companies trading on
securities markets in the United States, which may not be sustainable. In
addition, risks due to the lack of modern technology, the lack of a sufficient
capital base to expand business operations, the possibility of permanent or
temporary termination of trading, and greater spreads between bid and ask prices
may exist in such markets.

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Trading practices in certain foreign securities markets are also significantly
different from those in the United States. Brokerage commissions and other
transaction costs on the securities exchanges in many countries are generally
higher than in the United States. In addition, securities settlements and
clearance procedures in certain countries, and, in Latin American and other
emerging market countries in particular, are less developed and less reliable
than those in the United States and the Funds may be subject to delays or other
material difficulties and could experience a loss if a counterparty defaults.
Delays in settlement could result in temporary periods when assets of the Funds
are uninvested and therefore no return is earned. The inability of a Fund to
make intended security purchases due to settlement problems could cause such
Fund to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to a
Fund due to subsequent declines in the value of such portfolio security or, if
such Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.

Non-U.S. Subcustodians. Rules adopted under the 1940 Act permit the Funds, to
the extent they invest outside the U.S., to maintain their non-U.S. securities
and cash in the custody of certain eligible non-U.S. banks and securities
depositories. Certain banks in non-U.S. countries may not be eligible
subcustodians for the Funds, in which event the Funds may be precluded from
purchasing securities in which they would otherwise invest, and other banks that
are eligible subcustodians may be recently organized or otherwise lack extensive
operating experience. At present, custody arrangements complying with the
requirements of the Securities and Exchange Commission ("SEC") are available in
each of the countries in which the Adviser intends to invest. In certain
countries in which the Funds may make investments, there may be legal
restrictions or limitations on the ability of the Funds to recover assets held
in custody by subcustodians in the event of the bankruptcy of the subcustodian.

Government Supervision; Legal Systems. Disclosure and regulatory standards in
certain foreign countries, including Latin American and other emerging market
countries, are in many respects less stringent than U.S. standards. There may be
less government supervision and regulation of securities exchanges, listed
companies and brokers in these countries than exists in the United States.
Brokers in some countries may not be as well capitalized as those in the United
States, so that they may be more susceptible to financial failure in times of
market, political, or economic stress, exposing the Funds to a risk of loss.
Less information may be available to the Funds than with respect to investments
in the United States and, in certain of these countries, less information may be
available to the Funds than to local market participants. In addition, existing
laws and regulations are often inconsistently applied. Foreign investors may be
adversely affected by new laws and regulations, changes to existing laws and
regulations and preemption of local laws and regulations by national laws. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.

Financial Information and Standards. Non-U.S. issuers may be subject to
accounting, auditing and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular,
the assets and profits appearing on the financial statements of certain non-U.S.
issuers may not reflect their financial position or results of operations in the
way they would be reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that

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keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Moreover,
substantially less information may be publicly available about non-U.S. issuers
than is available about U.S. issuers.

High Yield, High Risk Debt Securities

General. The High Yield, Emerging Markets, Total Return and Global Convertible
Funds may invest all or substantially all of their respective assets, the Global
Debt Fund may invest up to 25% of its total assets and the Latin America Equity
and the Municipal Funds may invest up to 20% of their total assets, in high
yield, high risk debt securities. High yield, high risk debt securities are
those debt securities rated below investment grade and unrated securities of
comparable quality. They offer yields that fluctuate over time, but which
generally are superior to the yields offered by higher-rated securities.
However, securities rated below investment grade also involve greater risks,
including greater price volatility and a greater risk of default in the timely
payment of principal and interest, than higher-rated securities. Under rating
agency guidelines, medium- and lower-rated securities and comparable unrated
securities will likely have some quality and protective characteristics that are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Certain of the debt securities in which the Funds may invest may have, or be
considered comparable to securities having, the lowest ratings for
non-subordinated debt instruments assigned by Moody's, S&P or D&P (i.e., rated C
by Moody's or D by S&P or D&P) . Under rating agency guidelines, these
securities are considered to have extremely poor prospects of ever attaining
investment grade standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay principal
when due in the event of adverse business, financial or economic conditions,
and/or to be in default or not current in the payment of interest or principal.
Such securities are considered speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. Unrated securities deemed comparable to these lower- and
lowest-rated securities will have similar characteristics. Accordingly, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Funds with a commensurate effect on the value of
their respective shares. Therefore, an investment in the Funds should not be
considered as a complete investment program for all investors.

The secondary markets for high yield, high risk corporate and sovereign debt
securities are not as liquid as the secondary markets for higher-rated
securities. The secondary markets for high yield, high risk debt securities are
characterized by relatively few market makers and participants in the market are
mostly institutional investors, including insurance companies, banks, other
financial institutions and mutual funds. In addition, the trading volume for
high yield, high risk debt securities is generally lower than that for
higher-rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in the
condition of a particular issuer. These factors may have an adverse effect on a
Fund's ability to dispose of particular portfolio investments and may limit its
ability to obtain accurate market quotations for purposes of valuing securities
and calculating NAV. If a Fund is

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not able to obtain precise or accurate market quotations for a particular
security, it will become more difficult for the Company's Board of Directors to
value such Fund's portfolio securities and the Company's Directors may have to
use a greater degree of judgment in making such valuations. Furthermore, adverse
publicity and investor perceptions about lower-rated securities, whether or not
based on fundamental analysis, may tend to decrease the market value and
liquidity of such lower-rated securities. Less liquid secondary markets may also
affect each Fund's ability to sell securities at their fair value. In addition,
each of the Funds may invest up to 15% of its net assets, measured at the time
of investment, in illiquid securities, which may be more difficult to value and
to sell at fair value. If the secondary markets for high yield, high risk debt
securities contract due to adverse economic conditions or for other reasons,
certain previously liquid securities in a Fund's portfolio may become illiquid
and the proportion of the Fund's assets invested in illiquid securities may
increase.

The ratings of fixed income securities by Moody's, S&P and D&P are a generally
accepted barometer of credit risk. You should be aware, however, that they are
subject to certain limitations. The rating of an issuer is heavily weighted by
past developments and does not necessarily reflect probable future conditions.
There is frequently a lag between the time a rating is assigned and the time it
is updated. In addition, there may be varying degrees of difference in credit
risk of securities within each rating category. See Appendix A to this
Prospectus for a description of such ratings.

Fixed Income Debt Securities. Each of the Funds (other than the Municipal Funds)
may invest in fixed income debt securities. Changes in market yields will affect
a Fund's NAV as prices of fixed income securities generally increase when
interest rates decline and decrease when interest rates rise. Prices of longer
term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes, particularly if
such securities were purchased at a discount. While the market values of
securities rated below investment grade and comparable unrated securities tend
to react less to fluctuations in interest rate levels than do those of
higher-rated securities, the market values of certain of these securities also
tend to be more sensitive to individual issuer developments and changes in
economic conditions than higher-rated securities. In addition, such securities
generally present a higher degree of credit risk. Corporate issuers of
securities valued below investment grade and comparable unrated securities are
often highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. The risk of loss due to default in payment of interest or
principal by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness.

Many fixed income securities, contain call or buy-back features which permit the
issuer of the security to call or repurchase it. Such securities may present
risks based on payment expectations. If an issuer exercises such a "call option"
and redeems the security, a Fund may have to replace the called security with a
lower yielding security, resulting in a decreased rate of return for such Fund.

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Sovereign Debt Securities. Each of the Funds (other than the Municipal Funds)
may invest in sovereign debt securities. Investing in sovereign debt securities
will expose the Funds to the direct or indirect consequences of political,
social or economic changes in the countries, including developing or emerging
countries such as those in Latin America, that issue the securities. The ability
and willingness of sovereign obligors in developing and emerging countries or
the governmental authorities that control repayment of their external debt to
pay principal and interest on such debt when due may depend on general economic
and political conditions within the relevant country. Emerging and developing
countries such as those in which the Funds may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.

The ability of a foreign sovereign obligor to make timely and ultimate payments
on its external debt obligations will also be strongly influenced by the
obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the obligor's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a sovereign obligor to obtain sufficient foreign exchange
to service its external debt.

As a result of the foregoing, a governmental obligor may default on its
obligations. If such a default occurs, the Funds may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders

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of commercial bank debt will not contest payments to the holders of other
foreign sovereign debt obligations in the event of default under their
commercial bank loan agreements.

Sovereign obligors in developing and emerging countries, including those in
Latin America, are among the world's largest debtors to commercial banks, other
governments, international financial organizations and other financial
institutions. These obligors have in the past experienced substantial
difficulties in servicing their external debt obligations, which led to defaults
on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign sovereign debt securities may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the Brady Bonds and other foreign sovereign debt
securities in which the Funds may invest will not be subject to similar defaults
or restructuring arrangements which may adversely affect the value of such
investments. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants.

In addition to high yield foreign sovereign debt securities, the Funds may also
invest in foreign corporate securities. For a discussion of such securities and
their associated risks, see "Securities of Non-U.S. Issuers", above.

Municipal Securities

Concentration. Because the California Municipal and New York Municipal Funds
will invest primarily in obligations issued by the States of California and New
York, respectively, and their agencies, instrumentalities and various political
subdivisions, these Funds are more susceptible to factors adversely affecting
issuers of such obligations than comparable municipal securities funds that are
not so concentrated.

California Issuers. California is experiencing significant financial
difficulties, which have reduced its credit standing. The ratings of certain
related debt of other issuers for which California has an outstanding lease
purchase, guarantee or other contractual obligation (such as state-insured
hospital bonds) are generally linked directly to California's rating. Should the
financial condition of California deteriorate further, its credit ratings could
be further reduced, the market value and marketability of all outstanding notes
and bonds issued by California, its public authorities or local governments
could be adversely affected, and the income derived by the California Municipal
Fund and its ability to preserve capital and liquidity could be adversely
affected. See "Appendix A: Special Factors Affecting the California Municipal
Fund" in the Statement of Additional Information for further information.

New York Issuers. New York State, New York City and other issuers of New York
Municipal Securities have, at various times in the past, encountered financial
difficulties. A continuation or recurrence of the financial difficulties
previously experienced by the issuers of New York Municipal Securities could
result in defaults or declines in the market values of those issuers'

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existing obligations and, possibly, in the obligations of other issuers of New
York Municipal Securities and the income derived by the Fund and its ability to
preserve capital and liquidity could be adversely affected. See "Appendix B:
Special Factors Affecting the New York Municipal Fund" in the Statement of
Additional Information for further information.

Liquidity. The Adviser believes that, in general, the secondary market for
municipal obligations is less liquid than that for most taxable fixed income
securities. Consequently, the ability of each Fund to buy and sell municipal
obligations may, at any particular time and with respect to any particular
securities, be limited. The amount of information about the financial condition
of an issuer of municipal obligations may not be as extensive as information
about corporations whose securities are publicly traded. Obligations of issuers
of municipal obligations may be subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the U.S. Bankruptcy Code and applicable state laws, which could limit the
ability of the Funds to recover payments of principal or interest on such
securities.

Callable Securities. Certain tax exempt securities which may be held by each
such Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem tax exempt securities held by a Fund
during a time of declining interest rates, the Fund may realize a capital loss
on its investment if the security was purchased at a premium and may not be able
to reinvest the proceeds in tax exempt securities providing as high a level of
investment return as the securities redeemed. For additional considerations
relating to the Funds' investments in tax-exempt securities, including investing
in municipal leases, see "Investment Objectives and Policies" and "Additional
Information on Portfolio Instruments" in the Statement of Additional
Information.

Taxes. All or a portion of each Municipal Fund's dividends may be subject to
alternative minimum tax and the National Municipal Fund's dividends may be
subject to state or local taxation. In addition, each of these Funds may invest
up to 20% of their respective assets in non-municipal obligations. Certain
provisions in the Code relating to the issuance of municipal obligations impose
restrictions on the volume of municipal obligations qualifying for federal tax
exemption. One effect of these provisions could be to increase the cost of the
tax exempt securities available for purchase by the Funds and thus reduce
available yield. Legislative proposals that may further restrict or eliminate
the federal income tax exemption for interest on municipal obligations may be
introduced in the future. See "Taxes" below.

Convertible Securities

General. Each Fund (other than the U.S. Government Securities Fund, the Mortgage
Securities Fund and the Municipal Funds) may invest in convertible securities.
Set forth below is additional information concerning traditional convertible
securities and "synthetic" convertible securities.

Convertible securities are issued and traded in a number of securities markets.
For the past several years, the principal markets have been the United States,
the Euromarket and Japan. Issuers during this period have included major
corporations domiciled in the United States, Japan, France, Switzerland, Canada
and the United Kingdom. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the

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conversion price may be based on a fixed exchange rate established at the time
the security is issued. As a result, fluctuations in the exchange rate between
the currency in which the debt security is denominated and the currency in which
the share price is quoted will affect the value of the convertible security. The
Funds may enter into foreign currency hedging transactions in which they may
seek to reduce the impact of such fluctuations.

Apart from currency considerations, the value of convertible securities is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent there are changes in interest rates or yields of similar non-convertible
securities, the investment value of the convertible security typically will
fluctuate. However, at the same time, the value of the convertible security will
be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock. If, because of a low price of the underlying common stock, the
conversion value is below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value.

To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed income security. The yield and conversion premium of
convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market
value more than the securities' investment value. If no capital appreciation
occurs on the underlying common stock, a premium may not be fully recovered.

Holders of convertible securities have a claim on the assets of the issuer prior
to the common stockholders but may be subordinated to similar non-convertible
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is
called for redemption, the Fund will be required to redeem the security, convert
it into the underlying common stock or sell it to a third party. Certain
convertible debt securities may provide a put option to the holder which
entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security.

Synthetic Convertible Securities. "Synthetic" convertible securities are created
by combining separate securities that possess the two principal characteristics
of a true convertible security, i.e., fixed income ("fixed income component")
and the right to acquire equity securities ("convertibility component") . The
fixed income component is achieved by investing in nonconvertible fixed income
securities such as nonconvertible bonds, preferred stocks and money market
instruments. The convertibility component is achieved by investing in warrants,
exchanges or NASDAQ-listed call options or stock index call options granting the
holder the

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right to purchase a specified quantity of securities within a specified period
of time at a specified price or to receive cash in the case of stock index
options.

A warrant is an instrument issued by a corporation that gives a holder the right
to subscribe to a specified amount of capital stock at a set price for a
specified period of time. Warrants involve the risk that the price of the
security underlying the warrant may not exceed the exercise price of the warrant
and the warrant may expire without any value. See "Hedging and Derivatives"
below for a discussion of call options and stock index call options.

A synthetic convertible security differs from a traditional convertible security
in several respects. Unlike a traditional convertible security, which is a
single security having a unitary market value, a synthetic convertible security
is comprised of two or more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security is the sum of
the values of its fixed income component and its convertibility component. For
this reason, the values of a synthetic convertible security and a traditional
convertible security will respond differently to market fluctuations.

More flexibility is possible in the assembly of a synthetic convertible security
than in the purchase of a convertible security. Synthetic convertible securities
may be selected where the two components represent one issuer or are issued by a
single issuer, thus making the synthetic convertible security similar to a
traditional convertible security. Alternatively, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers which will be used when the Adviser believes that such a combination
would better promote a Fund's investment objective. A synthetic convertible
security also is a more flexible investment in that its two components may be
purchased or sold separately. For example, a Fund may purchase a warrant for
inclusion in a synthetic convertible security but temporarily hold short-term
investments while postponing the purchase of a corresponding bond pending
development of more favorable market conditions.

A holder of a synthetic convertible security faces the risk of a decline in the
price of the stock or the level of the index involved in the convertibility
component, causing a decline in the value of the call option or warrant. Should
the price of the stock fall below the exercise price and remain there throughout
the exercise period, the entire amount paid for the call option or warrant would
be lost. Since a synthetic convertible security includes the fixed income
component as well, the holder of a synthetic convertible security also faces the
risk that interest rates will rise, causing a decline in the value of the fixed
income instrument.

Short Sales

Short sales by the Funds involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. The
Funds are permitted to engage in short sales only with respect to securities
related to those in their portfolios. The Adviser therefore expects that if the
price of the securities a Fund is required to replace in connection with a short
sale increases, the value of the related

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securities in the Fund's portfolio will also increase, although not necessarily
in the same proportion.

Non-Diversified Funds

Each Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Funds are not limited by the 1940 Act in the proportion of their
assets that may be invested in the obligations of a single issuer. Each Fund,
however, intends to comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code") for qualification as a
regulated investment company. Thus, a Fund may invest a greater proportion of
its assets in the securities of a smaller number of issuers and, as a result,
will be subject to greater risk of loss with respect to its portfolio
securities.

Hedging and Derivatives

Each of the Funds may be authorized to use a variety of investment strategies
described below to hedge various market risks (such as, to the extent
applicable, interest rates, currency exchange rates and broad or specific market
movements) , to manage the effective maturity or duration of debt instruments
held by a Fund, or to seek to increase the Fund's income or gain. Limitations on
the portion of a Fund's assets that may be used in connection with the
investment strategies described below are set out in Appendix B to this
Prospectus.

A Fund may (if and to the extent so authorized and consistent with the Fund's
objective and policies) purchase and sell (or write) exchange-listed and
over-the-counter put and call options on securities, index futures contracts,
financial futures contracts and fixed income indices and other financial
instruments, enter into financial futures contracts, enter into interest rate
transactions, and enter into currency transactions (collectively, these
transactions are referred to in this Prospectus as "Hedging and Derivatives") .
A Fund's interest rate transactions may take the form of swaps, caps, floors and
collars, and a Fund's currency transactions may take the form of currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.

Hedging and Derivatives may generally be used to attempt to protect against
possible changes in the market value of securities held or to be purchased by a
Fund resulting from securities markets or currency exchange rate fluctuations,
to protect a Fund's unrealized gains in the value of its securities, to
facilitate the sale of those securities for investment purposes, to manage the
effective maturity or duration of a Fund's securities or to establish a position
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities. A Fund may use any or all types of Hedging and
Derivatives which it is authorized to use at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized Hedging and Derivatives will be a function of numerous variables,
including market conditions. The ability of a Fund to utilize Hedging and
Derivatives successfully will depend on, in addition to the factors described
above, the Adviser's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
securities. None of the Funds is a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is

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registered with the Commodity Futures Trading Commission (the "CFTC") ) and
Hedging and Derivatives involving futures contracts and options on futures
contracts will be purchased, sold or entered into only for bona fide hedging,
and non-hedging purposes to the extent permitted by CFTC regulations; provided
that a Fund may enter into futures contracts or options thereon for purposes
other than bona fide hedging if immediately thereafter, the sum of the amount of
its initial margin and premiums on open contracts would not exceed 5% of the
liquidation value of such Fund's portfolio; provided further, than in the case
of an option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The use of certain
Hedging and Derivatives will require that a Fund segregate cash, U.S. government
securities or other liquid assets to the extent such Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Risks associated with Hedging and Derivatives are
described in Appendix B to this Prospectus. A detailed discussion of various
Hedging and Derivatives including applicable regulations of the CFTC and the
requirement to segregate assets with respect to these transactions also appears
in Appendix B.

To the extent a Fund conducts Hedging and Derivatives outside the United States,
such transactions may be subject to political, economic and legal risks that are
distinct from domestic transactions. Such risks are similar to those applicable
to investment in foreign securities described under "Securities of Non-U.S.
Issuers" above.

Year 2000

Like other mutual funds, the Funds could be adversely affected if the computer
systems used by their service providers, including shareholder servicing agents,
do not properly process and calculate date-related information. The Fund's
service providers are taking the measures necessary to provide reasonable
assurance to the Funds that their systems will be able to process year 2000
data. However, there can be no assurance that these measures will be adequate to
avoid a service disruption or any adverse impact on the Funds or their
shareholders.

MANAGEMENT OF THE FUNDS

Investment Adviser

The OFFITBANK Investment Fund, Inc. (the "Company") receives investment advisory
services from OFFITBANK, whose principal address is 520 Madison Avenue, New
York, New York 10022 (the "Adviser" or "OFFITBANK") . OFFITBANK manages each
Fund's business and investment activities, subject to the authority of the
Company's Board of Directors. OFFITBANK's principal business is providing
discretionary investment management services to high net worth individuals and
family groups, foundations, endowments and corporations. OFFITBANK specializes
in global fixed income asset management and offers its clients a complete range
of investments in the major capital markets of the world. OFFITBANK currently
manages approximately $10.2 billion in assets and serves as investment adviser
to twenty-one registered investment company portfolios.

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Stephen T. Shapiro serves as the portfolio manager for the High Yield Fund. Mr.
Shapiro is a Managing Director of OFFITBANK and has been associated with
OFFITBANK since 1983. Dr. Wallace Mathai-Davis and Richard M. Johnston serve as
portfolio managers of the Emerging Markets Fund. Dr. Mathai-Davis is a Managing
Director of OFFITBANK and has been associated with OFFITBANK since 1986. Mr.
Johnston is a Managing Director of OFFITBANK and has been director of
OFFITBANK's Latin American investments since 1991. Mr. Johnston also serves as
the portfolio manager for the Latin America Equity Fund. Dr. Mathai-Davis will
also serve as portfolio manager of the Global Convertible Fund. Jack Burks
serves as the portfolio manager of the U.S. Government Securities and Mortgage
Securities Funds and will also serve as portfolio manager of the Total Return
and Investment Grade Global Debt Funds. Mr. Burks is a Managing Director of
OFFITBANK and has been associated with OFFITBANK since 1985. Carolyn N. Dolan
serves as the portfolio manager for the New York Municipal Fund. Ms. Dolan has
been associated with OFFITBANK since 1983, with responsibilities for OFFITBANK's
tax sensitive and cross market portfolios. Ms. Dolan and Michael Pietronico
serve as portfolio managers for the National Municipal Fund. Mr. Pietronico has
been associated with OFFITBANK since 1992 and specializes in municipal
securities. John H. Haldeman, Jr. serves as the portfolio manager of the
California Municipal Fund. Mr. Haldeman is a Managing Director of OFFITBANK and
has been associated with OFFITBANK since 1988, with responsibilities in fixed
income portfolio management, specializing in municipal securities.

For the fiscal year ended December 31, 1998, OFFITBANK received the following
fees, as a percentage of the following active Fund's average net assets: High
Yield Fund .72%, Emerging Market Fund .88%, Latin America Equity Fund 1.00%,
U.S. Government Securities Fund .15%, Mortgage Securities Fund .12%, California
Municipal Fund .01%, New York Municipal Fund .20% and National Municipal Fund
.11%.

The following chart shows the Company's other service providers and includes
their addresses and principal activities.

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SHAREHOLDER INFORMATION

Pricing of Fund Shares

Shares of the Funds are priced at their net asset value ("NAV") . The NAV of
each Fund is calculated as follows:

Value of Assets Attributable to a Class
NAV = -Value of Liabilities Attributable to the same Class
----------------------------------------------------
Number of Outstanding Shares of the Class

Each Fund's NAV is calculated once daily at 4:00 p.m. Eastern Time, Monday
through Friday each day the New York Stock Exchange (the "Exchange") is open.
Each Fund will effect purchases or redemptions of Fund shares at the next NAV
calculated after receipt of your order or request in proper form. Fund shares
will not be priced on the following days the Exchange is closed:

Good Friday Friday, April 2, 1999
Memorial Day (observed) Monday, May 31, 1999
Independence Day (observed) Monday, July 5, 1999
Labor Day Monday, September 6, 1999
Thanksgiving Day Thursday, November 25, 1999
Christmas Day (observed) Friday, December 24, 1999
New Year's Day (observed)
Martin Luther King, Jr. Day
Presidents' Day

Foreign and domestic equity securities held by a Fund are valued using the
closing price or the last sale price on the exchange or in the principal
over-the-counter market where they are traded. If the last sale price is
unavailable, the last available quote or last bid price is normally used. Debt
securities held by a Fund generally are valued based on quoted bid prices. Short
term debt investments having maturities of 60 days or less are amortized to
maturity based on their cost, and if applicable, adjusted for foreign exchange
translation. If market quotations are unavailable or if an event occurs after
the close of an exchange that is expected to materially affect the value of a
security held by the Fund, securities and other assets will be valued at fair
value as determined in good faith by the Adviser according to procedures adopted
by the Company's Board of Directors.

If a Fund holds foreign equity securities, the calculation of that Fund's NAV
will not occur at the same time as the determination of the value of the foreign
equity securities in the Fund's portfolio, since these securities are traded on
foreign exchanges. Additionally, if the foreign equity securities held by a Fund
trade on days when that Fund does not price its shares, the NAV of the Fund's
shares may change when shareholders will not be able to purchase or redeem the
Fund's shares.

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Purchase of Fund Shares

Select Shares

You may purchase Select Shares of each Fund at the NAV per share next calculated
after your order is received by the Transfer Agent in proper form. After an
initial purchase is made, the Transfer Agent will set up an account for you on
the Company's records, which will show all of your transactions and the balance
of the shares you own. You can only purchase Select Shares of each Fund on days
the Exchange is open and through the means described below.

Initial Investment By Mail. Subject to acceptance by the Company, an account may
be opened by completing and signing an Account Application and mailing it to the
Company at the address noted below, together with a check ($250,000 minimum)
payable to The OFFITBANK Investment Fund, Inc.:

The OFFITBANK Investment Fund, Inc.
c/o PFPC Inc.
P.O. Box 8701
Wilmington, DE 19899

The Fund(s) to be purchased should be designated on the Account Application.
Subject to acceptance by the Company, payment for the purchase of Select Shares
received by mail will be credited to a shareholder's account at the NAV per
share of the Fund next determined after receipt. Such payment need not be
converted into federal funds (monies credited to the Company's custodian bank by
a Federal Reserve Bank) before acceptance by the Company. No third party
endorsed checks or foreign checks will be accepted.

Initial Investment By Wire. Subject to acceptance by the Company, Select Shares
of each Fund may be purchased by wiring federal funds ($250,000 minimum) to PNC
Bank (see instructions below) . A completed Account Application should be
forwarded to the Company at the address noted above under "Initial Investment by
Mail" in advance of the wire. For each Fund, notification must be given to the
Company at 1-800-618-9510 prior to 4:00 p.m., New York time, on the business day
prior to the wire date. (Prior notification must also be received from investors
with existing accounts.) Funds should be wired to:

PNC Bank
Philadelphia, Pennsylvania
ABA# 031-0000-53
Account # 86-0179-1617
F/B/O The OFFITBANK Investment Fund, Inc.
Ref. (Fund Name and Account Number)

Federal funds purchases will be accepted only on a day on which the Company and
PNC Bank are open for business.

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<PAGE>

Additional Investments. Additional investments may be made at any time (minimum
investment $10,000) by purchasing Select Shares of any Fund at NAV by mailing a
check to the Company at the address noted above under "Initial Investment by
Mail" (payable to The OFFITBANK Investment Fund, Inc.) or by wiring monies to
the custodian bank as outlined above under "Initial Investment by Wire." For
each Fund, notification must be given to the Company at 1-800-618-9510 prior to
4:00 p.m., New York time, on the business day prior to the wire date. Initial
and additional purchases made by check cannot be redeemed until payment of the
purchase has been collected.

Shareholder Organizations. Select Shares of the Company's Funds may also be sold
to corporations or other institutions such as trusts, foundations or
broker-dealers purchasing for the accounts of others ("Shareholder
Organizations") . Investors purchasing and redeeming shares of the Funds through
a Shareholder Organization may be charged a transaction-based fee or other fee
for the services of such organization. Each Shareholder Organization is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding purchases
and redemptions. Customers of Shareholder Organizations should read this
Prospectus in light of the terms governing accounts with their organization. The
Company does not pay to or receive compensation from Shareholder Organizations
for the sale of Select Shares. The Company's officers are authorized to waive
the minimum initial and subsequent investment requirements.

IRA Accounts. The Company has available a form of Individual Retirement Account
("IRA") which may be obtained from the Distributor that permits the IRA to
invest in Select Shares of the Funds. The minimum investment for all such
retirement plans is $250,000. Investors desiring information regarding
investments through IRAs should write or telephone the Company at
1-800-618-9510.

Advisor Shares

All purchase orders for Advisor Shares must be placed through a Shareholder
Servicing Agent. Orders for purchases of Advisor Shares will be executed at the
NAV per share next determined after an order has been transmitted to and
accepted by the Company's distributor. Advisor Shares are subject to such
investment minimums and other terms and conditions as may be imposed by
Shareholder Servicing Agents from time to time. Shareholder Servicing Agents may
offer additional services to their customers. For further information as to how
to direct a Shareholder Servicing Agent to purchase Advisor Shares of any Fund
on your behalf, you should contact your Shareholder Servicing Agent or the
Company's distributor.

Other Purchase Information

The Company reserves the right, in its sole discretion, to suspend the offering
of shares of its Funds or to reject purchase orders when, in the judgment of
management, such suspension or rejection is in the best interests of the
Company.

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<PAGE>

Purchases of a Fund's shares will be made in full and fractional shares of the
Fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares, however, will
not be issued.

Redemption of Fund Shares

You may redeem shares of the Funds at the next NAV calculated after a redemption
request is received by the Transfer Agent in proper form. You can only redeem
shares of the Funds on days the Exchange is open and through the means described
below.

Select Shares

You may redeem Select Shares of each Fund of the Company by mail, or, if you are
authorized, by telephone. No charge is made for redemptions. The value of Select
Shares redeemed may be more or less than the purchase price, depending on the
market value of the investment securities held by the Fund.

Redemption By Mail. Your redemption requests should be addressed to The
OFFITBANK Investment Fund, Inc., c/o PFPC Inc., P.O. Box 8701, Wilmington, DE
19899 and must include:

- - the share certificates, if issued;

- - a letter of instruction, if required, or a stock assignment specifying the
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;

- - any required signature guarantees, which are required when (i) the
redemption request proceeds are to be sent to someone other than the
registered shareholder(s) , (ii) the redemption request is for $25,000 or
more, or (iii) a share transfer request is made. A signature guarantee may
be obtained from a domestic bank or trust company, broker, dealer,
clearing agency or savings association who are participants in a Medallion
Program recognized by the Securities Transfer Association. The three
recognized Medallion Programs are Securities Transfer Agent Medallion
Program (STAMP) , Stock Exchanges Medallion Program (SEMP) and New York
Stock Exchange, Inc. Medallion Program (MSP) . Signature Guarantees, which
are not a part of these programs, will not be accepted. Please note that a
notary public stamp or seal is not acceptable; and

- - other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit
sharing plans and other organizations.

Redemption By Telephone. If you are authorized to utilize the Telephone
Redemption Option, a redemption of Select Shares may be requested by calling the
Company at 1-800-618-9510 and requesting that the redemption proceeds be mailed
to the primary registration address or wired per the authorized instructions.
Select Shares cannot be redeemed by telephone if share certificates are held for
those shares. If the Telephone Redemption Option or the Telephone

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<PAGE>

Exchange Option (as described below) is authorized, the Company and its transfer
agent may act on telephone instructions from any person representing himself or
herself to be a shareholder and believed by the Company or its transfer agent to
be genuine. The transfer agent's records of such instructions are binding and
shareholders, not the Company or its transfer agent, bear the risk of loss in
the event of unauthorized instructions reasonably believed by the Company or its
transfer agent to be genuine. The Company will employ reasonable procedures to
confirm that instructions communicated are genuine and, if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Company in connection with transactions initiated by
telephone include tape recording of telephone instructions and requiring some
form of personal identification prior to acting upon instructions received by
telephone.

Systematic Withdrawal Plan. If you hold Select Shares of a Fund with a NAV of
$10,000 or more, you may elect to have periodic redemptions paid on a monthly,
quarterly, semiannual or annual basis (the "Systematic Withdrawal Plan," or the
"Plan") . The maximum withdrawal per year under the Systematic Withdrawal Plan
is 12% of the account value at the time of the election. A number of Select
Shares sufficient to make the scheduled redemption will normally be redeemed on
the date you select. Depending on the size of the payment requested and
fluctuations in the NAV of the shares redeemed, redemptions for the purpose of
making payments under the Systematic Withdrawal Plan may reduce or even exhaust
the account. You may request that the payments under the Plan be sent to a
predesignated bank or other designated party.

Advisor Shares

You must place all redemption orders for Advisor Shares through a Shareholder
Servicing Agent in accordance with instructions or limitations pertaining to
your account with your Shareholder Servicing Agent. Redemption orders for
Advisor Shares are effected at the NAV next determined after the order is
received by the Company's Distributor. While no redemption fee is imposed by the
Funds, Shareholder Servicing Agents may charge your account for redemption
services. You should contact your Shareholder Servicing Agent or the Company's
Distributor for further information regarding redemption of Advisor Shares,
including the availability of wire or telephone redemption privileges, or
whether you may elect to participate in a systematic withdrawal plan.

Other Redemption Information

Redemption proceeds for shares of the Company recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to fifteen days from the purchase date. Shareholders can avoid this
delay by utilizing the wire purchase option.

Redemption proceeds will ordinarily be paid within seven business days after a
redemption request is received by the Transfer Agent in proper form.

Other than as described above, payment of the redemption proceeds will be made
within seven days after receipt of an order for a redemption. The Company may
suspend the right of

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<PAGE>

redemption or postpone the date at times when the Exchange or the bond market is
closed or under any emergency circumstances as determined by the SEC.

If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of the Company to make payment wholly or
partly in cash, the Company may pay the redemption proceeds in whole or in part
by a distribution in-kind of readily marketable securities held by a Fund in
lieu of cash in conformity with applicable rules of the SEC. Investors generally
will incur brokerage charges on the sale of portfolio securities so received in
payment of redemptions.

Shareholder Services

Exchange Privilege. Shares of each class of any Fund may be exchanged for shares
of the same class of any other Fund of the Company based on the respective NAV
of the shares involved. The exchange privilege is only available, however, with
respect to the Funds that are registered for sale in a shareholder's state of
residence. In addition, with respect to Select Shares, shareholders must
transfer a minimum of $50,000 of assets between Funds for each transfer. The
Company imposes no exchange fees. Exchange requests with respect to Select
Shares should be sent to The OFFITBANK Investment Fund, Inc., c/o PFPC Inc.,
P.O. Box 8701, Wilmington, DE 19899 or, if the Telephone Exchange Option has
been authorized, by calling the Company at 1-800-618-9510. See "Redemption of
Shares-Redemption By Telephone" above. Shareholders should note that an exchange
between Funds is considered a sale and purchase of shares for tax purposes. A
shareholder who holds Advisor Shares should consult his/her Shareholder
Servicing Agent to determine the availability of and terms and conditions
imposed on exchanges with the other Funds of the Company.

Transfer of Registration. The registration of Company Fund may be transferred by
writing to The OFFITBANK Investment Fund, Inc., c/o PFPC Inc., P.O. Box 8701,
Wilmington, DE 19899. As in the case of redemptions, the written request must be
received in good order as defined above.

Dividends and Distributions

The High Yield, Total Return, Global Debt, U.S. Government Securities, Mortgage
Securities, California Municipal, New York Municipal and National Municipal
Funds declare dividends of substantially all of their net investment income
daily and pay dividends monthly, and the Emerging Markets and Global Convertible
Funds declare dividends daily and pay dividends quarterly. The Latin America
Equity Fund declares and pays dividends quarterly. Each Fund distributes, at
least annually, substantially all net capital gains, if any, earned by such
Fund. Each Fund will inform shareholders of the amount and nature of all such
income or gains.

Dividends are paid in the form of additional shares of the same class of the
same Fund, unless you have elected prior to the date of distribution to receive
payment in cash. Such election, or any revocation thereof, must be made in
writing to the Transfer Agent and will become effective with respect to
dividends paid after its receipt. Dividends that are otherwise taxable are
taxable to you whether received in cash or in additional shares of a Fund. It is
anticipated that expenses

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<PAGE>

incurred by each class of shares of each Fund will differ and, accordingly, that
the dividends distributed with respect to each class will differ.

Shares purchased will begin earning dividends on the business day on which
federal funds are available in payment for such shares. Shares redeemed will
earn dividends through the date of redemption. Net investment income of the
Funds for a Saturday, Sunday or a holiday will be declared as a dividend on the
prior business day. If you who redeem all or a portion of a Fund's shares prior
to a dividend payment date, you will receive all dividends declared but unpaid
on those shares at the time of their redemption.

TAXES

Each Fund intends to qualify for taxation as a "regulated investment company"
("RIC") under Subchapter M of the Code. The California Municipal, New York
Municipal and National Municipal Funds intend to satisfy conditions under the
Code that will enable interest from municipal obligations, which is exempt from
regular federal income taxes in the hands of these Funds, to qualify as
"exempt-interest dividends" when distributed to such Funds' shareholders. Under
the Code, such dividends are exempt from regular federal income taxes. Each Fund
that qualifies as a RIC will not be subject to federal income taxes with respect
to its net investment income (i.e., its investment company taxable income, as
that term is defined in the Code, determined without regard to the deduction for
dividends paid) and net capital gain (i.e., the excess of a Fund's net realized
long-term capital gain over its net realized short-term capital loss) , if any,
that are distributed to its shareholders, provided that the Fund distributes
each taxable year (i) at least 90% of its net investment income for such taxable
year, and (ii) at least 90% of the excess of its tax-exempt interest income net
of certain deductions allocable to such income.

Each Fund will be treated as a separate entity for federal income tax purposes,
and thus the provisions of the Code, applicable to RICs generally will be
applied to each Fund separately, rather than to the Company as a whole. In
addition, net capital gain, net investment income and operating expenses will be
determined separately for each Fund.

Dividends, either in cash or reinvested in shares, paid by a Fund from net
investment income will be taxable to you as ordinary income. Whether paid in
cash or additional shares of a Fund, and regardless of the length of time the
shares in such Fund have been owned by you, distributions of net capital gain
which are designated by a Fund as "capital gain dividends" are taxable to you as
long-term capital gain. You will be notified annually by the Company as to the
federal tax status of dividends and distributions paid by a Fund. Such dividends
and distributions may also be subject to state and local taxes.

Exchanges and redemptions of shares in a Fund are generally taxable events for
federal income tax purposes. You may also be subject to state and local taxes on
such exchanges and redemptions.

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<PAGE>

SHAREHOLDERS

Distribution and
Shareholder
Services

PRINCIPAL DISTRIBUTOR TRANSFER AGENT
OFFIT FUNDS DISTRIBUTOR, INC. PFPC INC.
FOUR FALLS CORPORATE CENTER, 6TH FL. 400 BELLEVUE PARKWAY
WEST CONSHOCHOCKEN, PA 19428 WILMINGTON, DE 19809

Distributes Select Shares and contracts with Handles shareholder services,
Shareholders Servicing Agents who including recordkeeping and
distribute and redeem Advisor Shares and statements, distribution of dividends
provide various services to beneficial and processing of buy and sell requests.
owners of Advisor Shares.

Asset Management

INVESTMENT ADVISER CUSTODIANS
OFFITBANK THE BANK OF NEW YORK
520 MADISON AVENUE ("BONY")
NEW YORK, NY 10022 90 WASHINGTON STREET
NEW YORK, NY 10286

THE CHASE MANHATTAN BANK ("CHASE")
4 METROTECH CENTER
BROOKLYN, NY 11245

Manages the Funds' business and Chase serves as custodian of the assets
investment activities. of the Emerging Markets and Latin American
Equity Funds. BONY serves as custodian of the
assets of the remaining FUnds. The custodians
settle all portfolio trades and collect most of
the valuation data required for calculating
the Funds' net asset value ("NAV").

Fund
Operations

ADMINISTRATOR AND
FUND ACCOUNTING AGENT
PFPC INC.
400 BELLEVUE PARKWAY
WILMINGTON, DW 19809

Provides facilities, equipment and personnel
to carry out administrative services related
to the Funds and calculates the Funds'
NAV, dividends and distributions.

BOARD OF DIRECTORS
Supervises the Fund's Activities

</TABLE>

<PAGE>

Depending on your residence for tax purposes, distributions from a Fund may also
be subject to state and local taxes or withholding taxes. You should consult
with your own tax adviser about state and local tax matters.

Most states provide that a RIC may pass through (without restriction) to its
shareholders state and local income tax exemptions available to direct owners of
certain types of U.S. government securities (such as U.S. Treasury obligations)
. Thus, if you are a resident of one of these states, distributions derived from
a Fund's investment in certain types of U.S. government securities should be
free from state and local income taxes to the extent that the interest income
from such investments would have been exempt from state and local income taxes
if such securities had been held directly by you. Certain states, however, do
not allow a RIC to pass through to its shareholders the state and local income
tax exemptions available to direct owners of certain types of U.S. government
securities unless the RIC holds at least a required amount of U.S. government
securities. Accordingly, if you are a resident of one of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities may not be entitled to the exemptions from state and local
taxes that would be available if you had purchased U.S. government securities
directly. The exemption from state and local income taxes does not preclude
states from asserting other taxes on the ownership of U.S. government
securities.

Each Fund intends to declare and pay dividends and capital gain distributions so
as to avoid imposition of a non-deductible 4% federal excise tax. To do so, each
Fund intends to distribute an amount at least equal to (i) 98% of its calendar
year ordinary income, (ii) 98% of its capital gain net income for the one-year
period ending October 31st, and (iii) 100% of any undistributed ordinary or
capital gain net income from the prior calendar year. Although dividends
generally will be treated as distributed when paid, dividends declared in
October, November or December, payable to shareholders of record on a specified
date in one of those months and paid during the following January will be
treated as having been distributed by a Fund (and received by the shareholders)
on December 31 of the year declared.

A Fund may be subject to certain taxes imposed by foreign countries with respect
to dividends, capital gain and other income. If a Fund qualifies as a RIC, if
certain distribution requirements are satisfied and if more than 50% in value of
a Fund's total assets at the close of any taxable year consists of stocks or
securities of foreign corporations, which for this purpose should include
obligations issued by foreign governmental issuers, a Fund may elect to treat
any foreign income taxes paid by it that can be treated as income taxes under
U.S. federal income tax regulations as paid by its shareholders. The Emerging
Markets and Latin America Equity Funds expect to qualify for this election. Each
of these Funds may make such an election in a taxable year in which it is
qualified to make the election. For any year that a Fund makes such an election,
an amount equal to the foreign income taxes paid by a Fund that can be treated
as income taxes under U.S. income tax principles will be included in your income
and you will be entitled (subject to certain limitations) to credit the amount
included in your income against your U.S. tax liabilities, if any, or to deduct
such amount from your U.S. taxable income, if any. Shortly after any year for
which it makes such an election, a Fund will report to its shareholders, in
writing, the amount per share of such foreign income taxes that must be included
in each shareholder's gross income and the amount that will be available for
deductions or credit. In general, you may elect each year whether to claim
deductions or credits for foreign taxes. No

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<PAGE>

deductions for foreign taxes may be claimed, however, by non-corporate
shareholders (including certain foreign shareholders as described below) who do
not itemize deductions. If you elect to credit foreign taxes, the amount of
credit that may be claimed in any year may not exceed the same proportion of the
U.S. federal income tax against which such credit is taken that your taxable
income from foreign sources (but not in excess of your entire taxable income)
bears to your entire taxable income. For this purpose, the Funds expect that the
capital gain they distribute to shareholders, whether dividends or capital gain
distributions, will generally not be treated as foreign source taxable income.
If a Fund makes this election, you will be treated as receiving foreign source
income in an amount equal to the sum of your proportionate share of foreign
income taxes paid by the Fund and the portion of dividends paid by the Fund
representing income earned from foreign sources. This limitation must be applied
separately to certain categories of income and the related foreign taxes.

Ordinary income dividends paid by a Fund to shareholders who are non-resident
aliens or foreign entities will be subject to a 30% withholding tax unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law or the income is "effectively connected" with a U.S. trade
or business. Generally, subject to certain exceptions, capital gain dividends
paid to non-resident shareholders or foreign entities and gains realized on the
sale of shares of a Fund will not be subject to U.S. federal income tax. If you
are a non-resident, you are urged to consult your own tax adviser concerning the
applicability of the U.S. withholding tax.

A Fund may be required to withhold federal income tax at a rate of 31% ("backup
withholding") from dividends and redemption proceeds paid to non-corporate
shareholders. This tax may be withheld from dividends if (i) you fail to furnish
the Fund with your correct taxpayer identification number, (ii) the Internal
Revenue Service ("IRS") notifies the Fund that you have failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (iii) when required to do so, you fail to certify
that you are not subject to backup withholding or that you are an exempt
recipient (such as a corporation) .

California, New York and National Municipal Funds

Although exempt-interest dividends paid by the California Municipal, New York
Municipal and National Municipal Funds may be excluded by shareholders of such
Funds from their gross income for regular federal income tax purposes, under the
Code all or a portion of such dividends may be (i) a preference item for
purposes of the alternative minimum tax, (ii) a component of the "ACE"
adjustment for purposes of determining the amount of corporate alternative
minimum tax or (iii) a factor in determining the extent to which a shareholder's
Social Security benefits are taxable. Moreover, receipt of exempt-interest
dividends from each Fund may affect the federal tax liability of certain foreign
corporations, S Corporations and insurance companies. Furthermore, under the
Code, interest on indebtedness incurred or continued to purchase or carry
portfolio shares, which interest is deemed to relate to exempt-interest
dividends, will not be deductible by shareholders of the Fund for federal income
tax purposes.

Each Fund may hold without limit certain private activity bonds issued after
August 7, 1986. You must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
your federal alternative minimum taxable income for

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<PAGE>

purposes of determining liability (if any) for the 26% or 28% alternative
minimum tax applicable to individuals and the 20% alternative minimum tax
applicable to corporations. Shareholders receiving Social Security benefits
should note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.

Each Fund intends that substantially all dividends and distributions it pays to
its shareholders will be designated as exempt-interest dividends and as such
will be exempt from regular federal income taxes. However, to the extent each
Fund earns ordinary income from taxable investments or gains attributable to
accrued market discount or realizes capital gains, some portion of its dividends
and distributions may not qualify as exempt-interest dividends and may be
subject to regular federal income taxes.

The exemption of exempt-interest dividend income from regular federal income
taxation does not necessarily result in similar exemptions for such income under
the income or other tax laws of state or local taxing authorities. In general,
states exempt from state income tax only that portion of any exempt-interest
dividend that is derived from interest received by a RIC on its holdings of
obligations issued by that state or its political subdivisions and
instrumentalities and other obligations exempt from state taxation by federal
law.

A notice detailing the tax status of dividends and distributions paid by each of
the Funds will be mailed annually to each Fund's shareholders. As part of this
notice, the Fund will report to its shareholders the percentage of interest
income earned by the Fund during the preceding year on tax-exempt obligations
indicating, on a state-by-state basis, the source of such income.

California State Taxation. Individual shareholders of the California Municipal
Fund who are subject to California personal income taxation will not be required
to include in their California gross income that portion of exempt interest
dividends which the Fund clearly and accurately identifies as directly
attributable to interest earned on obligations, the interest on which is exempt
from California personal income tax, provided that at least 50% of the value of
the Fund's total assets consist of obligations the interest on which is exempt
from California personal income taxation. Distributions to individual
shareholders derived from interest on Municipal Obligations issued by
governmental authorities in states other than California, short-term capital
gain and other taxable income will be taxed as dividends for purposes of
California personal income taxation. The Fund's net capital gain for federal
income tax purposes will be taxed as long-term capital gain to individual
shareholders of the Fund for purposes of California personal income taxation.
Gain or loss, if any, resulting from an exchange or redemption of shares will be
recognized in the year of exchange or redemption. Present California law taxes
both long-term and short-term capital gain at the rates applicable to ordinary
income. California has an alternative minimum tax similar to the federal
alternative minimum tax. Generally corporate shareholders of the California
Municipal Fund subject to the California franchise tax will be required to
include any gain on an exchange or redemption of shares and all distributions or
exempt-interest, capital gains and other taxable income, if any, as income
subject to such tax. Shares of the Fund will be exempt from property taxes in
California.

To the extent shareholders are obligated to pay state or local taxes other than
to California, dividends received from the Fund may be subject to such taxation.

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<PAGE>

New York State and Local Taxation. Exempt-interest dividends paid to
shareholders of the New York Municipal Fund will not be subject to New York
State and New York City personal income taxes to the extent they represent
interest income directly attributable to federally tax-exempt obligations of the
State of New York and its political subdivisions and instrumentalities and other
obligations exempt from state taxation under federal law. The Fund intends that
substantially all of the dividends it designates as exempt-interest dividends
will also be exempt from New York State and New York City personal income taxes.
To the extent shareholders are obligated to pay state or local taxes other than
to New York, dividends received from the Fund may be subject to such taxation.
Similarly, exempt-interest dividends paid to shareholders who are residents of
Yonkers will not be subject to the City of Yonkers personal income tax
surcharge, except and to the extent they are subject to the New York State
personal income tax on such income.

Corporate shareholders subject to New York State franchise tax or New York City
general corporation tax will be required to include all dividends received from
the Fund (including exempt-interest dividends) as net income subject to such
taxes. Furthermore, for purposes of calculating a corporate shareholder's
liability for such taxes under the alternative tax base measured by business and
investment capital, such shareholder's shares of the Fund will be included in
computing such shareholder's investment capital.

Shareholders will not be subject to the New York City unincorporated business
tax solely by reason of their ownership of shares in the Fund. If a shareholder
is subject to the New York City unincorporated business tax, income and gains
derived from the Fund will be subject to such tax, except for exempt-interest
dividend income that is directly attributable to interest on New York Municipal
Securities. Shares of the Fund will be exempt from local property taxes in New
York State and New York City.

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

Descriptions of tax consequences set forth in this Prospectus and in the
Statement of Additional Information are intended to be a general guide. You
should consult your tax adviser concerning a prospective investment in any of
the Funds and you should review the more detailed discussion of federal income
tax consideration in the Statement of Additional Information.

DISTRIBUTION ARRANGEMENTS

Shares of the Funds are sold on a continuous basis by OFFIT Funds Distributor,
Inc.

Multiple Class Structure. Each Fund may offer two classes of shares. The major
distinction between the share classes is the service or distribution fee plan
related to each class. Select Shares may be purchased and redeemed through the
Company's distributor, OFFIT Funds Distributor, Inc. Advisor Shares must be
purchased and redeemed through a Shareholder Servicing Agent, which is a
financial institution that has entered into an agreement with the Company to
provide various shareholder services to the beneficial owners of shares. Since
the fees associated with the service or distribution plan are paid out of the
Fund's assets on an on-going basis, over time shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by NASD
Regulation, Inc.

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<PAGE>

Fee Plan: Applies to: Plan Purpose: Fees:
- --------- ----------- ------------- -----

Rule 12b-1 Advisor Shares The Plan is Payments may not
Distribution Plan intended to exceed 0.25% of a
reimburse the Fund's aggregate
Distributor for average daily net
certain assets
distribution attributable to
expenses intended Advisor Shares.
to result in the Holders of a
sale of Advisor Fund's Advisor
Shares of the Shares generally
Funds. bear this
expense. At this
time, the Rule
12b-1 Distribution
fee for Advisor
Shares is being
waived
indefinitely.
This waiver may be
terminated at any
time.

Shareholder Advisor Shares The Plan is Payments may not
Servicing Plan intended to exceed 0.25% of a
compensate Fund's aggregate
Shareholder average daily net
Servicing Agents assets
for shareholder attributable to
services provided Advisor Shares.
to clients of the Holders of a
Shareholder Fund's Advisor
Servicing Agents Shares bear this
who own Advisor expense.
Shares of the
Funds.

107
<PAGE>

APPENDIX A

The following is a description of certain ratings of Standard & Poor's
Ratings Group ("S&P") , Moody's Investors Service, Inc. ("Moody's") , Duff &
Phelps Credit Rating Co. ("D&P") and Fitch Investors Service Inc. ("Fitch") that
are applicable to certain obligations in which certain of the Company's Funds
may invest.

Commercial Paper Ratings

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
following summarizes the rating categories used by Standard and Poor's for
commercial paper:

"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+) .
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.

"A-2" - Obligations are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.

"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.

"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.

"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.

"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year, unless

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<PAGE>

explicitly noted. The following summarizes the rating categories used by Moody's
for commercial paper:

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

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

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

"Not Prime" - Issuers do not fall within any of the Prime rating
categories.

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

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

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

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

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

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<PAGE>

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

"D-4" - Debt possesses speculative investment characteristics. Liquidity
is not sufficient to insure against disruption in debt service. Operating
factors and market access may be subject to a high degree of variation.

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

Fitch short-term ratings apply to debt obligations that have time horizons
of less than 12 months for most obligations, or up to three years for U.S.
public finance securities. The following summarizes the rating categories used
by Fitch for short-term obligations:

"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.

"F2" - Securities possess good credit quality. This designation indicates
a satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.

"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.

"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.

"C" - Securities possess high default risk. This designation indicates
that default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.

"D" - Securities are in actual or imminent payment default.

Corporate and Municipal Long-Term Debt Ratings

The following summarizes the ratings used by S&P for corporate and
municipal debt:

"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.

A-3
<PAGE>

"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.

"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.

"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.

"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

A-4
<PAGE>

"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:

"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." 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 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 risk appear somewhat larger than the "Aaa" securities.

"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.

"Baa" - Bonds are considered as medium-grade obligations, (i.e., they are
neither highly protected nor poorly secured) . Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.

"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds) . "Caa," "Ca" and "C" bonds may be in default.

Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

A-5
<PAGE>

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.

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

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

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

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

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

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

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

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

"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.

"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.

A-6
<PAGE>

"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.

"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.

"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.

"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.

"CCC", "CC", "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.

"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.

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

Municipal Note Ratings

A S&P rating reflects the liquidity concerns and market access risks
unique to notes due in three years or less. The following summarizes the ratings
used by Standard & Poor's Ratings Group for municipal notes:

"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.

"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.

A-7
<PAGE>

"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.

Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG") . Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:

"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.

"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of
protection that are ample although not so large as in the preceding group.

"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.

"SG" - This designation denotes speculative quality. Debt instruments in
this category lack of margins of protection.

Fitch and D&P use the short-term ratings described under Commercial Paper
Ratings for municipal notes.

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<PAGE>

APPENDIX B

HEDGING AND DERIVATIVES

Each Fund may be authorized to use a variety of investment strategies to
hedge various market risks (such as interest rates, currency exchange rates and
broad or specific market movements) , to manage the effective maturity or
duration of debt instruments held by the Fund, or, with respect to certain
strategies, to seek to increase the Fund's income or gain (such investment
strategies and transactions are referred to herein as "Hedging and
Derivatives"). The description of each Fund indicates which, if any, of these
types of transactions may be used by such Fund.

A detailed discussion of Hedging and Derivatives follows below. No Fund
which is authorized to use any of these investment strategies will be obligated,
however, to pursue any of such strategies and no Fund makes any representation
as to the availability of these techniques at this time or at any time in the
future. In addition, a Fund's ability to pursue certain of these strategies may
be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools. To the extent not otherwise
restricted by the Securities and Exchange Commission (the "SEC") , the CFTC, the
Code or its investment objectives and policies, a Fund may utilize, without
limitation, Hedging and Derivatives. See "Additional Information Concerning
Dividends, Distributions and Taxes" in the Statement of Additional Information.

General Characteristics of Options

Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging and Derivatives involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
A Fund's purchase of a put option on a security, for example, might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it

B-1
<PAGE>

intends to purchase in the future by fixing the price at which it may purchase
the instrument. An "American" style put or call option may be exercised at any
time during the option period, whereas a "European" style put or call option may
be exercised only upon expiration or during a fixed period prior to expiration.
Exchange-listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC") , which guarantees the performance of the
obligations of the parties to the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.

OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options and Eurodollar
instruments (which are described below under "Eurodollar Instruments") are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

A Fund's inability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options; (2) restrictions on transactions imposed by
an exchange; (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits; (4) interruption of the normal operations
of the OCC or an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options) , in which event the relevant market for that option on that
exchange would cease to exist, although any such outstanding options on that
exchange would continue to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.

Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees

B-2
<PAGE>

and security, are determined by negotiation of the parties. It is anticipated
that any Fund authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required
to do so.

Unless the parties provide for it, no central clearing or guarantee
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that are deemed creditworthy by the Adviser. In the absence of a change in the
current position of the staff of the SEC, OTC options purchased by a Fund and
the amount of the Fund's obligation pursuant to an OTC option sold by the Fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.

If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.

If and to the extent authorized to do so, a Fund may purchase and sell
call options on securities and on Eurodollar instruments that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered", that is, the Fund must own the securities subject to the call, must
own an offsetting option on a futures position, or must otherwise meet the asset
segregation requirements described below for so long as the call is outstanding.
Even though a Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the option
to possible loss of opportunity to realize appreciation in the market price of
the underlying security or instrument and may require the Fund to hold a
security or instrument that it might otherwise have sold.

Each Fund reserves the right to purchase or sell options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.

If and to the extent authorized to do so, a Fund may purchase and sell put
options on securities (whether or not it holds the securities in its portfolio)
and on securities indices, currencies and futures contracts. In selling put
options, a Fund faces the risk that

B-3
<PAGE>

it may be required to buy the underlying security at a disadvantageous price
above the market price.

General Characteristics of Futures Contracts and Options on Futures
Contracts

If and to the extent authorized to do so, a Fund may trade financial
futures contracts or purchase or sell put and call options on those contracts as
a hedge against anticipated interest rate, currency or market changes, for
duration management and for permissible non-hedging purposes. Futures contracts
are generally bought and sold on the commodities exchanges on which they are
listed with payment of initial and variation margin as described below. The sale
of a futures contract creates a firm obligation by a Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
certain instruments, the net cash amount) . Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.

A Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC and generally will be entered
into only for bona fide hedging, risk management (including duration management)
or other permissible non-hedging purposes. Maintaining a futures contract or
selling an option on a futures contract will typically require a Fund to deposit
with a financial intermediary, as security for its obligations, an amount of
cash or other specified assets ("initial margin") that initially is from 1% to
10% of the face amount of the contract (but may be higher in some circumstances)
. Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.

No Fund will enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums required to maintain permissible non-hedging
positions in futures contracts and options thereon would exceed 5% of the
liquidation value of the Fund's net assets; however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below under "Use
of Segregated and Other Special Accounts."

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<PAGE>

Options on Securities Indices and Other Financial Indices

If and to the extent authorized to do so, a Fund may purchase and sell
call and put options on securities indices and other financial indices. In so
doing, the Fund can achieve many of the same objectives it would achieve through
the sale or purchase of options on individual securities or other instruments.
Options on securities indices and other financial indices are similar to options
on a security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, options on indices settle by cash
settlement; that is, an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified) . This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments comprising the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

Currency Transactions

If and to the extent authorized to do so, a Fund may engage in currency
transactions with Counterparties to hedge the value of portfolio securities
denominated in particular currencies against fluctuations in relative value.
Currency transactions include currency forward contracts, exchange-listed
currency futures contracts and options thereon, exchange- listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below under "Swaps, Caps,
Floors and Collars." A Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.

Except as provided in this Prospectus, a Fund's dealings in forward
currency contracts and other currency transactions such as futures contracts,
options, options on futures contracts and swaps will be limited to hedging and
other non- speculative purposes, including transaction hedging and position
hedging. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of the Fund's portfolio securities or
the receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other

B-5
<PAGE>

transactions, than the aggregate market value (at the time of entering into the
transaction) of the securities held by the Fund that are denominated or
generally quoted in or currently convertible into the currency, other than with
respect to proxy hedging as described below.

A Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, a Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.

Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts".

Combined Transactions

If and to the extent authorized to do so, a Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) , multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions, instead of a single Hedging
and Derivatives, as part of a single or combined strategy when, in the judgment
of the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions will normally be
entered into by a Fund based on the Adviser's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase the risks or hinder achievement of the portfolio management objective.

Swaps, Caps, Floors and Collars

A Fund may be authorized to enter into interest rate, currency and index
swaps and the purchase or sale of related caps, floors and collars. A Fund will
enter into these transactions primarily to seek to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against
currency fluctuations, as a duration management technique or to protect against
any increase in the price of securities a Fund anticipates purchasing at a later
date. A Fund will use these transactions for non-speculative purposes and will
not sell interest rate caps or floors if it does not own securities or other

B-6
<PAGE>

instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal) . A currency swap is an agreement to exchange cash flows on a
notional amount based on changes in the values of the reference indices. An
index swap is an agreement to exchange cash flows on a national principal amount
based on changes in the values of the reference index. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified index exceeds a
predetermined interest rate. The purchase of an interest rate floor entitles the
purchaser to receive payments of interest on a notional principal amount from
the party selling the interest rate floor to the extent that a specified index
falls below a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specific index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return with a predetermined range of interest
rates or values.

Provided the contract so permits, a Fund will usually enter into interest
rate swaps on a net basis, that is, the two payments streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors, collars and other similar
derivatives are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the Investment Company
Act of 1940, as amended and, thus, will not be treated as being subject to the
Fund's borrowing restrictions. A Fund will not enter into any swap, cap, floor,
collar or other derivative transaction unless the Counterparty is deemed
creditworthy by the Adviser. If a Counterparty defaults, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.

The liquidity of swap agreements will be determined by the Adviser based
on 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) . Such determination will govern whether a swap will
be deemed within the 15% restriction on investments in securities that are not
readily marketable.

Each Fund will maintain cash and appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements. If a
Fund enters

B-7
<PAGE>

into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If a Fund enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement. See "Use of Segregated and Other
Special Accounts".

Eurodollar Instruments

If and to the extent authorized to do so, a Fund may make investments in
Eurodollar instruments, which are typically dollar-denominated futures contracts
or options on those contracts that are linked to the London Interbank Offered
Rate ("LIBOR") , although foreign currency denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.

Risk Factors

Hedging and Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of the Hedging and Derivatives could result in losses greater than
if they had not been used. Use of put and call options could result in losses to
a Fund, force the sale or purchase of portfolio securities at inopportune times
or for prices higher than (in the case of put options) or lower than (in the
case of call options) current market values, or cause a Fund to hold a security
it might otherwise sell.

The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to a Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium.

Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund

B-8
<PAGE>

if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, the risk exists that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Fund is engaging in proxy hedging. Currency transactions
are also subject to risks different from those of other portfolio transactions.
Because currency control is of great importance to the issuing governments and
influences economic planning and policy, purchases and sales of currency and
related instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to a Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures
contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.

Losses resulting from the use of Hedging and Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses can be greater than
if Hedging and Derivatives had not been used.

Risks of Hedging and Derivatives Outside the United States

When conducted outside the United States, Hedging and Derivatives may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and will be subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of positions taken as part of
non-U.S. Hedging and Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors; (2) lesser availability
of data on which to make trading decisions than in the United States; (3) delays
in a Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States; (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (5) lower trading volume and liquidity.

Use of Segregated and Other Special Accounts

Use of many Hedging and Derivatives by a Fund will require, among other
things, that the Fund segregate cash or other liquid assets with its custodian,
or a designated sub-custodian, to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or,

B-9
<PAGE>

subject to any regulatory restrictions, an amount of cash or liquid assets at
least equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by a Fund, for
example, will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid assets sufficient to purchase and deliver
the securities if the call is exercised. A call option sold by a Fund on an
index will require the Fund to own portfolio securities that correlate with the
index or to segregate liquid assets equal to the excess of the index value over
the exercise price on a current basis. A put option on securities written by a
Fund will require the Fund to segregate liquid assets equal to the exercise
price. Except when a Fund enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency, liquid securities denominated in
that currency equal to a Fund's obligations or to segregate liquid assets equal
to the amount of the Fund's obligations.

OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although a Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.

In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. These assets may consist of cash, cash
equivalents or other liquid assets. A Fund will accrue the net amount of the
excess, if any, of its obligations relating to swaps over its entitlements with
respect to each swap on a daily basis and will segregate with its custodian, or
designated sub-custodian, an amount of cash or liquid assets having an aggregate
value equal to at least the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Fund's net obligation, if any.

Hedging and Derivatives may be covered by means other than those described
above when consistent with applicable regulatory policies. A Fund may also enter
into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Hedging and Derivatives. A Fund could purchase a put option, for example, if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead

B-10
<PAGE>

of segregating assets if it holds a futures contracts or forward contract, a
Fund could purchase a put option on the same futures contract or forward
contract with a strike price as high or higher than the price of the contract
held. Other Hedging and Derivatives may also be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to that
time, assets equal to any remaining obligation would need to be segregated.

B-11
<PAGE>

The OFFITBANK Investment Fund, Inc.

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

Officers and Directors Investment Adviser
Morris W. Offit OFFITBANK
Chairman of the Board, 520 Madison Avenue
President andDirector New York, NY 10022-4213

Edward J. Landau Distributor
Director OFFIT Funds Distributor, Inc.
Four Falls Corporate Center,
The Very Reverend James Parks Morton 6th Floor
Director West Conshohocken, PA 19428-2961

Dr. Wallace Mathai-Davis Custodians
Secretary and Treasurer The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Gary M. Gardner Brooklyn, NY 11245
Assistant Secretary (OFFITBANK Emerging Markets Fund
and OFFITBANK Latin America Equity
David C. Lebisky Fund)
Assistant Secretary
The Bank of New York
Stephen Brent Wells 48 Wall Street
Assistant Treasurer New York, NY 10286
(all other OFFITBANK Funds)
David D. Marky
Assistant Treasurer Legal Counsel
Kramer Levin Naftalis & Frankel LLP
Vincent M. Rella 919 Third Avenue
Assistant Treasurer New York, NY 10022

Stephen M. Wynne Administrator; Transfer and
Assistant Treasurer Dividend Disbursing Agent
Investment Adviser PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809

Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036

<PAGE>

FOR MORE INFORMATION

FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUNDS, THE FOLLOWING DOCUMENTS
ARE AVAILABLE FREE UPON REQUEST:

Annual/Semi-Annual Reports: Contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal years or half
years and, on an annual basis, a statement from portfolio management and the
auditor's report.

Statement of Additional Information (SAI) : Contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.

Copies of these documents and answers to questions about the Funds may be
obtained without charge by contacting:

THE OFFITBANK INVESTMENT FUND, INC.
P.O. Box 8701
Wilmington, Delaware 19899
1-800-618-9510

Information about the Funds (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C., 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information
about the Funds may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.

- --------------------------------------------------------------------------------
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:

1-800-618-9510
Monday through Friday
8:30 a.m. to 5:00 p.m. (EST)
- --------------------------------------------------------------------------------

The Funds's Investment Company Act File number is 811-08036.
<PAGE>

THE OFFITBANK INVESTMENT FUND, INC.

400 Bellevue Parkway
Wilmington, DE 19809
(800) 618-9510

STATEMENT OF ADDITIONAL INFORMATION

April __, 1999

The OFFITBANK Investment Fund, Inc. (the "Company") is an open-end,
management investment company comprised of the following investment portfolios:

OFFITBANK High Yield Fund

OFFITBANK Emerging Markets Fund

OFFITBANK Latin America Equity Fund

OFFITBANK Total Return Fund

OFFITBANK Investment Grade Global Debt Fund

OFFITBANK Global Convertible Fund

OFFITBANK U.S. Government Securities Fund

OFFITBANK Mortgage Securities Fund

OFFITBANK California Municipal Fund

OFFITBANK New York Municipal Fund

OFFITBANK National Municipal Fund

(individually, a "Fund", and collectively, the "Funds"). This Statement of
Additional Information ("SAI") provides information about the Company applicable
to each of the Funds. This information is in addition to the information that is
contained in the Company's Prospectus dated April __, 1999.

This SAI is not a prospectus. The Prospectus may be obtained, without
charge, by calling the Company toll-free at (800) 618-9510 or by writing to the
Company at 400 Bellevue Parkway, Wilmington, Delaware 19809. The SAI should be
read in conjunction with the Company's Prospectus dated April __, 1999 and the
Company's Annual Report dated December 31, 1998.

<PAGE>

TABLE OF CONTENTS

Page
----

Organization and Classification ........................................... 3

Non-Primary Investment Strategies and Related Risks ....................... 3

Additional Risk Considerations ............................................ 14

Fundamental Investment Policies ........................................... 15

Non-Fundamental Investment Policies ....................................... 16

Management of the Company ................................................. 17

Investment Adviser ........................................................ 20

Distributor ............................................................... 22

Administration, Transfer Agency, Fund Accounting and Custody Services ..... 23

Portfolio Transactions .................................................... 25

Purchase of Shares ........................................................ 26

Redemption of Shares ...................................................... 26

Performance Calculations .................................................. 27

Additional Information Concerning Dividends, Distributions and Taxes ...... 30

Shareholder Services ...................................................... 37

General Information ....................................................... 38

Financial Information ..................................................... 39

Appendix A: Special Factors Affecting the California Municipal Fund ....... A-1

Appendix B: Special Factors Affecting the New York Municipal Fund ......... B-1

2
<PAGE>

ORGANIZATION AND CLASSIFICATION

The Company is an open-end, management investment company that was
incorporated under the laws of the State of Maryland on September 8, 1993. All
of the Funds are non-diversified and offer two classes of shares: Select and
Advisor. Select Shares may be purchased from the Company's distributor, OFFIT
Funds Distributor, Inc. and Advisor Shares may be purchased through a
Shareholder Servicing Agent.

The Transfer

On March 1, 1994, the Fund exchanged its shares (now Select Shares) for
portfolio securities of The Senior Securities Fund, L.P. (the "Partnership"), a
Delaware limited partnership, after which the Partnership dissolved and
distributed shares of the Fund received pro rata to its partners. Following this
transfer (the "Transfer"), partners of the Partnership who participated in the
Transfer constituted all of the shareholders of the Fund, except for shares
representing seed capital contributed to the Fund by the Distributor. No gain or
loss was recognized by the Partnership or the participating partners upon the
Transfer. The investment performance of the Fund may include the performance of
the Partnership. The investment objective and policies of the Fund are in all
material respects equivalent to those of the Partnership. While the Fund is
managed in a manner that is in all material respects equivalent to the
management of the Partnership, the Fund is subject to certain restrictions on
its investment activities under the Investment Company Act of 1940, as amended
(the "1940 Act") and the Internal Revenue Code of 1986, as amended ("the Code")
to which the Partnership was not subject. Had the Partnership been registered
under the 1940 Act and subject to the provisions of the Code, its investment
performance may have been adversely affected. Operating expenses incurred by the
Fund may be higher than expenses that would have been incurred by the
Partnership had it continued to operate as a private investment partnership.
Past performance of the Fund (including the performance of the Partnership)
should not be interpreted as indicative of the Fund's future performance.

NON-PRIMARY INVESTMENT STRATEGIES AND RELATED RISKS

The Funds may utilize many of the same investment techniques and certain
Funds may invest in similar securities. Investors should note, however, that the
Funds will invest their assets in accordance with their respective investment
objectives and policies. Accordingly, the Adviser expects that each Fund's
investment portfolio will be distinct.

Repurchase Agreements

Each Fund may enter into repurchase agreements. A repurchase agreement is
a transaction in which the seller of a security commits itself at the time of
the sale to repurchase that security from the buyer at a mutually agreed upon
time and price. The Funds will enter into repurchase agreements only with
dealers, domestic banks or recognized financial institutions which, in the
opinion of the Adviser based on guidelines established by the Company's Board of
Directors, present minimal credit risks. The Adviser will monitor the value of
the securities underlying the repurchase agreement at the time the transaction
is entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always exceeds the repurchase price. In
the event of default by the seller under the repurchase agreement, the Fund may
incur costs and experience time delays in connection with the disposition of the
underlying securities.

Reverse Repurchase Agreements

Each Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement is a borrowing transaction in which the Fund transfers
possession of a security to another party, such as a bank or broker/dealer, in
return for cash, and agrees to repurchase, the security in the future at an
agreed upon price, which includes an interest component. Whenever the Funds
enter into reverse repurchase agreements, they will place in a segregated
custodian account liquid assets having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
such equivalent value is maintained. Reverse repurchase agreements are
considered to be borrowings by the Funds under the Investment Company Act of
1940, as amended (the "1940 Act").

3
<PAGE>

Asset-Backed Securities

Each of the Funds may invest in asset-backed securities. Asset-backed
securities are generally issued as pass through certificates, which represent
undivided fractional ownership interests in the underlying pool of assets, or as
debt instruments, 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. Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit or other enhancement issued by a financial institution
unaffiliated with the entities issuing the securities. Assets which, to date,
have been used to back asset-backed securities include motor vehicle installment
sales contracts or installment loans secured by motor vehicles, and receivables
from revolving credit (credit card) agreements.

Asset-backed securities present certain risks which are, generally,
related to limited interests, if any, in related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the services to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the
purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities. If
the letter of credit is exhausted, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
sales contracts are not realized. Because asset-backed securities are relatively
new, the market experience in these securities is limited and the market's
ability to sustain liquidity through all phases of the market cycle has not been
tested.

Credit Support. Asset-backed securities often contain elements of credit
support to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying asset. Liquidity protection ensures that
the pass through of payments due on the installment sales contracts and
installment loans which comprise the underlying pool occurs in a timely fashion.
Protection against losses resulting from ultimate default enhances the
likelihood of ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The Funds will not pay any additional fees for
such credit support. However, the existence of credit support may increase the
market price of the security.

Mortgage-Related Securities

The Mortgage Securities Fund will invest substantially all of its assets,
and each of the other Funds may invest from time to time in mortgage-related
securities, consistent with its respective investment objectives and policies,
that provide funds for mortgage loans made to residential home owners. These
include securities, such as collateralized mortgage obligations and stripped
mortgage-backed securities which represent interests in pools of mortgage loans
made by lenders such as savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled for sale to
investors (such as a Fund) by various government, government-related and private
organizations.

The Adviser expects that government, government-related or private
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities may
be second mortgages or alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term fixed rate mortgages. As new types
of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with each Fund's investment objectives and policies,
consider making investments in such new types of securities.

4
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Short Sales

Each Fund may make short sales of securities "against the box". A short
sale is a transaction in which a Fund sells a security it does not own in
anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, a Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.

Convertible Securities

The High Yield, Emerging Markets, Latin America Equity, Total Return and
Global Debt Funds may, and the Global Convertible Fund will, invest in
convertible securities. The convertible securities that may be held by a Fund
include any corporate debt security or preferred stock that may be converted
into underlying shares of common stock and include both traditional convertible
securities and synthetic convertible securities. The common stock underlying
convertible securities may be issued by a different entity than the issuer of
the convertible securities. Convertible securities entitle the holder to receive
interest payments paid on corporate debt securities or the dividend preference
on a preferred stock until such time as the convertible security matures or is
redeemed or until the holder elects to exercise the conversion privilege.
"Synthetic" convertible securities, as such term is used herein, are created by
combining separate securities which possess the two principal characteristics of
a true convertible security, fixed income and the right to acquire equity
securities. Convertible securities have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed income characteristics,
and (iii) the potential for capital appreciation if the market price of the
underlying common stock increases.

The High Yield, Emerging Markets, Latin America Equity, Total Return and
Global Debt Funds have no current intention of converting any convertible
securities they may own into equity securities or holding them as an equity
investment upon conversion, although they may do so for temporary purposes. A
convertible security might be subject to redemption at the option of the issuer
at a price established in the convertible security's governing instrument. If a
convertible security held by a Fund is called for redemption, such Fund may be
required to permit the issuer to redeem the security, convert it into the
underlying common stock or sell it to a third party.

Depository Receipts and Depository Shares

The High Yield, Emerging Markets, Latin America Equity, Total Return,
Investment Grade Global Debt and Global Convertible Funds may hold equity
securities of foreign issuers in the form of American Depository Receipts
("ADRs"), American Depository Shares ("ADSs") and European Depository Receipts
("EDRs"), or other securities convertible into securities of eligible issuers.
These securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an American bank or trust company which evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in United States securities markets and EDRs and CDRs in bearer
form are designed for use in European securities markets. For purposes of the
Funds' investment policies, the Funds' investments in ADRs, ADSs, EDRs, and CDRs
will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted. As a result of
the absence of established securities markets and publicly owned corporations in
certain foreign countries as well as restrictions on direct investment by
foreign entities, the Funds may be able to invest in such countries solely or
primarily through ADRs or similar securities and government approved investment
vehicles. The Adviser expects that the Funds, to the extent of their investment
in ADRs, will invest predominantly in ADRs sponsored by the underlying issuers.
The Funds, however, may invest in unsponsored ADRs. Issuers of the stock of
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.

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Warrants or Rights

Warrants or rights may be acquired by each of the High Yield, Emerging
Markets, Latin America Equity, Total Return, Investment Grade Global Debt and
Global Convertible Funds in connection with other securities or separately, and
provide the applicable Fund with the right to purchase at a later date other
securities of the issuer. Warrants or rights acquired by a Fund in units or
attached to securities will be deemed to be without value for purpose of this
restriction. These limits are not fundamental policies of the Funds and may be
changed by the Company's Board of Directors without shareholder approval.

Borrowing

The Latin America Equity, Total Return, Global Debt, National Municipal,
California Municipal and New York Municipal Funds' borrowings will not exceed
25% of each Fund's respective total assets (including the amount borrowed), less
all liabilities and indebtedness other than the borrowings and may use the
proceeds of such borrowings for investment purposes. These Funds may borrow for
leveraging purposes. The High Yield, Emerging Markets, Global Convertible, U.S.
Government Securities and Mortgage Securities Funds borrowings will not exceed
20% of their respective total assets and is permitted only for temporary or
emergency purposes other than to meet redemptions. Any borrowing by the Funds
may cause greater fluctuation in the value of their shares than would be the
case if the Funds did not borrow. In the event that the Funds employ leverage,
they would be subject to certain additional risks. Use of leverage creates an
opportunity for greater growth of capital but would exaggerate any increases or
decreases in the Funds' net asset values. When the income and gains on
securities purchased with the proceeds of borrowings exceed the costs of such
borrowings, the Funds' earnings or net asset values will increase faster than
otherwise would be the case; conversely, if such income and gains fail to exceed
such costs, the Funds' earnings or net asset values would decline faster than
would otherwise be the case.

The Latin America Equity, Total Return, Global Debt and the Municipal
Funds may, in addition to engaging in the transactions described above, borrow
money for temporary or emergency purposes (including, for example, clearance of
transactions, share repurchases or payments of dividends to shareholders) in an
amount not exceeding 5% of the value of the applicable Fund's total assets
(including the amount borrowed.)

When Issued and Forward Commitment Transactions

Each Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a forward commitment basis. These transactions,
which involve a commitment by a Fund to purchase or sell particular securities
at a set price with payment and delivery taking place beyond the normal
settlement date, allow such Fund to lock in what the Adviser believes to be an
attractive price or yield on a security it owns or intends to purchase or sell,
regardless of future changes in interest rates or securities prices. No income
accrues to the purchaser of a security on a when-issued or forward commitment
basis prior to delivery. When a Fund purchases securities on a when-issued basis
or engages in forward commitment transactions, it sets aside securities or cash
with its custodian equal to the payment that will be due. Engaging in
when-issued and forward commitment transactions can cause greater fluctuation in
a Fund's net asset value and involves a risk that yields or prices available in
the market on the delivery date may be more advantageous to such Fund than those
received in each transaction.

Forward Foreign Currency Exchange Contracts

Each Fund (other than the Municipal Funds) may purchase or sell forward
foreign currency exchange contracts ("forward contracts") as part of its
portfolio investment strategy. A forward contract is an obligation to purchase
or sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when a Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of such Fund's portfolio
securities denominated in such foreign currency. Conversely, when a Fund
believes that the U.S. dollar may suffer a substantial decline against foreign
currency, it may enter into a forward purchase contract to buy that foreign
currency for a fixed dollar amount ("position hedge"). In this situation, a Fund
may, in the alternative, enter into a forward contract to sell a different

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foreign currency for a fixed U.S. dollar amount where such Fund believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated
("cross-hedge"). Each Fund's custodian will place cash not available for
investment or U.S. government securities or other liquid investments in a
separate account having a value equal to the aggregate amount of such Fund's
commitments under forward contracts entered into with respect to position
hedges, cross-hedges and transaction hedges, to the extent they do not already
own the security subject to the transaction hedge. If the value of the
securities placed in a separate account declines, additional cash or investments
will be placed in the account on a daily basis so that the value of the account
will equal the amount of such Fund's commitments with respect to such contracts.
As an alternative to maintaining all or part of the separate account, a Fund may
purchase a call option permitting such Fund to purchase the amount of foreign
currency being hedged by a forward sale contract at a price no higher than the
forward contract price or a Fund may purchase a put option permitting such Fund
to sell the amount of foreign currency subject to a forward purchase contract at
a price as high or higher than the forward contract price. Unanticipated changes
in currency prices may result in poorer overall performance for a Fund than if
it had not entered into such contracts. If the party with which a Fund enters
into a forward contract becomes insolvent or breaches its obligation under the
contract, then the Fund may lose the ability to purchase or sell a currency as
desired.

Loans Of Portfolio Securities

For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. Securities loans are made to broker/dealers or institutional investors
pursuant to agreements requiring that the loans continuously be secured by
collateral at least equal at all times to the value of the securities lent plus
any accrued interest, "marked to market" on a daily basis. The collateral
received will consist of cash, U.S. short-term government securities, bank
letters of credit or such other collateral as may be permitted under the Fund's
investment program and by regulatory agencies and approved by the Company's
Board of Directors. While the securities loan is outstanding, a Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Each Fund has a right to call each loan
and obtain the securities on five business days' notice. To the extent
applicable, a Fund will not have the right to vote equity securities while they
are being lent, but it will call in a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans only will be made to firms deemed by
the Adviser to be of good standing and will not be made unless, in the judgment
of the Adviser, the consideration to be earned from such loans would justify the
risk.

Loan Participations And Assignments

Each Fund (other than the U.S. Government Securities, Mortgage Securities
and the Municipal Funds) may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a domestic or foreign entity and
one or more financial institutions ("Lenders"). The majority of the Funds'
investments in Loans in Latin America and other emerging markets are expected to
be in the form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in a Fund having a contractual relationship only with the
Lender, not with the borrower. Such Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, a Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and such Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, a Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. A Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy. Creditworthiness will be judged based on the same credit
analysis performed by the Adviser when purchasing marketable securities. When a
Fund purchases Assignments from Lenders, that Fund will acquire direct rights
against the borrower on the Loan. However, since assignments are arranged
through private negotiations between potential assignees and potential
assignors, the

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rights and obligations acquired by a Fund as the purchaser of an Assignment may
differ from, and be more limited than, those held by the assigning Lender.

A Fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and it is anticipated that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on a Fund's ability to dispose of particular Assignments
or Participations when necessary to meet a Fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for a Fund to assign a value to
those securities for purposes of valuing such Fund's portfolio and calculating
its net asset value. Each Fund currently treats investments in Participations
and Assignments as illiquid for purposes of its limitation on investments in
illiquid securities. See "Illiquid Securities" below. However, each Fund may
revise its policy in the future based upon further review of the liquidity of
Assignments and Participations. Any determination to treat an Assignment or
Participation as liquid would be made based on procedures adopted by the Board
of Directors.

U.S. Government Obligations

Except for temporary defensive purposes, no Fund (other than the U.S.
Government Securities and Mortgage Securities Funds) will invest more than 25%
(35% with respect to the National Municipal, California Municipal and New York
Municipal Funds) of its net assets in securities issued or guaranteed by the
U.S. government or by its agencies or instrumentalities. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by agencies
or instrumentalities established or sponsored by the U.S. government.

In addition to the U.S. Treasury obligations described above, the Funds
may invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") program. Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.

Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the case
of obligations not backed by the full faith and credit of the U.S. Treasury, the
agency issuing or guaranteeing the obligation is principally responsible for
ultimate repayment.

Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.

Zero Coupon Securities, Pay-In-Kind Bonds And Discount Obligations

Each Fund may invest in zero coupon securities and debt securities
(including for certain Funds convertible debt securities) acquired at a
discount. A substantial portion of the Emerging Markets, Total Return and Global
Debt Fund's sovereign debt securities may be acquired at a discount. The Funds
will only purchase such securities to the extent consistent with their
respective investment objectives. These investments involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity. The
entire return of a zero coupon security consists of the amortization of
discount. The High Yield, Emerging Markets, Latin America Equity, Total Return
and Global Debt Funds also may purchase pay-in-kind bonds. Pay-in-kind bonds pay
all or a portion of their interest in the form of debt or equity securities. The
High Yield and Global Debt Funds will only purchase pay-in-kind bonds that pay
all or a portion of their interest in the form of debt securities. The Emerging
Markets, Latin America Equity, Total Return and Global Convertible Funds may
receive payments from pay-in-kind bonds in the form of both debt and equity
securities provided that such equity securities do

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not cause each of these Funds to exceed their respective investment limitation
in equity securities. Zero coupon securities and pay-in-kind bonds may be issued
by a wide variety of corporate and governmental issuers.

Zero coupon securities, pay-in-kind bonds and debt securities acquired at
a discount are subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities and debt securities acquired at
a discount appreciates more during periods of declining interest rates and
depreciates more during periods of rising interest rates than does the value of
ordinary interest-bearing debt securities with similar maturities. Under current
federal income tax law, the Funds are required to accrue as income each year the
value of securities received in respect of pay-in-kind bonds and a portion of
the original issue discount with respect to zero coupon securities and other
securities issued at a discount to the stated redemption price. In addition, the
Funds will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Funds may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
current cash to satisfy certain distribution requirements. See "Taxes".

Bank Obligations

Bank obligations that may be purchased by each Fund include certificates
of deposit, bankers' acceptances and fixed time deposits. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A banker's acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Fixed time deposits are obligations of branches of U.S. banks or foreign
banks which are payable at a stated maturity date and bear a fixed rate of
interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. The Funds do not consider fixed time deposits illiquid
for purposes of the restriction on investment in illiquid securities.

Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation.

Investors should also be aware that securities of foreign banks and
foreign branches of U.S. banks may involve investment risks in addition to those
relating to domestic bank obligations. Such investment risks include future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on such securities held by a Fund,
the possible seizure or nationalization of foreign assets and the possible
establishment of exchange controls or other foreign governmental laws or
restrictions which might affect adversely the payment of the principal of and
interest on such securities held by a Fund. In addition, there may be less
publicly-available information about a foreign issuer than about a U.S. issuer,
and foreign issuers may not be subject to the same accounting, auditing and
financial record-keeping standards and requirements as U.S. issuers.

Variable and Floating Rate Instruments

Securities purchased by each Fund may include variable and floating rate
instruments, which provide for adjustments in the interest rate on certain reset
dates or whenever a specified interest rate index changes, respectively. In some
cases the Fund may require that the obligation to pay the principal of the
instrument be backed by a letter or line of credit or guarantee. Although a
particular variable or floating rate demand instrument might not be actively
traded in a secondary market, in some cases, the Fund may be entitled to
principal on demand and may be able to resell such notes in the dealer market.
With respect to the floating and variable rate notes and demand notes described
in the Prospectus, the Adviser will consider the earning power, cash flows and
other liquidity ratios of the issuers or guarantors of such notes and will
continuously monitor their financial ability to meet payment obligations when
due.

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Municipal Leases, Certificates Of Participation And Other Participation
Interests

The National Municipal, California Municipal and New York Municipal Funds
may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any 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. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover a Fund's original investment.

Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.

Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' 15% limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by a Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Trust, to be
liquid securities for the purpose of such limitation. In determining the
liquidity of municipal lease obligations and certificates of participation, the
Adviser will consider a variety of factors including: (i) the willingness of
dealers to bid for the security; (ii) the number of dealers willing to purchase
or sell the obligation and the number of other potential buyers; (iii) the
frequency of trades or quotes for the obligation; and (iv) the nature of the
marketplace trades. In addition, the Adviser will consider factors unique to
particular lease obligations and certificates of participation affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by a Fund.

Each Fund may purchase participations in Municipal Securities held by a
commercial bank or other financial institution. Such participations provide a
Fund with the right to a pro rata undivided interest in the underlying Municipal
Securities. In addition, such participations generally provide a Fund with the
right to demand payment, on not more than seven days' notice, of all or any part
of such Fund's participation interest in the underlying Municipal Security, plus
accrued interest. Each Fund will only invest in such participations if, in the
opinion of bond counsel, counsel for the issuers of such participations or
counsel selected by the Adviser, the interest from such participations is exempt
from regular federal income tax and California income tax, in the case of the
California Municipal Fund, or New York State, New York City and City of Yonkers
personal income tax, in the case of the New York Municipal Fund.

Pre-Refunded Municipal Securities

The National Municipal, California Municipal and New York Municipal Funds
may invest in pre-refunded Municipal Securities. The principal of and interest
on pre-refunded Municipal Securities are no longer paid from the original
revenue source for the securities. Instead, the source of such payments is
typically an escrow fund consisting of obligations issued or guaranteed by the
U.S. Government. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded Municipal
Securities. Issuers of Municipal Securities use this advance refunding technique
to obtain more favorable terms with respect to securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates, restructure
debt to improve cash flow or eliminate restrictive covenants in the indenture or
other governing instrument for the pre-refunded Municipal Securities. However,
except for a change in revenue source

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from which principal and interest payments are made, the pre-refunded Municipal
Securities remain outstanding on their original terms until they mature or are
redeemed by the Issuer. Pre-refunded Municipal Securities are usually purchased
at a price which represents a premium over their face value.

Brady Bonds

Each Fund (other than the U.S. Government Securities, the Mortgage
Securities and the Municipal Funds) may invest in "Brady Bonds", which are debt
securities issued or guaranteed by foreign governments in exchange for existing
external commercial bank indebtedness under a plan announced by former U.S.
Treasury Secretary Nicholas F. Brady in 1989. To date, Brady Bonds have been
issued by the governments of fifteen countries, the largest proportion having
been issued by Argentina, Brazil, Mexico and Venezuela. Brady Bonds have been
issued only recently, and accordingly, they do not have a long payment history.
Brady Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are actively traded in the
over-the-counter secondary market.

Each such Fund may invest in either collateralized or uncollateralized
Brady Bonds. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed rate par bonds or floating rate discount bonds, are collateralized in full
as to principal by U.S. Treasury zero coupon bonds having the same maturity as
the bonds. Interest payments on such bonds generally are collateralized by cash
or securities in an amount that, in the case of fixed rate bonds, is equal to at
least six months of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds which have been issued to date are rated BB or
B by S&P or Ba or B by Moody's or, in cases in which a rating by S&P or Moody's
has not been assigned, are generally considered by the Adviser to be of
comparable quality.

Tender Option Bonds

The National Municipal, California Municipal and New York Municipal Funds
may invest in tender option bonds. A tender option bond is a Municipal Security
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term-tax-exempt rates. The bond is typically issued in
conjunction with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the bond's fixed coupon rate and the rate, as determined
by a remarketing or similar agent at or near the commencement of such period,
that would cause the securities, coupled with the tender option, to trade at par
on the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term, tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults or a
significant downgrade in the credit rating assigned to the issuer of the bond.
The liquidity of a tender option bond is a function of the credit quality of
both the bond issuer and the financial institution providing liquidity. Tender
option bonds are deemed to be liquid unless, in the opinion of the Adviser, the
credit quality of the bond issuer and the financial institution is deemed, in
light of the Fund's credit quality requirements, to be inadequate.

No Fund will purchase tender option bonds unless at the time of such
purchase the Adviser reasonably expects that (i) based upon its assessment of
current and historical interest rate trends, prevailing short-term tax-exempt
rates will not exceed the stated interest rate on the underlying municipal
obligations at the time of the next tender fee adjustment, and (ii) the
circumstances which might entitle the grantor of a tender option to terminate
the tender option would not occur prior to the time of the next tender
opportunity. At the time of each tender opportunity, a Fund will exercise the
tender option with respect to any tender option bonds unless the Adviser
reasonably expects that, (i) based upon its assessment of current and historical
interest rate trends, prevailing short-term tax-exempt rates will not exceed the
stated interest rate on the underlying municipal obligations at the time of the
next tender fee adjustment, and (ii) the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. Each Fund will exercise the tender
feature with respect to tender option bonds, or otherwise dispose of their
tender option bonds, prior to the time the tender option is scheduled to expire
pursuant to the terms of the agreement under which the tender option is granted.
Each Fund will purchase tender option bonds only when it is satisfied that (i)
the custodial and tender option arrangements, including the fee payment
arrangements, will

11
<PAGE>

not adversely affect the tax-exempt status of the underlying municipal
obligations and (ii) payment of any tender fees will not have the effect of
creating taxable income for the Funds.

Each Fund intends to invest in tender option bonds the interest on which
will, in the opinion of bond counsel, counsel for the issuer of interests
therein or counsel selected by the Investment Adviser, be exempt from regular
federal income tax and, in the case of the California Municipal Fund, California
state income tax, or in the case of the New York Municipal Fund, New York State,
New York City and City of Yonkers personal income tax. However, because there
can be no assurance that the Internal Revenue Service (the "Service") will agree
with such counsel's opinion in any particular case, there is a risk that a Fund
will not be considered the owner of such tender option bonds and thus will not
be entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees, in relation to various regulated investment company tax provisions is
unclear. Each Fund intends to manage its portfolio in a manner designed to
eliminate or minimize any adverse impact from the tax rules applicable to these
investments.

Auction Rate Securities

The National Municipal, California Municipal and New York Municipal Funds
may invest in auction rate securities. Auction rate securities consist of
auction rate Municipal Securities and auction rate preferred securities issued
by closed-end investment companies that invest primarily in Municipal
Securities. Provided that the auction mechanism is successful, auction rate
securities usually permit the holder to sell the securities in an auction at par
value at specified intervals. The dividend is reset by "Dutch" auction in which
bids are made by broker-dealers and other institutions for a certain amount of
securities at a specified minimum yield. The dividend rate set by the auction is
the lowest interest or dividend rate that covers all securities offered for
sale. While this process is designed to permit auction rate securities to be
traded at par value, there is the risk that an auction will fail due to
insufficient demand for the securities.

Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Internal
Revenue Code. For purposes of complying with the 35% limitation on each Fund's
investments in securities other than Municipal Securities, auction rate
preferred securities will not be treated as Municipal Securities unless
substantially all of the dividends on such securities are expected to be exempt
from regular federal income taxes and, in the case of the California Fund,
California state income tax, or, in the case of the New York Fund, New York
State, New York City and City of Yonkers personal income tax.

Each Fund's investments in auction rate preferred securities of closed-end
funds are subject to the limitations prescribed by the 1940 Act and certain
state securities regulations. These limitations include a prohibition against
acquiring more than 3% of the voting securities of any other investment company
and investing more than 5% of such Fund's assets in securities of any one
investment company or more than 10% of its assets in securities of all
investment companies. Each Fund will indirectly bear its proportionate share of
any management fees paid by such closed-end funds in addition to the advisory
and administration fees payable directly by such Fund.

Insurance

The National Municipal, California Municipal and New York Municipal Funds
may invest in "insured" tax-exempt Municipal Securities. Insured Municipal
Securities are those for which scheduled payments of interest and principal are
guaranteed by a private (non-governmental) insurance company. The insurance only
entitles a Fund to receive the face or par value of the securities held by such
Fund. The insurance does not guarantee the market value of the Municipal
Securities or the value of the shares of a Fund.

Each Fund may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a premium and meeting the insurer's underwriting
standards, the bond issuer is able to obtain a high credit rating (usually, Aaa
from Moody's Investors Service, Inc. ("Moody's") or AAA from Standard & Poor's
Ratings Group ("Standard & Poor's") for the issued

12
<PAGE>

security. Such insurance is likely to increase the purchase price and resale
value of the security. New issue insurance policies are noncancellable and
continue in force as long as the bonds are outstanding.

A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. Each Fund may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or a Fund may itself purchase such a policy from insurers for
bonds which are currently uninsured.

An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by the Funds will be obtained only from insurance companies rated, at the time
of purchase, Aaa by Moody's or AAA by Standard & Poor's.

Illiquid Securities

No Fund will knowingly invest more than 15% of the value of its net assets
in illiquid securities, including securities which are not readily marketable,
time deposits and repurchase agreements not terminable within seven days.
Illiquid assets are assets which may not be sold or disposed of in the ordinary
course of business within seven days at approximately the value at which a Fund
has valued the investment. Securities that have readily available market
quotations are not deemed illiquid for purposes of this limitation (irrespective
of any legal or contractual restrictions on resale). The Funds may purchase
securities that are not registered under the Securities Act of 1933, as amended,
but which can be sold to qualified institutional buyers in accordance with Rule
144A under that Act ("Rule 144A securities"). Rule 144A securities generally
must be sold to other qualified institutional buyers. If a particular investment
in Rule 144A securities is not determined to be liquid, that investment will be
included within the 15% limitation on investment in illiquid securities. The
sale of restricted or illiquid securities require more time and result in higher
brokerage charges or dealer discounts and other selling expenses than the sale
of securities eligible for trading on securities exchanges or in the
over-the-counter markets. Restricted securities often sell at a price lower than
similar securities that are not subject to restrictions on resale.

With respect to liquidity determinations generally, the Company's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, are liquid or illiquid. The Board has
delegated the function of making day to day determinations of liquidity to the
Adviser, pursuant to guidelines reviewed by the Board. The Adviser takes into
account a number of factors in reaching liquidity decisions, including, but not
limited to: (i) the frequency of trading in the security; (ii) the number of
dealers who make quotes for the security; (iii) the number of dealers who have
undertaken to make a market in the security; (iv) the number of other potential
purchasers; and (v) the nature of the security and how trading is effected
(e.g., the time needed to sell the security, how offers are solicited and the
mechanics of transfer). The Adviser will monitor the liquidity of securities in
each Fund's portfolio and report periodically on such decisions to the Board of
Directors.

Other Investment Companies

The Total Return Fund may invest all or any portion of its assets in each
of the other Funds. Each other Fund reserves the right to invest up to 10% of
its total assets in the securities of other unaffiliated investment companies.
Each other Fund may not invest more than 5% of its total assets in the
securities of any one investment company or acquire more than 3% of the voting
securities of any other investment company. No such Fund intends to invest in
such investment companies unless, in the judgment of the Adviser, the potential
benefits of such investment justify the payment of any premium to net asset
value of the investment company or of any sales charge. Each such other Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by investment companies in which it invests in addition to the
advisory fee paid by the Fund. To the extent that the Total Return Fund's assets
are invested in the other Funds of the Company, no advisory fee is paid at the
Fund level, and shareholders incur their proportionate share of advisory fees
paid by the other Funds.

13
<PAGE>

Future Developments

Each Fund may, following notice to its shareholders, take advantage of
other investment practices which are not at present contemplated for use by a
Fund or which currently are not available but which may be developed, to the
extent such investment practices are both consistent with a Fund's investment
objectives and legally permissible for such Fund. Such investment practices, if
they arise, may involve risks which exceed those involved in the activities
described above.

Hedging and Derivatives

Each Fund (other than the Municipal Funds) may use, as portfolio
management strategies, cross currency hedges, interest rate transactions,
commodity futures contracts in the form of futures contracts on securities,
securities indices and foreign currencies, and related options transactions.
Each such Fund also may enter into forward foreign currency contracts and
options transactions to hedge in connection with currency and interest rate
positions and in order to enhance the Fund's income or gain. The Municipal Funds
may, in order to further their investment objectives, purchase or sell futures
contracts on (i) U.S. Government Securities and (ii) municipal bond indices.
Currently, at least one exchange trades futures contracts on an index of
long-term municipal bonds, and the Funds reserve the right to conduct futures
transactions based on an index which may be developed in the future to correlate
with price movements in municipal obligations. In addition, each such Fund may
buy and sell interest rate futures contracts and options on interest rate
futures contracts. The Funds will not engage in futures and options transactions
for leveraging purposes. See Appendix B to the Prospectus.

Temporary Strategies

Each Fund retains the flexibility to respond promptly to changes in market
and economic conditions. Accordingly, consistent with the Fund's investment
objectives, the Adviser may employ a temporary defensive investment strategy if
it determines such a strategy is warranted. Under such a defensive strategy,
each of the Funds (other than the Municipal Funds) temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency units) and/or invest
up to 100% of their respective assets in high quality debt securities or money
market instruments of U.S. or foreign issuers, and most or all of each Fund's
investments may be made in the United States and denominated in U.S. dollars.
The Municipal Funds may, for temporary defensive purposes, invest without
limitation in taxable, high quality short term money market instruments if, in
the opinion of the Adviser, adverse conditions prevail in the markets for
Municipal Securities (including conditions under which such obligations are
unavailable for investment). Any net interest income derived from taxable
securities and distributed by the Municipal Funds will be taxable as ordinary
income when distributed.

In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, each Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and may invest any
portion of its assets in high quality foreign or domestic money market
instruments.

ADDITIONAL RISK CONSIDERATIONS

Non-U.S. Withholding Taxes

A Fund's net investment income from foreign issuers may be subject to
non-U.S. withholding taxes, thereby reducing the Fund's net investment income.
See "Additional Information Concerning Taxes" below.

Investing In Puerto Rico, The United States Virgin Islands and Guam

Although the economy of Puerto Rico expanded significantly from fiscal
1984 through fiscal 1990, the rate of this expansion slowed during and after
fiscal 1991. Growth in fiscal 1994 will depend on several factors, including the
state of the U.S. economy, the exchange rate of the U.S. dollar, the cost of
borrowing and the relative stability in the price of oil. Puerto Rico is
required to import all of its oil.

Puerto Rico has a diversified economy dominated by the manufacturing and
service sectors. Manufacturing is the largest sector in terms of gross domestic
product and is more diversified than during earlier phases of Puerto Rico's

14
<PAGE>

industrial development. The service sector, particularly finance, insurance and
real estate, grew significantly in response to the expansion of the
manufacturing sector. However, government layoffs and a recession driven
slowdown in tourism have lead to weakness in these areas and have had a negative
ripple effect on services as well. In addition, legislation was adopted in
August 1993 which will phase out over a number of years certain tax benefits to
U.S. corporations with manufacturing operations in Puerto Rico. Puerto Rico's
unemployment rate tends to be significantly higher than the average rate for the
United States.

Puerto Rico exercises virtually the same control over its internal affairs
as do the fifty states; however, it differs from the states in its relationship
with the federal government. Most federal taxes, except those such as social
security taxes that are imposed by mutual consent, are not levied in Puerto
Rico.

Puerto Rico's financial reporting was first conformed to generally
accepted accounting principles in fiscal 1990. Non-recurring revenues have been
used frequently to balance recent years' budgets. This reliance on non-recurring
revenues and economic weakness led Standard & Poor's to change its outlook from
stable to negative. Standard & Poor's rates Puerto Rico general obligation debt
A, while Moody's rates it Baa1.

The United States Virgin islands ("USVI") are located approximately 1,100
miles east-southeast of Miami and are made up of St. Croix, St. Thomas and St.
John. The economy is heavily reliant on the tourism industry, with roughly 43%
of non-agricultural employment in tourist-related trade and services. However, a
recession-driven decline in visitors to the Virgin Islands has caused
unemployment to increase.

An important component of the USVI revenue base is the federal excise tax
on rum exports. The preferential tariff treatment the USVI rum industry
currently enjoys could be reduced under the North American Free Trade Agreement.
Increased competition from Mexican rum producers could reduce USVI rum imported
to the U.S., decreasing excise tax revenues generated. There is currently no
rated, unenhanced Virgin Islands debt outstanding.

Guam, an unincorporated U.S. territory, is located 1,500 miles southeast
of Tokyo. Population has grown consistently since 1970. The U.S. military is a
key component of Guam's economy. The federal government directly comprises more
than 10% of the employment base, with a substantial component of the service
sector to support these personnel. Guam is expected to benefit from the closure
of the Subic Bay Naval Base and the Clark Air Force Base in the Philippines.
Guam is also heavily reliant on tourists, particularly the Japanese. There is
currently no rated, unenhanced Guam debt outstanding.

FUNDAMENTAL INVESTMENT POLICIES

In addition to the Funds' investment objectives, the following is a list
of restrictions and fundamental investment policies that may not be changed
without the affirmative vote of a majority of the Funds' outstanding shares (as
defined below under "General Information - Capital Stock.") No Fund may:

1. invest 25% or more of the value of its total assets in securities of
issuers in any one industry; provided, that there is no limitation
with respect to investment in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; and provided
further, that, with respect to the California Municipal Fund and the
New York Municipal Fund, there is no limitation with respect to
obligations issued or guaranteed by any state, territory or
possession of the United States, the District of Columbia, or any of
their authorities, agencies, instrumentalities or political
subdivisions;

2. invest an amount equal to 15% or more of the current value of their
net assets in investments that are illiquid;

3. purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial and currency futures contracts
and options thereon, and may purchase and sell currency forward
contracts, options on foreign currencies and may otherwise engage in
transactions in foreign currencies;

4. make loans, except that a Fund may (a) (i) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit and bankers' acceptances) and (ii) invest in

15
<PAGE>

loans and participations in accordance with its investment
objectives and policies, (b) make loans of portfolio securities and
(c) enter into repurchase agreements with respect to portfolio
securities;

5. underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof
and later disposition of such securities in accordance with a Fund's
investment program may be deemed to be an underwriting;

6. purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or
interests therein);

7. purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5%
of a Fund's total assets in the case of any one other investment
company and 10% of such total assets in the case of all other
investment companies in the aggregate. This restriction shall not
apply to investment company securities received or acquired by a
Fund pursuant to a merger or plan of reorganization; and

8. sell securities short (except for short positions in a futures
contract or forward contract or short sales against the box and
except in connection with Hedging and Derivatives).

The High Yield, Emerging Markets, Global Convertible, U.S. Government
Securities and Mortgage Securities Funds may not borrow money (except that they
may enter into reverse repurchase agreements) except from banks for temporary or
emergency purposes; PROVIDED, that (a) the amount of such borrowing may not
exceed 20% of the value of such Fund's total assets, and (b) each such Fund will
not purchase portfolio securities while such outstanding borrowing exceeds 5% of
the value of such Fund's total assets. The Latin America Equity, Total Return
and Global Debt Funds may borrow money from banks and enter into reverse
repurchase agreements in an aggregate amount up to 25% of their total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing. The California Municipal, New York Municipal and National
Municipal Funds may not borrow money, except (a) from banks or by entering into
reverse repurchase agreements, in aggregate amounts not exceeding 25% of the
value of its total assets at the time of such borrowing and (b) in amounts not
exceeding 5% of the value of its total assets at the time of such borrowing for
temporary or emergency purposes (including for clearance of securities
transactions or payment of redemptions or dividends). For purposes of the
California Municipal, New York Municipal and National Municipal Funds'
investment limitation, the term "total assets" shall be calculated after giving
effect to the net proceeds of any borrowings and reduced by any liabilities and
indebtedness other than such borrowings. The High Yield, Emerging Markets,
Investment Grade Global Debt, Global Convertible and Latin America Equity Funds
may not purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with the use of options, futures contracts, options thereon or
forward currency contracts; a Fund may also make deposits of margin in
connection with futures and forward contracts and options thereon) (other than
Municipal Funds). Investment restriction (8) is a fundamental policy with
respect to the National Municipal, California Municipal and New York Municipal
Funds and a non-fundamental policy with respect to all other Funds.

NON-FUNDAMENTAL INVESTMENT POLICIES

The following are non-fundamental investment policies and may be changed
by a vote of the Company's Board of Directors. No Fund may:

1. invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases;

2. pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure permitted borrowings (and to the extent related to
the deposit of assets in escrow in connection with the writing of
covered put and call options and the purchase of securities on a
forward commitment or delayed-delivery basis and collateral and
initial or variation margin arrangements with respect to futures
contracts and options on futures contracts, securities or indices);

16
<PAGE>

3. investment in stock or bond futures and/or options on futures unless
(i) not more than 5% of a Fund's total assets are required as
deposit to secure obligations under such futures and/or options on
futures contracts, provided, however, that in the case of an option
that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing such 5%;

4. purchase or retain securities of an issuer if those officers or
Directors of the Fund or its investment adviser who own more than
1/2 of 1% of such issuer's securities together own more than 5% of
the securities of such issuer; and

5. invest more than 5% of its total assets in securities of issuers
(other than securities issued or guaranteed by U.S. or foreign
governments or political subdivisions thereof) which have (with
predecessors) a record of less than three years' continuous
operation.

In addition, each of the High Yield, Emerging Markets, Investment Grade
Global Debt, Global Convertible and Latin America Equity Funds may not:

1. invest for the purpose of exercising control over management of any
company; and

2. invest in puts, calls, straddles or spreads, except as described in
(3) above;

If a percentage restriction on investment or use of assets set forth above
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.

MANAGEMENT OF THE COMPANY

Directors and Officers

The business of the Company is managed under the direction of the Board of
Directors. Specifically, the Board of Directors is responsible for oversight of
the Funds by reviewing and approving agreements with the Funds' service
providers, and mandating policies for the Funds' operations. The principal
occupations of the directors and executive officers of the Company (and any
positions held with affiliated persons of the Company) for the past five years
are listed below.

17
<PAGE>

<TABLE>
<CAPTION>
Position(s) Held With Principal Occupation(s) Past 5
Name, Address and Age the Fund Years
- --------------------- --------------------- ------------------------------
<S> <C> <C>
Morris W. Offit* Chairman of the Board, President and Director,
OFFITBANK President, OFFITBANK (investment adviser)
520 Madison Avenue and Director (1983-present); one additional
New York, NY 10022 Chairman of the Board,
Age: 62 Years President and Director
position with the OFFITBANK
Fund Complex.

Edward J. Landau Director Of Counsel, Wolf, Block Schorr
Wolf, Block Schorr and and Solis-Cohen, LLP
Solis-Cohen LLP (2/1/98-present); Member,
250 Park Avenue Lowenthal, Landau, Fischer &
New York, NY 10177 Bring, P.C (1960-1/31/98);
Age: 71 Years Director, Revlon Group Inc.,
Revlon Consumer Products Inc.;
Pittsburgh Annealing Box and
Clad Metals Inc.; one
additional Director position
with the OFFITBANK Fund
Complex.

The Very Reverend James Director President, Interfaith Center
Parks Morton of New York (1/1/98- present);
Interfaith Center of New formerly Dean of Cathedral of
York St. John the Divine
570 Lexington Avenue (1972-1996); one additional
New York, New York 10022 Director position with the
Age: 74 Years OFFITBANK Fund Complex.

Dr. Wallace Mathai-Davis Secretary and Treasurer Managing Director, OFFITBANK
OFFITBANK (investment adviser)
520 Madison Avenue (1986-present); one additional
New York, NY 10022 Officer position with the
Age: 54 Years OFFITBANK Fund Complex.

Stephen Brent Wells Assistant Treasurer Managing Director, OFFITBANK
OFFITBANK (investment adviser) (1994 to
52 Madison Avenue present); one additional
New York, NY 10022 Officer position with the
Age: 54 Years OFFITBANK Fund Complex.

Vincent M. Rella Assistant Treasurer Controller, OFFITBANK
OFFITBANK (investment adviser) (1986 to
5230 Madison Avenue present); one additional
New York, NY 10022 Officer position with the
Age: 46 Years OFFITBANK Fund Complex.

Stephen M. Wynne Assistant Treasurer Chairman of PFPC Trustee &
PFPC Inc. Custodial Services Ltd.
400 Bellevue Parkway (1995-present); Executive Vice
Wilmington, DE 19809 President and Chief Accounting
Age: 44 Years Officer (1993-present) and
Senior Vice President and
Chief Accounting Officer
(1991-1993) of PFPC Inc.;
Executive Vice President
(1993-1995) of PFPC
International; one additional
Officer position with the
OFFITBANK Fund Complex.
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
Position(s) Held With Principal Occupation(s) Past 5
Name, Address and Age the Fund Years
- --------------------- --------------------- ------------------------------

<S> <C> <C>
David D. Marky Assistant Treasurer Vice-President and Director of
PFPC Inc. Accounting (1996-present) of
103 Bellevue Parkway PFPC Inc.; Assistant Vice
Wilmington, DE 19809 President and Accounting
Age: 33 Years Conversion Manager
(1992-present) of PFPC Inc;
one additional Officer
position with the OFFITBANK
Fund Complex.

Gary M. Gardner Assistant Secretary Chief Counsel (1994-present)
PFPC Inc. of PFPC Inc.; Associate
400 Bellevue Parkway General Counsel (1992-1994) of
Wilmington, DE 19809 The Boston Company, Inc.; one
Age: 47 Years additional Officer position
with the OFFITBANK Fund
Complex.

David C. Lebisky Assistant Secretary Administrative Officer
PFPC Inc. (1996-present) of PFPC Inc.;
400 Bellevue Parkway Legal Assistant (1994-1996)
Wilmington, DE 19809 with the law firm of Drinker
Age: 27 years Biddle & Reath; BA Candidate
(1990-1994) LaSalle
University; one additional
Officer position with the
OFFITBANK Fund Complex.

</TABLE>

* "Interested person" of the Fund as defined in the 1940 Act.

The Board of Directors has designated an audit committee to advise the
full Board with respect to accounting, auditing and financial matters affecting
the Company. The Audit Committee is comprised of Mr. Landau and The Very
Reverend Morton and meets periodically.

The Company pays each Director who is not also an officer or affiliated
person an annual fee of $10,000 and a fee of $1,250 for each Board of Directors
and Board committee meeting attended and reimburses such Director for all
out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with the Adviser do not receive compensation from the Company but are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.

Director Compensation

(The following table shows the compensation paid by the Company to the Directors
for calendar year 1998.)

<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated from Registrant and
Compensation Accrued as Part of Annual Benefits Fund Complex*
Name of Director From the Registrant Fund Expenses Upon Retirement Paid to Directors
- ---------------- ------------------- ------------- --------------- -----------------

<S> <C> <C> <C> <C>
Morris W. Offit $0 $0 $0 $0

Edward J. Landau $__ $0 $0 $__

The Very Reverend
James Parks Morton $__ $0 $0 $__
</TABLE>

o For this purpose, the "Fund Complex" consists of all other regulated
investment companies advised by OFFITBANK.

19
<PAGE>

INVESTMENT ADVISER

The Company has retained OFFITBANK, a New York State chartered trust
company, to act as its investment adviser (the "Adviser"). The advisory
agreements (the "Advisory Agreements") between the Adviser and the Company
provide that the Adviser shall manage the operations of the Company, subject to
policies established by the Board of Directors of the Company. Pursuant to the
Advisory Agreements, the Adviser manages the Company's investment portfolios,
directs purchases and sales of the portfolio securities and reports to the
Company's officers and directors regularly. In addition, the Adviser pays the
compensation of the Company's officers, employees and directors affiliated with
the Adviser. The Company bears all other costs of its operations, including the
compensation of its directors not affiliated with the Adviser.

For its services under the Advisory Agreements, the Adviser receives from
each Fund an advisory fee. The fee is payable monthly at an annual rate of .85%
of the first $200,000,000, .75% on the next $400,000,000 and .65% on amounts in
excess of $600,000,000 of OFFITBANK High Yield Fund's average daily net assets;
.90% of the first $200,000,000 and .80% on amounts in excess thereof of
OFFITBANK Emerging Markets Fund's average daily net assets; .80% of the first
$200,000,000 and .70% on amounts in excess thereof of OFFITBANK Investment Grade
Global Debt Fund's average daily net assets; .90% of OFFITBANK Global
Convertible Fund's average daily net assets; 1.00% of OFFITBANK Latin America
Equity Fund's average daily net assets; .35% of OFFITBANK U.S. Government
Securities Fund's average daily net assets; .35% of OFFITBANK Mortgage
Securities Fund's average daily net assets; .35% of OFFITBANK National Municipal
Fund's average daily net assets; .35% of OFFITBANK California Municipal Fund's
average daily net assets and .35% of OFFITBANK New York Municipal Fund's average
daily net assets. With respect to OFFITBANK Total Return Fund, the Adviser is
entitled to receive a monthly fee from the Fund at the annual rate of .50% with
respect to the Fund's assets other than investments in the other Funds of the
Company. The Adviser may waive all or part of its fee from time to time in order
to increase a Fund's net investment income available for distribution to
shareholders. The Funds will not be required to reimburse the Adviser for any
advisory fees waived. The Adviser may from time to time, at its own expense,
provide compensation to financial institutions for performing administration or
other tentative services for their customers. These services may include
maintaining account records, processing orders to purchase, redeem and exchange
shares and answering customer inquiries.

The charts below show the investment advisory fees for each Fund for the
last three fiscal years along with any waivers that reduced the investment
advisory fees. The fees shown were paid by the Funds to OFFITBANK.

<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
High Yield 1998 1997 1996
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned _________ $7,832,049 $4,989,174
Fees waived _________ $0 $0
Net amount of fees paid by the Fund _________ $7,832,049 $4,989,174

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Emerging Markets 1998 1997 1996
- ---------------- ---- ---- ----
Fees earned _________ $1,527,416 $759,339
Fees waived _________ $0 $0
Net amount of fees paid by the Fund _________ $1,527,416 $759,339
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Latin America Equity 1998 1997 1996
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned _________ $589,281 $53,176
Fees waived _________ $0 $53,176
Net amount of fees paid by the Fund _________ $589,281 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
U.S. Government Securities 1998 1997 1996
- -------------------------- ---- ---- ----
Fees earned _________ $3,596 $0
Fees waived _________ $3,596 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Mortgage Securities 1998 1997 1996
- ------------------- ---- ---- ----
Fees earned _________ $20,098 $0
Fees waived _________ $20,098 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
California Municipal 1998 1997 1996
- -------------------- ---- ---- ----
Fees earned _________ $7,908 $0
Fees waived _________ $7,908 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
New York Municipal 1998 1997 1996
- ------------------ ---- ---- ----
Fees earned _________ $108,310 $69,937
Fees waived _________ $79,754 $69,937
Net amount of fees paid by the Fund _________ $28,556 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
National Municipal 1998 1997 1996
- ------------------ ---- ---- ----
Fees earned _________ $1,654 $0
Fees waived _________ $1,654 $0
Net amount of fees paid by the Fund _________ $0 $0
</TABLE>

Unless sooner terminated, the Advisory Agreements will continue in effect
until February 7, 1999, with respect to the High Yield, Global Debt and Emerging
Markets Funds, until February 8, 1999 with respect to the Latin

21
<PAGE>

America Equity, Global Convertible, National Municipal, California Municipal and
New York Municipal Funds, and until June 1, 1999 with respect to the Total
Return, U.S. Government Securities and Mortgage Securities Funds, and from year
to year thereafter if such continuance is approved at least annually by the
Company's Board of Directors or by a vote of a majority (as defined under
"General Information -- Capital Stock") of the outstanding shares of each Fund,
and, in either case, by a majority of the directors who are not parties to the
contract or "interested persons" (as defined in the 1940 Act) of any party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreements may each be terminated by the Company or the Adviser on 60 days'
written notice, and will terminate immediately in the event of its assignment.

DISTRIBUTOR

OFFIT Funds Distributor, Inc. (the "Distributor"), a wholly-owned
subsidiary of Provident Distributors, Inc., with its principal office at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961, distributes
the shares of the Company. From January 1, 1997 to June 1, 1998, the Distributor
was a wholly-owned subsidiary of BISYS Fund Services Limited Partnership, d/b/a
BISYS Fund Services. Prior to January 1, 1997, the Distributor was a
wholly-owned subsidiary of Furman Selz. Under a distribution agreement with the
Company (the "Distribution Agreement"), the Distributor, as agent of the
Company, agrees to use its best efforts as distributor of the Company's shares.
Solely for the purpose of reimbursing the Distributor for its expenses incurred
in certain activities primarily intended to result in the sale of Advisor Shares
of the Funds, the Company has adopted a Plan of Distribution (the "Plan") under
Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Under the Plan and
Distribution Agreement, each Fund is authorized to spend for the account of
Advisor Shares up to 0.25% of its average daily net assets solely attributable
to Advisor Shares annually, to reimburse the Distributor for such activities
primarily intended to result in the sale of Advisor Shares, which are summarized
in the Prospectus. For the fiscal periods ended December 31, 1998, 1997 and
1996, no distribution costs were incurred by the Funds.

The Plan, together with the Distribution Agreement, continue in effect
with respect to a particular Fund from year to year if such continuance is
approved at least annually by the Company's Board of Directors and by a majority
of the Directors who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan ("Qualified
Directors") and who are not "interested persons" (as defined in the 1940 Act) of
any party by votes cast in person at a meeting called for such purpose. In
approving the continuance of the Plan and the Distribution Agreement, the
Directors must determine that the Plan is in the best interest of the
shareholders of each Fund.

The Plan requires that, at least quarterly, the Board of Directors must
review a written report prepared by the Treasurer of the Company enumerating the
amounts expended and purposes therefor under the Plan. Rule 12b-1 also requires
that the selection and nomination of Directors who are not "interested persons"
of the Company be made by such Qualified Directors.

Shareholder Servicing Agents

Pursuant to a Shareholder Servicing Plan adopted by the Board of Directors
of the Company, the Company may enter into Shareholder Servicing Agreements with
financial institutions ("Shareholder Servicing Agents") with respect to Advisor
Shares. Shareholder administrative support services will be performed by
Shareholder Servicing Agents for their customers who beneficially own Advisor
Shares. Such services may include, among other things: assisting in aggregating
and processing purchase, exchange and redemption transactions; placing net
purchase and redemption orders with the Company's distributor; transmitting and
receiving funds in connection with customer orders to purchase or redeem shares;
processing dividend payments; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder-designated accounts, as necessary; providing periodic statements
showing a customer's positions in the Funds; transmitting, on behalf of the
Company, proxy statements, annual reports, updating prospectuses and other
communications from the Company to the shareholders of the Funds; and receiving,
tabulating and transmitting to the Company proxies executed by shareholders with
respect to meetings of shareholders of the Fund. Customers may have or be given
the right to vote shares held of record by Shareholder Servicing Agents.

For the services provided, the Company's Shareholder Servicing Plan
permits each Fund to pay fees to Shareholder Servicing Agents at an annual rate
of up to .25% of the average daily net asset value of Advisor Shares of

22
<PAGE>

the Fund for which such Shareholder Servicing Agents provide services for the
benefit of customers. Shareholder Servicing Agents will provide their customers
with a schedule of any credits, fees or of the terms or conditions that may be
applicable to the investment of customer assets in each Fund's Advisor Shares.

ADMINISTRATION, TRANSFER AGENCY, FUND ACCOUNTING AND CUSTODY SERVICES

Administration

PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
serves as Administrator to the Company. Pursuant to an Administration Agreement
with the Company, PFPC performs administrative and fund accounting services for
the Company, and is responsible for certain clerical, record keeping and
bookkeeping services, except those performed by the Adviser, or by Chase or BONY
in their capacity as custodians of the Company. The services provided by PFPC as
Administrator include regulatory compliance, assistance in the preparation and
filing of post-effective amendments to the Company's registration statement with
the Commission, preparation of annual, semi-annual and other reports to
shareholders and the Commission, filing of federal and state income tax returns,
preparation of financial and management reports, preparation of board meeting
materials, preparation and filing of blue sky registrations and monitoring
compliance with the amounts and conditions of each state's qualification. For
the administrative and fund accounting services PFPC provides to the Company,
PFPC is paid an annual fee calculated daily and paid monthly which will not
exceed .125% of average daily net assets. From time to time, the Administrator
may waive all or a portion of its fees.

From January 1, 1997 to June 1, 1998, BISYS Fund Services Limited
Partnership ("BISYS") served as the Company's administrator. Prior to January 1,
1997, Furman Selz served as the Company's administrator.

The charts below show the administration fees for each Fund for the last
three fiscal years along with any waivers that reduced those fees.

<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
High Yield 1998 1997 1996
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned _________ $1,622,785 $971,474
Fees waived _________ $811,392 $485,738
Net amount of fees paid by the Fund _________ $811,393 $485,736

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Emerging Markets 1998 1997 1996
- ---------------- ---- ---- ----
Fees earned _________ $254,833 $126,556
Fees waived _________ $127,416 $63,278
Net amount of fees paid by the Fund _________ $127,417 $63,278

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Latin America Equity 1998 1997 1996
- -------------------- ---- ---- ----
Fees earned _________ $88,392 $8,039
Fees waived _________ $44,196 $8,039
Net amount of fees paid by the Fund _________ $44,196 $0
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
U.S. Government Securities 1998 1997 1996
- -------------------------- ---- ---- ----
<S> <C> <C> <C>
Fees earned _________ $1,541 $0
Fees waived _________ $1,541 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
Mortgage Securities 1998 1997 1996
- ------------------- ---- ---- ----
Fees earned _________ $8,613 $0
Fees waived _________ $8,613 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
California Municipal 1998 1997 1996
- -------------------- ---- ---- ----
Fees earned _________ $3,373 $0
Fees waived _________ $3,373 $0
Net amount of fees paid by the Fund _________ $0 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
New York Municipal 1998 1997 1996
- ------------------ ---- ---- ----
Fees earned _________ $44,828 $26,227
Fees waived _________ $36,410 $26,227
Net amount of fees paid by the Fund _________ $8,418 $0

Fiscal Year Ended
------------------------------------------------
December 31, December 31, December 31,
National Municipal 1998 1997 1996
- ------------------ ---- ---- ----
Fees earned _________ $709 $0
Fees waived _________ $709 $0
Net amount of fees paid by the Fund _________ $0 $0
</TABLE>

Transfer Agency

PFPC serves as the Company's Transfer Agent and Dividend Disbursing Agent.
As part of PFPC's duties, PFPC: (i) processes shareholder purchase and
redemption orders; (ii) issues periodic statements to shareholders; (iii)
processes transfers, exchanges and dividend payments; and (iv) maintains all
shareholder records for each account in the Company. From January 1, 1997 to
June 1, 1998, BISYS Fund Services, Inc., an affiliate of BISYS, served as the
Company's transfer agent. Prior to January 1, 1997, Furman Selz served as the
Company's transfer agent.

Custody

The Chase Manhattan Bank ("Chase") serves as the Company's custodian with
respect to the Global Debt, Emerging Markets Funds, Global Convertible and Latin
America Equity Funds. Prior to June 27, 1996, Chase also

24
<PAGE>

served as the custodian for the High Yield and New York Municipal Funds. Chase
is located at 4 MetroTech Center, 18th Floor, Brooklyn, New York 11245. The Bank
of New York ("BONY") serves as custodian of the assets of the High Yield, Total
Return, U.S. Government Securities, Mortgage Securities, National Municipal,
California Municipal and New York Municipal Funds. The principal business
address of BONY is 48 Wall Street, New York, New York 10286. Under the Custodian
Agreements, each Custodian has agreed to maintain a separate account or accounts
in the name of each applicable Fund; hold and disburse portfolio securities on
account of each Fund; collect and receive all income and other payments and
distributions on account of each Fund's portfolio securities; and make periodic
reports to the Company's Board of Directors concerning the Funds' operations.
Each is authorized under the Custodian Agreements to establish separate accounts
for the Funds' foreign securities with subcustodians, provided that the
custodian remains responsible for the performance of all of its duties under the
Custodian Agreements.

Counsel

Kramer Levin Naftalis & Frankel LLP, whose address is 919 Third Avenue,
New York, NY 10022, serves as counsel to the Company.

Independent Accounting

PricewaterhouseCoopers LLP, whose address is 1177 Avenue of the Americas,
New York, NY 10036, serves as the independent accountants for the Company. The
independent accountants conduct audits of the Company and assist in the
preparation of the Company's semi-annual and annual reports.

PORTFOLIO TRANSACTIONS

The Company has no obligation to deal with any dealer or group of dealers
in the execution of transactions in portfolio securities. Subject to policy
established by the Company's Board of Directors, the Adviser is primarily
responsible for the Company's portfolio decisions and the placing of the
Company's portfolio transactions. The High Yield, Emerging Markets and New York
Municipal Funds did not pay any brokerage commissions for the fiscal periods
ended December 31, 1996. The Latin America Equity Fund paid brokerage
commissions of $61,192 for the fiscal period ended December 31, 1996. The High
Yield, Emerging Markets, U.S. Government Securities, California Municipal, New
York Municipal and National Municipal Funds did not pay any brokerage
commissions for the fiscal periods ended December 31, 1997. The Latin America
Equity Fund paid brokerage commissions of $467,811 for the fiscal period ended
December 31, 1997. For the fiscal year ended December 31, 1998, the High Yield,
Emerging Markets, Latin America Equity, U.S. Government Securities, Mortgage
Securities, California Municipal, New York, Municipal and National Municipal
Funds paid ___, ___, ___, ___, ___, ___, ___ and ___, respectively, in brokerage
commissions.

Fixed-income and certain short-term securities normally will be purchased
or sold from or to dealers serving as market makers for the securities at a net
price, which may include dealer spreads and underwriting commissions. Purchases
and sales of securities on a stock exchange are effected through brokers who
charge a commission. In the over-the-counter market, securities 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 placing orders, it is the policy of the Company to
obtain the best results taking into account the dealer's general execution and
operational facilities, the type of transaction involved and other factors such
as the dealer's risk in positioning the securities involved. While the Adviser
generally seeks a competitive price in placing its orders, the Company may not
necessarily be paying the lowest price available.

Trading practices in certain emerging market and Latin American countries
are significantly different from those in the United States, and these
differences may have adverse consequences on the investment operations of the
Emerging Markets, Global Debt, Global Convertible, Total Return and Latin
America Equity Funds. Brokerage commissions and other transaction costs on the
securities exchanges of emerging market and Latin American countries are
generally higher than in the United States. In addition, securities settlements
and clearance procedures in emerging market countries are less developed and
less reliable than those in the United States and the Funds may be subject to
delays or other material difficulties. Delays in settlement could result in
temporary periods when assets of the Funds are uninvested and no return is
earned thereon. The inability of a Fund to make intended security purchases due
to settlement problems could cause such Fund to miss attractive investment
opportunities. The inability to dispose of a

25
<PAGE>

portfolio security due to settlement problems could result either in losses to a
Fund due to subsequent declines in the value of such portfolio security or, if
such Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.

Factors relating to brokers in emerging market and Latin American
countries may also expose the Funds' to risks in connection with the execution
of portfolio transactions. There may be less government supervision and
regulation of securities exchanges and brokers in these countries than exists in
the United States. Brokers in these countries may not be as well capitalized as
those in the United States, so that they may be more susceptible to financial
failure in times of market, political, or economic stress, exposing the Funds to
a risk of loss in the event of such failure.

Under the 1940 Act, persons affiliated with the Company are prohibited
from dealing with the Company as a principal in the purchase and sale of
securities unless an exemptive order allowing such transactions is obtained from
the Commission. Affiliated persons of the Company, or affiliated persons of such
persons, may from time to time be selected to execute portfolio transactions for
the Company as agent. Subject to the considerations discussed above and in
accordance with procedures expected to be adopted by the Board of Directors, in
order for such an affiliated person to be permitted to effect any portfolio
transactions for the Company, the commissions, fees or other remuneration
received by such affiliated person must be reasonable and fair compared to the
commissions, fees or other remuneration received by other brokers in connection
with comparable transactions. This standard would allow such an affiliated
person to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length agency
transaction.

Investment decisions for the Company are made independently from those for
other funds and accounts advised or managed by the Adviser. Such other funds and
accounts may also invest in the same securities as the Company. If those funds
or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as the Company, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Company or the price paid or received by the Company. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Company with those to be sold or
purchased for other funds or accounts in order to obtain best execution.

PURCHASE OF SHARES

For information pertaining to the manner in which shares of each class of
each Fund are offered to the public, see "Purchase of Shares" in the Prospectus.
The Company reserves the right, in its sole discretion, to (i) suspend the
offering of shares of its Funds, and (ii) reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interest of
the Company. The officers of the Company may, from time to time, waive the
minimum initial and subsequent investment requirements.

REDEMPTION OF SHARES

For information pertaining to the manner in which each class of each Fund
may be redeemed, see "Redemption of Shares" in the Prospectus. The Company may
suspend redemption privileges or postpone the date of payment (i) during any
period that the New York Stock Exchange (the "Exchange") or the bond market is
closed, or trading on the Exchange is restricted as determined by the SEC, (ii)
during any period when an emergency exists as defined by the rules of the SEC as
a result of which it is not reasonably practicable for a Fund to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the SEC may permit.

Furthermore, if the Board of Directors determines that it is in the best
interests of the remaining shareholders of a Fund, such Fund may pay the
redemption price, in whole or in part, by a distribution in kind.

The Company has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part in investment securities or in cash, as the Board of Directors

26
<PAGE>

may deem advisable; however, payment will be made wholly in cash unless the
Board of Directors believes that economic or market conditions exist which would
make such a practice detrimental to the best interests of the Company. If
redemptions are paid in investment securities, such securities will be valued as
set forth in the Company's Prospectus under "Pricing of Fund Shares" and
redeeming shareholders would normally incur brokerage expenses if they converted
these securities to cash.

No charge is made by a Fund for redemptions. Redemption proceeds may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.

PERFORMANCE CALCULATIONS

The Company may from time to time quote various performance figures to
illustrate the past performance of each class of shares of its Funds.
Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the SEC. An explanation of the SEC methods for computing performance
follows.

Total Return

A Fund's average annual total return is determined by finding the average
annual compounded rates of return over 1, 5 and 10 year periods (or, if shorter,
the period since inception of the Fund) that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes that all dividends and distributions are reinvested when paid. The
quotation assumes the amount was completely redeemed at the end of each 1, 5 and
10 year period (or, if shorter, the period since inception of the Fund) and the
deduction of all applicable Fund expenses on an annual basis. Average annual
total return is calculated according to the following formula:

n
P ( l + T ) = ERV

where: P = a hypothetical initial payment of $1,000.
T = the average annual total return.
N = the number of years.
ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the
beginning of the period.

Each Fund presents performance information for each class of shares
commencing with the Fund's inception (or the inception of the Partnership with
respect to the High Yield Fund, see "The Transfer" above for more information).
Performance information for each class of shares may also reflect performance
for time periods prior to the introduction of such class, and the performance
for such prior time periods will not reflect any fees and expenses, payable by
such class that were not borne by the Fund prior to the introduction of such
class.

All of the outstanding shares of the Funds were reclassified as "Select
Shares" as of April 29, 1996, and the Funds began to offer a new class of
shares, "Advisor Shares." The percentages shown in the tables below are based on
the fees and expenses actually paid by each Fund for the periods presented,
rather than the fees and expenses currently payable by each class of shares,
which in certain cases are different (as indicated in the footnotes to the
tables).

The following tables set forth the average annual total returns for each
class of shares of each of the High Yield Fund, Emerging Markets Fund, Latin
America Equity Fund, New York Municipal Fund, California Municipal Fund,
National Municipal Fund, U.S. Government Securities Fund, and Mortgage
Securities Fund for certain time periods ended December 31, 1998.

<TABLE>
<CAPTION>
High Yield Fund - Select Shares
-------------------------------
<S> <C>
One Year...................................... ____%
Five Years.................................... ____%
Since Inception (March 2, 1994)............... ____%
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
High Yield Fund - Advisor Shares
--------------------------------
<S> <C>
One Year...................................... ____%
Since Inception (August 14, 1997)............. ____%

Emerging Markets Fund - Select Shares*
--------------------------------------
One Year...................................... ____%
Since Inception (March 8, 1994)............... ____%
- ------------
*As of December 31, 1998 there were no Advisor Shares outstanding.

Latin America Equity Fund - Select Shares
-----------------------------------------

One Year...................................... ____%
Since Inception (February 13, 1996)........... ____%

Latin America Equity Fund - Advisor Shares
------------------------------------------

One Year...................................... ____%
Since Inception (June 23, 1997)............... ____%

New York Municipal Fund - Select Shares*
----------------------------------------

One Year...................................... ____%
Since Inception (April 3, 1995)............... ____%

- ------------
*As of December 31, 1998 there were no Advisor Shares outstanding.

California Municipal Fund - Select Shares*
------------------------------------------

One Year...................................... ____%
Since Inception (April 2, 1997)............... ____%

- ------------
*As of December 31, 1998 there were no Advisor Shares outstanding.
**Non-annualized

National Municipal Fund - Select Shares*
----------------------------------------

One Year...................................... ____%
Since Inception (October 20, 1997)............ ____%

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

*As of December 31, 1998 there were no Advisor Shares outstanding.
**Non-annualized

28
<PAGE>

<TABLE>
<CAPTION>
U.S. Government Securities Fund-Select Shares*
----------------------------------------------
<S> <C>

One Year...................................... ____%
Since Inception (July 1, 1997)................ ____% **
- ------------
*As of December 31, 1998 there were no Advisor Shares outstanding.
**Non-annualized

Mortgage Securities Fund - Select Shares*
-----------------------------------------

One Year...................................... ____%
Since Inception (July 1, 1997)................ ____% **
- ------------
</TABLE>

* As of December 31, 1998 there were no Advisor Shares outstanding.
** Non-annualized

As described in the Prospectus under the caption "Investor Expenses," the
High Yield Fund, Emerging Markets, Latin America Equity, New York Municipal
Fund, California Municipal, National Municipal, U.S. Government Securities, and
Mortgage Securities Funds have been and still are subject to certain fee
waivers. Absent such waivers, the returns shown above would be lower.

The Funds may also calculate total return on an aggregate basis which
reflects the cumulative percentage change in value over the measuring period.
The formula for calculating aggregate total return can be expressed as follows:

Aggregate Total Return = ERV - 1
---
P

In addition to total return, each Fund may quote performance in terms of a
30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:

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

where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of any reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.

For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.

Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by a Fund based on the market value of the obligation (including
actual accrued interest) at the close of business on the last day of each month,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest), (2) dividing that figure by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Undeclared earned income, computed in accordance
with generally accepted accounting principles, may be subtracted from the
maximum offering price calculation required pursuant to "d" above.

29
<PAGE>

The 30-day yield for the Select Shares of the High Yield, Emerging
Markets, Latin America Equity, U.S. Government Securities, Mortgage Securities,
California Municipal, New York Municipal and National Municipal Funds for the
period ended December 31, 1998, was ____%, ____%, ____%, ____%, ____%, ____%,
____% and ____% respectively. The 30-day yield for the Advisor Shares of the
High Yield Fund for the period ended December 31, 1998, was ____%.

Each Fund may also advertise tax-equivalent yields which are computed by
dividing that portion of yield that is tax-exempt by one, minus a stated income
tax rate and adding the quotient to that portion, if any, of the yield that is
not tax-exempt.

Each Fund may also advertise its "risk adjusted return," which reflects
the total return of the Fund over time adjusted to reflect volatility of the
Fund.

The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable ranking group. In addition, the Company may
use performance data reported in financial and industry publications, including
Barron's, Business Week, Forbes, Fortune, Institutional Investor, Money,
Morningstar, Mutual Fund Values, The Wall Street Journal, The New York Times And
U.S.A. Today.

A Fund may include in advertising or sales literature discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting), investment
management techniques, policies or investment suitability of a Fund, economic
and political conditions and the relationship between sectors of the economy and
the economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks and bonds. From time
to time advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in
shareholder reports (including the investment composition of a Fund), as well as
the views of the Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund. In addition, selected
indices may be used to illustrate historic performance of select asset classes.

ADDITIONAL INFORMATION CONCERNING DIVIDENDS, DISTRIBUTIONS AND TAXES

Information set forth in the Prospectus and this SAI is only a summary of
certain key tax considerations generally affecting purchasers of shares of the
Funds. The following is only a summary of certain additional tax considerations
generally affecting each Fund and its shareholders that are not described in the
Prospectus. No attempt has been made to present a complete explanation of the
federal, state and local tax treatment of the Funds or the implications to
shareholders, and the discussions here and in the Funds Prospectus are not
intended as substitutes for careful tax planning. Accordingly, potential
purchasers of shares of the Funds are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this SAI is based on tax law in effect on the
date of the Prospectus and this SAI; such laws and regulations may be changed by
legislative, judicial, or administrative action, sometimes with retroactive
effect.

Qualification as a Regulated Investment Company

Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a Fund is not
subject to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends, and other taxable ordinary income, net of expenses)
and capital gain net income (i.e., the excess of capital gains over capital
losses) that it distributes to shareholders, provided that it distributes at
least 90% of its investment company taxable income (i.e., net investment income
and the excess of net short-term capital gain over net long-term capital loss)
and at least 90% of its tax-exempt income (net of expenses allocable thereto)
for the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains for the taxable year and will therefore count toward
satisfaction of the Distribution Requirement.

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In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its 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 (the "Income Requirement").

In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation (including
municipal obligations) purchased by a Fund at a market discount (generally, at a
price less than its principal amount) will be treated as ordinary income to the
extent of the portion of the market discount which accrued while the Fund held
the debt obligation. In addition, under the rules of Code Section 988, gain or
loss recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise), generally will be treated as ordinary income
or loss.

Further, the Code also treats as ordinary income a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of Section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, if a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
loss will be preserved upon a subsequent disposition or termination of the
position. No authority exists that indicates that the character of the income
treated as ordinary under this rule will not pass through to the Funds'
shareholders.

In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected (as applicable, depending on the
type of the Fund involved) if (1) the asset is used to close a "short sale"
(which includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto), or (3) the asset is stock and the Fund grants an in-the-money
qualified covered call option with respect thereto. In addition, a Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.

Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.

Transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to

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have this special tax treatment apply to Section 1256 Contracts that are part of
a "mixed straddle" with other investments of the Fund that are not Section 1256
Contracts.

A Fund may enter into notional principal contracts, including interest
rate swaps, caps, floors, and collars. Treasury Regulations provide, in general,
that the net income or net deduction from a notional principal contract for a
taxable year is included in or deducted from gross income for that taxable year.
The net income or deduction from a notional principal contract for a taxable
year equals the total of all of the periodic payments (generally, payments that
are payable or receivable at fixed periodic intervals of one year or less during
the entire term of the contract) that are recognized from that contract for the
taxable year and all of the non-periodic payments (including premiums for caps,
floors, and collars) that are recognized from that contract for the taxable
year. No portion of a payment by a party to a notional principal contract is
recognized prior to the first year to which any portion of a payment by the
counterparty relates. A periodic payment is recognized ratably over the period
to which it relates. In general, a non-periodic payment must be recognized over
the term of the notional principal contract in a manner that reflects the
economic substance of the contract. A non-periodic payment that relates to an
interest rate swap, cap, floor, or collar is recognized over the term of the
contract by allocating it in accordance with the values of a series of
cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or, in the case of a swap, under an alternative method contained in the
proposed regulations and, in the case of a cap or floor, under an alternative
method which the IRS may provide in a revenue procedure).

A Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Fund invests in a PFIC, it has three separate
options. First, it may elect to treat the PFIC as a qualified electing fund (a
"QEF"), in which event the Fund will each year have ordinary income equal to its
pro rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for the
year, regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, a Fund that invests in stock of
a PFIC may make a mark-to-market election with respect to such stock. Pursuant
to such election, the Fund will include as ordinary income any excess of the
fair market value of such stock at the close of any taxable year over the Fund's
adjusted tax basis in the stock. If the adjusted tax basis of the PFIC stock
exceeds the fair market value of the stock at the end of a given taxable year,
such excess will be deductible as ordinary loss in an amount equal to the lesser
of the amount of such excess or the net mark-to-market gains on the stock that
the Fund included in income in previous years. The Fund's holding period with
respect to its PFIC stock subject to the election will commence on the first day
of the next taxable year. If the Fund makes the mark-to-market election in the
first taxable year it holds PFIC stock, it will not incur the tax described
below under the third option.

Finally, if a Fund does not elect to treat the PFIC as a QEF and does not
make a mark-to-market election, then, in general, (1) any gain recognized by the
Fund upon the sale or other disposition of its interest in the PFIC or any
excess distribution received by the Fund from the PFIC will be allocated ratably
over the Fund's holding period of its interest in the PFIC stock, (2) the
portion of such gain or excess distribution so allocated to the year in which
the gain is recognized or the excess distribution is received shall be included
in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year, plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received, at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to its shareholders of the portions of such gain or excess distribution
so allocated to prior years (net of the tax payable by the Fund thereon) will
again be taxable to the shareholders as an ordinary income dividend.

Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss (including, to
the extent provided in Treasury Regulations, losses recognized pursuant to the
PFIC mark-to-market election) incurred after October 31 as if it had been
incurred in the succeeding year.

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In addition to satisfying the requirements described above, a Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (provided that, with
respect to each issuer, the Fund has not invested more than 5% of the value of
the Fund's total assets in securities of each such issuer and the Fund does not
hold more than 10% of the outstanding voting securities of each such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
For purposes of asset diversification testing, obligations issued or guaranteed
by certain agencies or instrumentalities of the U.S. Government, such as the
Federal Agricultural Mortgage Corporation, the Farm Credit System Financial
Assistance Corporation, a Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, the Government National
Mortgage Corporation, and the Student Loan Marketing Association, are treated as
U.S. Government securities.

If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.

Excise Tax on Regulated Investment Companies

A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
its ordinary taxable income for the calendar year and 98% of its capital gain
net income for the one-year period ended on October 31 of such calendar year
(or, at the election of a regulated investment company having a taxable year
ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.

For purposes of calculating the excise tax, a regulated investment
company: (1) reduces its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
excludes foreign currency gains and losses and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon the actual disposition of
the PFIC stock subject to such election) incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining the company's
ordinary taxable income for the succeeding calendar year). Each Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and capital gain net income prior to the end of each calendar year to
avoid liability for the excise tax. However, investors should note that a Fund
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.

Fund Distributions

Each Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes. Distributions attributable to dividends received by a Fund from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Funds will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction.

Ordinary income dividends paid by a Fund with respect to a taxable year
will qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by a Fund will not be treated as

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<PAGE>

a qualifying dividend (1) if it has been received with respect to any share of
stock that the Fund has held for less than 46 days (91 days in the case of
certain preferred stock), excluding for this purpose under the rules of Code
Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case
of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code Section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).

A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his or her shares or
whether such gain was recognized by the Fund prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Fund's disposition of
domestic qualified "small business" stock will be subject to tax.

Conversely, if a Fund elects to retain its net capital gain, the Fund will
be subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.

The National Municipal Fund, California Municipal Fund and New York
Municipal Fund (each a "Tax Exempt Fund") intend to qualify to pay
exempt-interest dividends by satisfying the requirement that at the close of
each quarter of the Tax-Exempt Funds' taxable year at least 50% of each Fund's
total assets consists of tax-exempt municipal obligations. Distributions from a
Tax-Exempt Fund will constitute exempt-interest dividends to the extent of such
Fund's tax-exempt interest income (net of expenses and amortized bond premium).
Exempt-interest dividends distributed to shareholders of a Tax-Exempt Fund are
excluded from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt interest dividends on their returns. In general, a
state exempts from state income tax only interest earned on obligations issued
by that state or its political subdivisions and instrumentalities. Therefore,
shareholders that are subject to tax in another state may be subject to state
and local tax in such state on this interest. Moreover, while exempt-interest
dividends are excluded from gross income for federal income tax purposes, they
may be subject to alternative minimum tax ("AMT") in certain circumstances and
may have other collateral tax consequences as discussed below. Distributions by
a Tax-Exempt Fund of any investment company taxable income or of any net capital
gain will be taxable to shareholders as discussed above.

AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will constitute an item of tax
preference includable in AMTI for both corporate and non-corporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI. For purposes of the corporate AMT, the corporate
dividends- received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders generally will be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.

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<PAGE>

Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Further, a shareholder of a Tax-Exempt Fund is denied a deduction
for interest on indebtedness incurred or continued to purchase or carry shares
of a Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance companies, and foreign corporations engaged in a trade or
business in the United States. Prospective investors should consult their own
advisers as to such consequences.

Investment income that may be received by a Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Fund to a reduced rate of, or exemption from, taxes on such income. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of a Fund's assets to be invested in various countries is not known:
If more than 50% of the value of a Fund's total assets at the close of its
taxable year consist of the stock or securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from the
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credit rules.

Distributions by a Fund that do not constitute ordinary income dividends,
exempt-interest dividends, or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.

Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another Fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income, recognized net capital gain, or unrealized appreciation in
the value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the shareholder.

Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.

Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to report the receipt of interest or dividend
income properly, or (3) who has failed to certify to the Fund that it is not
subject to backup withholding or is an "exempt recipient" (such as a
corporation).

Sale or Redemption of Shares

A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of a Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or

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<PAGE>

redemption of shares of a Fund will be considered capital gain or loss and will
be long-term capital gain or loss if the shares were held for longer than one
year. However, any capital loss arising from the sale or redemption of shares
held for six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code Section 246(c)(3) and (4) (discussed above
in connection with the dividends-received deduction for corporations) generally
will apply in determining the holding period of shares. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

If a shareholder (1) incurs a sales load in acquiring shares of a Fund,
(2) disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.

Foreign Shareholders

Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.

If the income from a Fund is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, ordinary income dividends paid
to such foreign shareholder will be subject to U.S. withholding tax at the rate
of 30% (or lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding tax
at the rate of 30% (or lower applicable treaty rate) on the gross income
resulting from the Fund's election to treat any foreign taxes paid by it as paid
by its shareholders, but may not be allowed a deduction against such gross
income or a credit against the U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and exempt-interest dividends, and amounts retained by the Fund that
are designated as undistributed capital gains.

If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.

In the case of foreign noncorporate shareholders, a Fund may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.

Effect of Future Legislation, Local Tax Considerations

The foregoing general discussion of U.S. federal income tax consequences
is based on the Code and the Treasury Regulations issued thereunder as in effect
on the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect.

Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends, and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in a Fund.

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<PAGE>

California Municipal Fund, New York Municipal Fund And National Municipal Fund

The California Municipal Fund, New York Municipal Fund and National
Municipal Fund intend to qualify to pay "exempt-interest dividends," as that
term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. These Funds' policy is to
pay in each taxable year exempt-interest dividends equal to at least 90% of each
such Fund's interest from tax-exempt obligations net of certain deductions.
Except as discussed below, exempt-interest dividends will be exempt from regular
federal income tax.

Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of dividends from the Fund may increase a foreign
corporate shareholder's liability under the branch profits tax, and may also
affect the federal tax liability of certain Subchapter S corporations and
insurance companies. Furthermore, the receipt of exempt-interest dividends may
be a factor in determining the extent to which as shareholder's Social Security
benefits are taxable.

The exemption of interest income for regular federal income tax purposes
may not result in similar exemptions under the tax law of state and local taxing
Authorities. In general, a state exempts from state income tax only interest
earned on obligations issued by that state or its political subdivisions and
instrumentalities.

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

Backup Withholding

The Funds may be required to withhold U.S. federal income tax at a rate of
31% ("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends (other than
exempt-interest dividends) if (i) the payee fails to furnish a Fund with the
payee's correct taxpayer identification number, (ii) the IRS notifies a Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding.

Investors should consult their own tax advisers regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in any of the Funds.

SHAREHOLDER SERVICES

The following supplements the information regarding shareholder services
set forth in the Company's Prospectus relating to the Funds:

Exchange Privilege

Shares of each class of any Fund of the Company may be exchanged for
shares of the same class of any of the other Funds of the Company provided that,
with respect to Select Shares, a shareholder exchanges shares with a value of at
least $50,000. Exchange requests with respect to Select Shares should be sent to
The OFFITBANK Investment Fund, Inc., c/o PFPC Inc. P.O. Box 8701, Wilmington, DE
19899. Any such exchange will be based on the respective net asset values of the
shares involved. There is no sales commission or charge of any kind. Before
making an exchange, a shareholder should consider the investment objective of
the Fund or portfolio to be purchased. Exchange requests may be made either by
mail or telephone. Telephone exchanges (referred to as "expedited exchanges")
will be accepted only if the certificates for the shares to be exchanged are
held by the Company for the account of the shareholder and the registration of
the two accounts is identical. Requests for expedited exchanges received prior
to

37
<PAGE>

4:00 p.m. (New York time) will be processed as of the close of business on the
same day. Requests received after this time will be processed on the next
business day. Expedited exchanges may, upon 60 days' notice to shareholders,
also be subject to limitations as to amounts or frequency, and to other
restrictions established by the Board of Directors to assure that such exchanges
do not disadvantage the Company and its shareholders. A Shareholder who holds
Advisor Shares should consult his/her Shareholder Servicing Agent to determine
the availability of and terms and conditions imposed on exchanges with the other
Funds and portfolios of the Company.

For federal income tax purposes, an exchange between Funds of the Company
is a taxable event, and, accordingly, a capital gain or loss may be realized. In
a revenue ruling relating to circumstances similar to the Company's, an exchange
between a series of a fund was deemed to be a taxable event. It is likely,
therefore, that a capital gain or loss would be realized on an exchange between
Funds or portfolios; shareholders may want to consult their tax advisers for
further information in this regard. The exchange privilege maybe modified or
terminated at any time.

Transfer Of Shares

Shareholders may transfer shares of the Company's Funds to another person
by written request to The OFFITBANK Investment Fund, Inc. at the address noted
above. The request should clearly identify the account and number of shares to
be transferred and include the signature of all registered owners and all share
certificates, if any, which are subject to the transfer. The signature on the
letter of request, the share certificate or any stock power must be guaranteed
in the same manner as described under "Redemption of Shares" in the Prospectus.
As in the case of redemptions, the written request must be received in good
order before any transfer can be made.

GENERAL INFORMATION

Capital Stock

All shares of the Company have equal voting rights and will be voted in
the aggregate, and not by class, except where voting by class is required by
law. As used in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting a Fund and all additional investment portfolios,
means the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy or (ii) more than 50% of the Company's outstanding shares.
The term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting the Company, any other single
Fund (e.g., approval of Advisory Agreements) or any single class 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,
or of the class of shares of the Fund, if a class vote is required, are present
in person or by proxy or (ii) more than 50% of the outstanding shares of the
Fund or of the class of shares of the Fund, if a class vote is required.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.

Each share of each class of a Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared in the discretion of the Company's Board of Directors.
In the event of the liquidation or dissolution of the Company, shares of a class
of a Fund are entitled to receive the assets allocable to that class of shares
of such Fund which are available for distribution, and a proportionate
distribution, based upon the relative net assets of the Funds, of any general
assets not belonging to a Fund which are available for distribution. It is
anticipated that expenses incurred by each class of shares of each Fund will
differ and, accordingly, that the dividends distributed with respect to each
class will differ.

Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid, non-assessable, fully transferable and redeemable at
the option of the holder.

Certain Owners Of Shares Of The Company

As of March 30, 1999, to the knowledge of the Administrator, the Officers
and the Directors of the Company, as a group, own less than 1% of the
outstanding voting shares of each Fund. As of March 30, 1999, the following

38
<PAGE>

persons owned of record or beneficially 5% or more of the outstanding shares of
each class of shares of the Funds of the Company:

<TABLE>
<S> <C> <C>
High Yield Fund (Select Shares) Shares Owned Percentage

High Yield Fund (Advisor Shares) Shares Owned Percentage

Emerging Markets Fund (Select Shares) Shares Owned Percentage

Latin America Equity Fund (Select Shares) Shares Owned Percentage

Latin America Equity Fund (Advisor Shares) Shares Owned Percentage

Investment Grade Global Debt Fund (Select Shares) Shares Owned Percentage

U.S. Government Securities Fund (Select Shares) Shares Owned Percentage

Mortgage Securities Fund (Select Shares) Shares Owned Percentage

California Municipal Fund (Select Shares) Shares Owned Percentage

New York Municipal Fund (Select Shares) Shares Owned Percentage

National Municipal Fund (Select Shares) Shares Owned Percentage
</TABLE>

(1) Accountholder may be deemed to have "control" as defined under the
Securities Act of 1933.

Other Information

The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the SEC
under the Securities Act of 1933 with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to the
rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.

Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.

FINANCIAL INFORMATION

The audited financial statements for the Company and the notes thereto
appearing in the most current fiscal year Annual Report to shareholders are
incorporated in this Statement of Additional Information by reference. No other
parts of the Annual Report are incorporated by reference herein. The financial
statements included in the Annual Report have been audited by the Company's
independent accountants, PricewaterhouseCoopers LLP, whose report thereon dated
February __, 1999, is also incorporated herein by reference. Such financial
statements have been incorporated herein in reliance upon such report given upon
their authority as experts in accounting and auditing. Additional copies of the
Annual Report may be obtained at no charge by telephoning the Company at the
telephone number appearing on the front page of this Statement of Additional
Information.

39
<PAGE>

APPENDIX A

SPECIAL FACTORS AFFECTING THE CALIFORNIA MUNICIPAL FUND

The financial condition of the State of California (the "State" or
"California"), its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of, the OFFITBANK California Municipal Fund, or result
in the default of existing obligations, including obligations which may be held
by the OFFITBANK California Mutual Fund. The following section provides only a
brief summary of the complex factors affecting the State's financial condition,
and is based on information obtained from an Official Statement dated December
9, 1998 relating to $600,000,000 State of California General Obligation Bonds
and the Governor's Budget Summary 1999-2000. The information contained in such
publicly available documents has not been independently verified. It should be
noted that the creditworthiness of obligations issued by local issuers may be
unrelated to the State's creditworthiness, and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default in the absence of a specific guarantee or pledge provided by the State.

Limits on Spending and Taxes

Under California constitutional amendments, the State is subject to an
annual appropriations limit. The limit may be exceeded in cases of emergency.
The State's yearly appropriations limit is based on the limit for the prior
year, adjusted annually for changes in California per capita personal income and
population and any transfers of financial responsibility of providing services
to or from another unit of government.

On November 8, 1988, voters approved Proposition 98, a combined initiative
constitutional amendment and statute, which changed State funding of public
education below the university level and the operation of the State
appropriations limit, primarily by guaranteeing local schools and community
colleges ("K-14 schools") a minimum share of General Fund revenues. Under
Proposition 98, K-14 schools are guaranteed the greater of a fixed percentage of
General Fund revenues and the prior year's appropriation adjusted for growth.

During the recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98 appropriations
turned out to be higher than the minimum percentage provided in the law. The
Legislature responded to these developments by designating the "extra"
Proposition 98 payments in one year as a "loan" from future years' entitlements.
By implementing these actions, per-pupil funding from Proposition 98 sources
stayed almost constant at approximately $4,200 from Fiscal Year 1991-92 to
Fiscal Year 1993-94.

In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
in this case provides, among other things, that both the State and K-14 schools
share in the repayment of prior years' emergency loans to schools. Of the total
$1.76 billion in loans, the State will repay $935 million by forgiveness of the
amount owed, while schools will repay $825 million. The State share of the
repayment will be reflected as an appropriation above the current Proposition 98
base calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. The 1998-99
Budget Act appropriated $250 million as repayment of prior years' loans to
schools, as part of the settlement in this case.

Short-Term Borrowing of California

As part of its cash management program, the State has regularly issued
short-term obligations to meet cash flow needs. Between spring 1992 and summer
1994, the State had depended upon external borrowing, including borrowings
extending into the subsequent fiscal year, to meet its cash needs, including
repayment of maturing Notes and Warrants. The State issued $1.7 billion of
revenue anticipation notes for the 1998-99 Fiscal Year, which notes are to
mature on June 30, 1999.

The State Treasurer is working closely with the State Controller and the
Department of Finance to manage the State's cash flow on a regular basis, with
the goal of reducing the State's external cash flow borrowing. The three offices

<PAGE>

are also working to develop programs to use commercial paper in whole or in part
for the State's cash flow borrowing needs, and for construction period financing
for both general obligation bond-funded and lease-revenue bond-funded projects.
As of March 1, 1997 the Finance Committees had authorized the issuance of
approximately $3.356 billion of commercial paper notes, but as of that date only
$367.78 million aggregate principal amount of general obligation commercial
paper notes was actually issued and outstanding.

The State has always paid the principal of and interest on its general
obligation bonds, general obligation commercial paper, lease-purchase debt and
short-term obligations, including revenue anticipation notes and revenue
anticipation warrants when due.

1998-99 Fiscal Year Budget

When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount.

The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from Special Funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.

The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from revised 1997-98 figures. Special
Fund revenues were estimated at $14.3 billion.

After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projects a balance in the State's budget reserve (the
Special Fund for Economic Uncertainties or SFEU) at June 30, 1999 (but without
including the "set aside" veto amount) of $1.255 billion, a little more than 2%
of General Fund revenues. The Budget Act assumes the State will carry out its
normal intra-year cash flow borrowing in the amount of $1.7 billion of revenue
anticipation notes, which were issued on October 1, 1998.

The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill that provides
for a phased-in reduction of the Vehicle License Fee (VLF). Since the VLF is
currently transferred to cities and counties, the bill provides for the General
Fund to replace the lost revenues. Starting on January 1, 1999, the VLF will be
reduced by 25% at a cost to the General Fund of approximately $500 million in
the 1998-99 Fiscal Year and about $1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99 budget includes both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters' tax credit ($133 million), and various targeted business tax credits
($106 million).

Other significant elements of the 1998-99 Budget Act are as follows:

1. Proposition 98 funding for K-12 schools is increased by $1.7 billion in
General Fund moneys over revised 1997-98 levels, about $300 million higher than
the minimum Proposition 98 guaranty. An additional $600 million was appropriated
to "settle up" prior years' Proposition 98 entitlements, and was primarily
devoted to one-time uses such as block grants, deferred maintenance, and
computer and laboratory equipment. The Budget also includes $250 million as
repayment of prior years' loans to schools, as part of the settlement of
California Teachers' Association v. Gould.

2. Funding for higher education increased substantially above the level
called for in the Governor's four- year compact. General Fund support was
increased by $340 million (15.6%) for the University of California and $267
million (14.1%) for the California State University system. In addition,
Community Colleges received a $300 million (6.6%) increase under Proposition 98.

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<PAGE>

3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in 9 years.

4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for local
trial courts and a rising prison population.

5. The Budget also included new funding for resources projects, dedication
of $376 million of General Fund moneys for capital outlay projects, funding of a
3% State employee salary increase, funding of 2,000 new Department of
Transportation positions to accelerate transportation construction projects, and
funding of the Infrastructure and Economic Development Bank ($50 million).

6. The State received approximately $167 million of federal reimbursements
to offset costs related to the incarceration of undocumented alien felons for
federal fiscal year 1997. The State anticipates receiving approximately $195
million in federal reimbursements for federal fiscal year 1998.

After the Budget Act was signed, and prior to the close of the Legislative
session on August 31, 1998, the Legislature passed a variety of fiscal bills.
The Governor had until September 30, 1998 to sign or veto these bills. The bills
with the most significant fiscal impact that the Governor signed include $235
million for certain water system improvements in southern California, $243
million for the State's share of the purchase of environmentally sensitive
forest lands, $178 million for state prisons, $160 million for housing
assistance ($40 million of which was included in the 1998-99 Budget Act and an
additional $120 million reflected in Proposition 1A), and $125 million for
juvenile facilities. The Governor also signed bills totaling $223 million for
educational programs that were part of his $250 million veto "set aside," and
$32 million for local governments fiscal relief. In addition, he signed a bill
reducing by $577 million the State's obligation to contribute to the State
Teachers' Retirement System in the 1998-99 Fiscal Year.

Based solely on the legislation enacted, on a net basis, the reserve for
June 30, 1999, was reduced by $256 million. On the other hand, 1997-98 revenues
have been increased by $160 million. The revised June 30, 1999, reserve is
projected to be $1,159 million or $96 million below the level projected in the
Budget Act. In November 1998, the Legislative Analyst's Office released a report
predicting that General Fund revenues for 1998-99 would be somewhat lower, and
expenditures somewhat higher, than the Budget Act forecasts, but the net
variance would be within the projected $1.2 billion year-end reserve amount.

1995-96 through 1997-98 Fiscal Years

The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.

The economy grew strongly during these fiscal years and, as a result, the
General Fund received substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than initially
forecast when the related budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $639.8 million as of June 30, 1997 and $1.782 billion at June
30, 1998.

The following were major features of the 1997-98 Budget Act:

1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues that
exceeded initial budgeted amounts. Part of the nearly $1.75 billion of increased
spending was allocated to prior fiscal years.

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2. The Budget Act reflected payment of $1.228 billion to satisfy a court
judgment in a lawsuit regarding payments to the State pension fund, and brought
funding of the State's pension contribution back to the quarterly basis that
existed prior to the deferral actions that were invalidated by the courts.

3. Funding from the General Fund for the University of California and the
California State University system was increased by about 6% ($121 million and
$107 million respectively), and there was no increase in student fees.

4. Unlike prior years, this Budget Act did not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal Fiscal Year 1997 and 1998 budgets, was included in the Budget Act, to
offset incarceration costs for illegal aliens.

5. The Budget Act contained no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.

Fiscal Years Prior to 1995-96

Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions (including a recession
which began in 1990) and growth of the largest General Fund programs--K-14
education, health, welfare and corrections--at rates faster than the revenue
base. During this period, expenditures exceeded revenues in four out of six
years up to 1992-93, and the State accumulated and sustained a budget deficit
approaching $2.8 billion at its peak on June 30, 1993. Between the 1991-92 and
1994-95 Fiscal Years, each budget required multibillion dollar actions to bring
projected revenues and expenditures into balance, including significant cuts in
health and welfare program expenditures; transfers of program responsibilities
and funding from the State to local governments; transfer of about $3.6 billion
in annual local property tax revenues from other local governments to local
school districts, thereby reducing State funding for schools under Proposition
98; and revenue increases (particularly in the 1991-92 Fiscal Year), most of
which were for a short duration.

Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to retire the deficit in one year,
so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.

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

Economic Overview

California's economy is the largest among the 50 states and one of the
largest in the world. Recent economic expansion has been marked by strong growth
in high technology business services (including computer software),
construction, computers and electronic components.

During 1998, California's economic growth outpaced that of the nation, a
performance that will most likely be repeated in the coming year. Even with a
slowdown in job growth, it is expected that employment in 1999 will increase by
2.4% in California, twice the rate of increase for the nation as a whole.

The strong economy, along with a robust stock market, helped to generate
higher revenues to the State. In fiscal year 1997-98, revenues from personal
income tax receipts, the largest single resource of revenue to the General Fund,
grew

A-4
<PAGE>

by 20%. Overall tax receipts grew by 11%. This trend in tax revenues is also the
result of baby boomers passing through their prime earning years. Within the
next decade, however, this generation will begin to retire, slowing the rise in
personal income tax revenues.

Despite major disruptions in international markets during 1998,
California's economy has weathered the Asian financial storm with relatively
modest damage. Aerospace and electronics manufacturing employment peaked in
March, and by November had lost almost 15,000 jobs, or nearly 3% of the
industries' workforce. Total nonfarm employment started 1998 with annual growth
above 3.5%, but more recently the year-to-year pace has slowed to approximately
2.7%. Increased exports to NAFTA trading partners and Europe compensated for
declines in California's exports to Southeast Asian countries over the past
year.

The construction industry led California's employment growth in 1998. From
October 1997 to October 1998, construction jobs in the state increased by more
than 9%. By the end of 1998, residential permits reached 126,000 units, an
increase of more than 13.5% over 1997. In the previous year, permits totaled
111,000 units, topping 100,000 for the first time since 1991. Non-residential
construction activity remained quite strong, with building permit value up
almost 18%.

Apart from construction, California's economy continued to expand in 1998.
Non-farm employment growth averaged 3.2% and personal income was up more than
6%. The jobless rate was below 6% most of the year.

Rising incomes and confidence in the economy have propelled housing sales
and prices to record levels in many parts of California. The San Francisco-San
Jose metropolitan area has seen the greatest price appreciation and is now the
most expensive housing market in the nation. Statewide, sales of existing single
family homes in 1998 are expected to show a 10% increase over 1997 levels. By
the end of the year, the median price should surpass the peak in 1991.

The healthy economic climate and recent revisions to the State's welfare
system have produced a major turnaround in the growth of California's welfare
population. This trend began in 1996, when there was a slight decline in
California's public assistance caseloads, the first since 1980. In 1997, there
was a drop of almost 5%. As of August 1998, caseloads were down by nearly 10%
over the previous 12 months.

California's future rests on its investments in the State's education
system. The State's economy is increasingly driven by technology-oriented
industries, and a supply of skilled workers is indispensable to the health of
the economy. Recent increases in funding for California's public education
system represent progress in meeting this need.

Credit Rating

Moody's has assigned a rating of Aa3 to the general obligation bonds of
the State of California. The rating reflects the state's deep and diverse
economic base, its improved credit condition, including the rebuilding of cash
and budget reserves, and long-term structural budget condition, even under
assumptions of slowing economic growth. The credit outlook is stable.

The state's Aa3 rating is the product of its robust economy, offset by a
financial condition that shows dramatic improvement, but still lags that of most
states. The California economy has fully recovered from the recession of the
early 1990's, and continues to outpace the United States in terms of employment
and personal income growth. Diversification has positioned it for further
expansion, although at a slower pace than has been realized over the last
several years. General fund balance sheet deficits accumulated during the
recession have been substantially reversed and liquidity has been restored. New
five-year financial projections based on reasonable expenditure and revenue
assumptions indicate that the state has the capacity to maintain long-term
budget balance, even if economic growth slows. Budget reserves are funded at
levels that, while still low by national standards, would preserve liquidity in
a mild economic downturn. Its debt position is moderate though slowly increasing
as the state addresses its infrastructure needs.

At Aa3, California's rating is lower than that of most of the country's
large industrialized states, including Illinois, Texas, and Florida (each rated
Aa2), Michigan, New Jersey and Ohio (all Aa1), but is higher than New York
State's A2 rating. California shares the Aa3 rating with Pennsylvania,
Massachusetts and Connecticut. California's ranking among the states reflects
its still relatively weak, though improved, balance sheet condition, and its
above average exposure to international economic uncertainty. In addition, we
expect that California would move more slowly than most states to

A-5
<PAGE>

stem financial deterioration in the event of economic recession due to its
inflexible budget structure and complex political environment.

The Aa3 general obligation rating is based on the following factors:

Credit Strengths

- Economic recovery is now well-established and broad based, and absent a
national recession, continued, though slowing, job and income growth is
expected.

- Financial performance benefits from economic recovery's positive impact
on economically sensitive income and sales taxes.

- Long term spending pressures from caseload driven demand in social
services, schools, and prisons have eased compared to earlier expectations and
can be funded with available revenues.

- Liquidity from cash resources outside General Fund shows strong
improvement.

- Contingent reserve position significantly improved, offering moderate
protection against economic uncertainties.

Credit Weaknesses

- Financial flexibility remains limited due to education expenditures
mandated by Proposition 98.

- Lack of formalized mid-year budget correction capabilities leaves the
state exposed in periods of revenue under-performance.

- Future capital needs could weaken debt position if debt affordability
recommendations are not adhered to.

- Economically-sensitive tax structure produces revenue volatility.

- The state faces above-average exposure to international economic
conditions, particularly in Asia.

Litigation

The State is currently involved in certain legal proceedings that, if
decided against the State, may require the State to make significant future
expenditures or may impair future revenue sources. Following are significant
lawsuits involving the State as of December 9, 1998:

On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint challenging the authority of the State
Controller to make payments from the State Treasury in the absence of a state
budget. On July 21, 1998, the trial court issued a preliminary injunction
prohibiting the State Controller from paying moneys from the State Treasury for
fiscal year 1998-99, with certain limited exceptions, in the absence of a state
budget. The preliminary injunction, among other things, prohibited the State
Controller from making any payments pursuant to any continuing appropriation.

On July 22, 1998, the State Controller asked the California Supreme Court
to immediately stay the trial court's preliminary injunction and to overrule the
order granting the preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the Court of Appeal.
The matters are now pending before the Court of Appeal.

In Hayes v. Commission on State Mandates, certain local school districts
sought reimbursements for special education programs for handicapped children.
The State Board of Control, which was succeeded by the Commission on State
Mandates (COSM), decided in favor of the local school districts. The decision
was appealed by the Director of

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Finance in the trial court and was remanded to the COSM for redetermination. The
COSM expanded the claim to include supplemental claims filed by seven additional
educational institutions. The potential liability to the State has been
estimated at more than $1 billion. A final consolidated decision was expected to
be issued in late 1998.

In State v. Stringfellow, the State is seeking recovery for cleanup costs
of a toxic waste site presently owned by the State. Present estimates of the
cleanup range from $300 million to $800 million.

The State is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of 1986.
The State's potential liability to all plaintiffs in this lawsuit ranges from
$800 million to $1.5 billion.

Year 2000

The State's reliance on information technology in every aspect of its
operations has made Year 2000 related information technology ("IT") issues a
high priority for the State. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000.

In the July Quarterly Report, the DOIT estimates total Year 2000 costs
identified by the departments under its supervision at about $239 million, of
which more than $100 million was projected to be expended in fiscal years
1998-99 and 1999-2000. The October Quarterly Report indicated the total costs
were then estimated to be at least $290 million, and the estimate would likely
increase in the future. These costs are part of much larger overall IT costs
incurred annually by State departments and do not include costs for remediation
for embedded technology, desktop systems and additional costs resulting from
discoveries in the testing process. For fiscal year 1998-99, the Legislature
created a $20 million fund for unanticipated Year 2000 costs, which can be
increased if necessary.

Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Year 2000 compliance, the task is very large
and will likely encounter unexpected difficulties. The State cannot predict
whether all mission critical systems will be ready and tested by late 1999 or
what impact failure of any particular IT system(s) or of outside interfaces with
State IT systems might have. The State Treasurer's Office and the State
Controller's Office report that they are both on schedule to complete their Year
2000 remediation projects by December 31, 1998, allowing full testing during
1999.

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APPENDIX B

SPECIAL FACTORS AFFECTING THE NEW YORK MUNICIPAL FUND

Some of the significant financial considerations relating to he
investments of the OFFITBANK New York Municipal fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.

Current Fiscal Year

Overview

The State's current fiscal year began on April 1, 1998 and ends on March
31, 1999 and is referred to herein as the State's 1998-99 fiscal year. This
section of the Annual Information Statement (AIS) reflects estimates of receipts
and disbursements for the State's 1998-99 fiscal year as formulated in the
Financial Plan released on June 25, 1998 and updated on February 9, 1999
(Update).

The Legislature adopted the debt service component of the State budget for
the 1998-99 fiscal year on March 30, 1998 and the remainder of the budget on
April 18, 1998. In the period prior to adoption of the budget for the current
fiscal year, the Legislature also enacted appropriations to permit the State to
continue its operations and provide for other purposes. On April 25, 1998, the
Governor vetoed certain items that the Legislature added to the Executive
Budget. The Legislature had not overridden any of the Governor's vetoes as of
the start of the legislative recess on June 19, 1998 (under the State
Constitution, the Legislature can override one or more of the Governor's vetoes
with the approval of two-thirds of the members of each house). The 1998-99 State
Financial Plan described in this AIS reflects the impact of the Legislature's
and Governor's actions on the budget through the date of this AIS. For a full
discussion of the process of adopting the State's 1998-99 budget, please see
"State Organization - State Financial Procedures" in this AIS.

General Fund disbursements in 1998-99 are now projected to grow by $2.43
billion over the 1997-98 levels, or $690 million more than proposed in the
Governor's Executive Budget, as amended. The change in General Fund
disbursements from the Executive Budget to the enacted budget reflects
legislative additions (net of the value of the Governor's vetoes), actions taken
at the end of the regular legislative session, as well as spending that was
originally anticipated to occur in 1997-98 but is now expected to occur in
1998-99. The State projects that the 1998-99 State Financial Plan is balanced on
a cash basis, with an estimated reserve for future needs of $761 million.
Definitions for the General Fund and all other funds are provided in Exhibit A
to this AIS.

The State's enacted budget includes several new multi-year tax reduction
initiatives, including acceleration of the State-funded property and local
income tax relief for senior citizens under the School Tax Relief Program
(STAR), expansion of the child care income-tax credit for middle-income
families, a phased-in reduction of the general business tax, and reduction of
several other taxes and fees, including an accelerated phase-out of assessments
on medical providers. The enacted budget also provides for significant increases
in spending for public schools, special education programs, and for the State
and City university systems. It also allocates $50 million for a new Debt
Reduction Reserve Fund (DRRF) that may eventually be used to pay debt service
costs on or to prepay outstanding State-supported bonds.

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The 1998-99 State Financial Plan projects a closing balance in the General
Fund of $1.42 billion that is comprised of a reserve of $761 million available
for future needs, a balance of $400 million in the Tax Stabilization Reserve
Fund (TSRF), a balance of $158 million in the Community Projects Fund (CPF), and
a balance of $100 million in the Contingency Reserve Fund (CRF). The TSRF can be
used in the event of an unanticipated General Fund cash operating deficit, as
provided under the State Constitution and State Finance Law. The CPF is used to
finance various legislative and executive initiatives. The CRF provides
resources to help finance any extraordinary litigation costs during the fiscal
year.

Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of the Budget believes
that its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from time to
time. See the Section entitled "Special Considerations" below for a discussion
of risks and uncertainties faced by the State.

Current Fiscal Year (1998-99 State Financial Plan)

The State issues quarterly modifications to the cash-basis State Financial
Plan in July, October, and January, as provided by law. These modifications
summarize actual receipts and disbursements to date for each reporting period
and revised estimates of total receipts and disbursements for the current fiscal
year.

The State issued its Third Quarterly Update to the 1998-99 State Financial
Plan on January 27, 1999, in conjunction with the release of the 1999-2000
Executive Budget. To provide readers with a summary of previous changes to the
1998-99 Financial Plan, the review of the Third Quarterly Update is preceded by
a brief summary of the State's prior quarterly updates.

Prior Quarterly Updates (current fiscal year)

The State issued its First Quarterly Update to the cash-basis 1998-99
State Financial Plan on July 30, 1998. The update reported that the State's
Financial Plan remained balanced. In the update, the State made several
revisions to its receipts estimates, which had the net effect of increasing
projected General Fund receipts by $250 million over the Financial Plan issued
with the enacted budget (June 25, 1998). Stronger-than-expected personal income
tax and sales tax collections in the first quarter were the main reason for the
revision to the receipts estimate. The State made no changes to its disbursement
projections in the 1998-99 Financial Plan.

As updated in July, the Financial Plan projected a closing balance in the
General Fund of $1.67 billion, with the balance comprised of a $1.01 billion
reserve for future needs, $400 million in the Tax Stabilization Reserve Fund,
$100 million in the Contingency Reserve Fund (after a planned deposit of $32
million in 1998-99), and $158 million in the Community Projects Fund.

On October 30, 1998, the State issued the second of its three quarterly
updates to the 1998-99 Financial Plan ("Mid-Year Update"). In the Mid-Year
Update, the State projected that the Financial Plan would remain in balance,
with projected total receipts and transfers from other funds of $37.84 billion,
an increase of $29 million over the amount projected in the First Quarterly
Update. No changes were made to the July disbursement projections, with total
disbursements and transfers to other funds of $36.78 billion expected at that
time.

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The Mid-Year Update projected a closing balance in the General Fund of
$1.7 billion, with the balance comprised of $1.04 billion reserved for future
needs, $400 million in the Tax Stabilization Reserve Fund, $100 million in the
Contingency Reserve Fund and $158 million in the Community Projects Fund.

Third Quarterly Update (current fiscal year)

The State revised the cash-basis 1998-99 State Financial Plan on January
27, 1999, with the release of the 1999-2000 Executive Budget. The changes from
prior quarterly updates reflect actual results through December 1998, as well as
updated economic and spending projections for the balance of the current fiscal
year.

The 1998-99 Financial Plan currently projects a year-end available cash
surplus of $1.79 billion in the General Fund, an increase of $749 million over
the surplus estimate in the Mid-Year Update. Strong growth in receipts as well
as lower-than-expected disbursements during the first nine months of the fiscal
year account for the higher surplus estimate, as described in more detail below.

The 1999-2000 Executive Budget proposes using the projected available
surplus from 1998-99 to offset a portion of the incremental loss of tax receipts
from enacted tax cuts scheduled to be effective for the 2000-01 and 2001-02
fiscal years. To make this surplus available for the tax reduction program, the
State plans to deposit $1.79 billion in the tax refund reserve to pay tax
refunds in 1999-2000 from overpayments of taxes in 1998-99. This action has the
effect of decreasing reported personal income receipts in 1998-99, while
increasing reported receipts in 1999-2000, as these refunds will no longer be a
charge against current revenues in 1999-2000 (for a more complete discussion of
the tax refund reserve, see table 5 in the AIS and the text preceding that
table). The 1999-2000 Financial Plan assumes that these additional receipts will
become a part of the 1999-2000 closing fund balance, and not used to support
1999-2000 operations.

Revisions to 1998-99 Receipts Estimates

Total receipts and transfers from other funds to be deposited in the
General Fund in 1998-99 are projected to be $36.78 billion, $1.06 billion less
than projected at the time of the Mid-Year Update. The forecast for 1998-99 tax
receipts has been increased by $729 million, but this increase is more than
offset by the decision to create reserves for the payment of $1.79 billion in
personal income tax refunds for the 1998 tax year, which has the effect of
reducing reported receipts (as discussed above). The balance of the tax refund
reserve on March 31, 1999 is now projected to be $2.32 billion, including $521
million as a result of LGAC.

Prior to refund reserve transactions, personal income tax collections for
1998-99 are now projected at $20.69 billion, an increase of 13 percent from
comparable 1997-98 receipt levels. After reflecting the tax refund reserve
transactions discussed above, reported income tax receipts are projected at
$20.18 billion, or $1.26 billion less than projected in October. Projected
business tax receipts have been increased by $4 million, to $4.79 billion, and
user tax collections by $23 million, to $7.23 billion. Other tax receipts are
projected to increase by $27 million from the Mid-Year Update and are now
expected to total $1.10 billion for the fiscal year. Miscellaneous receipts and
transfers from other funds are projected to reach $3.48 billion, $145 million
higher than in the MidYear Update.

Revisions to 1998-99 Disbursements Estimates

The State now projects total General Fund disbursements and transfers to
other funds of $36.62 billion in 1998-99, a reduction of $161 million from the
Mid-Year Update. The State has lowered its estimate of disbursements for local
assistance by $248 million and for State operations by $54 million. Higher

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projected spending for general State charges ($71 million) and transfers to
other funds ($70 million) partially offset these reductions.

In local assistance, spending from the Community Projects Fund, which pays
primarily for legislative initiatives, has lagged behind earlier projections and
accounts for $68 million of the $248 million downward revision. Similarly,
special education claims from school districts are running below projections,
leading the State to lower its spending estimate by $32 million for 1998-99.
Lower-than-expected program and administrative costs in welfare ($99 million),
Medicaid ($32 million), and Children and Families Services ($21 million) account
for most of the remaining downward revisions in projected local assistance
spending.

In State operations, projected spending is lower by $54 million primarily
due to savings from the Statewide hiring freeze, agency attrition management,
and continued nonpersonal service efficiencies.

Revised higher spending for fringe benefits ($71 million) reflects
higher-than-anticipated costs for employee benefits and health insurance.
Transfers for debt service decline $29 million because of higher refunding
savings and other debt management activities. Capital projects transfers
increase by $5 million, while other transfers increase by $94 million primarily
to cover unanticipated shortfalls in the State Lottery Fund ($80 million) and
the Oil Spill Fund ($ 10 million).

Closing General Fund Balance

The State now projects a closing balance of $799 million in the General
Fund, a decrease of $899 million from the Mid-Year Update. The decline reflects
the payment of the $1.04 billion undesignated reserve identified in October plus
additional surplus monies projected in the January Update into the tax refund
reserve (as described above). The projected closing balance of $799 million in
the General Fund is comprised of $473 million in the Tax Stabilization Reserve
Fund, following a new $73 million deposit in 1998-99; $100 million in the
Contingency Reserve Fund, following a planned $32 million deposit; and the
remaining balance of $226 million in the Community Projects Fund.

1999-2000 Fiscal Year (Executive Budget Forecast)

The Governor presented his 1999-2000 Executive Budget to the Legislature
on January 27, 1999. The Executive Budget contains financial projections for the
State's 1998-99 through 200102 fiscal years, and a proposed Capital Program and
Financing Plan for the 1999-2000 through 2003-04 fiscal years. The Governor will
prepare amendments to his Executive Budget, as permitted under law. These
amendments will be reflected in a revised Financial Plan that will be released
on or before February 26, 1999. There can be no assurance that the Legislature
will enact into law the Executive Budget as proposed by the Governor, or that
the State's adopted budget projections will not differ materially and adversely
from the projections set forth in this Update. For a more detailed discussion of
the State's budgetary process and uncertainties involving its forecasts and
projections, see "State Organization - State Financial Procedures" in the AIS
and "Special Considerations" below.

The 1999-2000 Financial Plan is projected to have receipts in excess of
disbursements on a cash basis in the General Fund, after accounting for the
transfer of available receipts from 1998-99 to 1999-2000. Total General Fund
receipts, including transfers from other funds, are projected to be $38.66
billion, an increase of $1.88 billion over projected receipts in the current
fiscal year. General Fund disbursements, including transfer to other funds, are
recommended to grow by 1.3 percent to $37. 10 billion, an increase of $482
million over 1998-99. State Funds spending is projected to total $49.33 billion,
an increase of $867 million or 1.8 percent from the current year. Under the
Governor's recommendations, spending from All Governmental Funds is also
expected to grow by 1.8 percent, increasing by $1.25 billion to $72.66 billion.

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The State is projected to close the 1999-2000 fiscal year with a balance
in the General Fund of $2.36 billion. The balance is comprised of $1.79 billion
in tax reduction reserves, $473 million in the Tax Stabilization Reserve Fund
and $ 100 million in the Contingency Reserve Fund.

1998-99 State Financial Plan

Four governmental fund types comprise the State financial Plan: the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. The State's fund structure adheres to the accounting
standards of the Governmental Accounting Standards Board. This section discusses
significant activities in the General Fund and the other governmental funds
anticipated in 1998-99.

General Fund

The General Fund is the principal operating fund of the State and is used
to account for all financial transactions except those required to be accounted
for in another fund. It is the State's largest fund and received almost all
State taxes and other resources not dedicated to particular purpose. In the
State's 1998-99 fiscal year, the General Fund is expected to account for
approximately 47.6 percent of all Government Funds disbursements and 70.1
percent of total State Funds disbursement. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payment in other fund types.

Total receipts and transfers from other funds are projected to be $38.66
billion, an increase of $4.89 billion from the 1997-98 fiscal year. Total
General Fund disbursements and transfers to other funds are projected to be
$37.10 billion, an increase of $2.92 billion from the 1997-98 fiscal year.

Projected General Fund Receipts

The 1999-2000 Financial Plan projects General Fund receipts (including
transfers from other funds) of $38.66 billion, an increase of $1.88 billion over
the estimated 1998-99 level. After adjusting for tax law and administrative
changes, recurring growth in the General Fund tax base is projected to be
approximately three percent during 1999-2000.

The forecast of General Fund receipts in 1999-2000 reflects the next stage
of the School Tax Relief (STAR) property tax reduction program, which has an
incremental cost of $638 million in 1999-2000, as well as the continuing impact
of earlier tax reductions totaling approximately $2 billion. In addition, the
Executive Budget reflects several new tax reduction proposals that are projected
to have only a modest impact on receipts in 1999-2000 and 2000-01, but are
expected to reduce receipts by $1.04 billion annually when fully phased in at
the end of 2003-04.

The largest new tax cut proposals call for further reductions in the
personal income tax to benefit middle income taxpayers. These proposals increase
the income threshold where the top tax rate of 6.85 percent applies and doubles
the value of the dependent exemption to $2,000. The fully effective annual cost
of these proposals is $600 million in fiscal year 2003-04. In addition, the
Executive Budget includes several other targeted tax cut proposals, including:
reducing certain energy taxes; lowering the alternative minimum tax on
corporations from 3 percent to 2.5 percent; extending the business tax rate
reductions enacted for general corporations last year to banks and insurance
companies; creating a New York Capital Asset Exclusion for investments in a New
York business; creating a new credit for job creation in cities; expanding the
Qualified Emerging Technology Credit; conforming the estate tax to recent
federal changes; eliminating several nuisance taxes and fees, including minimum
taxes imposed on petroleum and aviation businesses; and expanding the income tax
credit benefits provided to farmers to ease school property tax burdens.
Together, these targeted reductions will have a full annual value of
approximately $440 million.

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Personal income tax collections for 1999-2000 are projected to reach
$22.83 billion, an increase of $2.65 billion (13.2 percent) over 1998-99. This
increase is due in part to refund reserve transactions (including those
described earlier) which serve to increase reported 1999-2000 personal income
tax receipts by $1.77 billion. Collections also benefit from the estimated
increase in income tax liability of 13.5 percent in 1998 and 5.3 percent in
1999. The large increases in liability in recent years have been supported by
the continued surge in taxable capital gains realizations. This activity is
related at least partially to recent changes in the federal tax treatment of
such income. The growth in capital gains income is expected to plateau in 1999.
Growth in 1999-2000 personal income tax receipts is partially offset by the
diversion of such receipts into the School Tax Relief Fund, which finances the
STAR tax reduction program. For 1999-2000, $1.22 billion will be deposited into
this fund, an increase of $638 million.

User tax and fees are projected at $7.16 billion in 1999-2000, a decrease
of $72 million from the current year. The decline in this category reflects the
incremental impact of already-enacted tax reductions, and the diversion of $30
million of additional motor vehicle registration fees to the Dedicated Highway
and Bridge Trust Fund. Adjusted for these changes, the underlying growth of user
taxes and fees is projected at 2.5 percent. The largest source of receipts in
this category is the sales and use tax, which accounts for nearly 80 percent of
projected receipts. The continuing base of the sales tax is projected to grow
4.4 percent in the coming year, and assumes the Legislature will not enact
additional "sales-tax free" weeks that would a&ct receipts before December 1,
1999, when the sales and use tax on clothing and footwear under $110 is
eliminated.

Business tax receipts are expected to total $4.53 billion in 1999-2000,
$267 million below 199899 estimated results. The intact of tax reductions
scheduled in law, as well as slower growth in the underlying tax base, explain
the decline in this category of the Financial Plan.

Receipts from other taxes, which are comprised primarily of receipts from
estate and gift taxes and pari-mutuel taxes on wagering, are expected to decline
$119 million to $980 million in 19992000. The ongoing effect of tax cuts already
in law is the main reason for the decline. In addition, this category formerly
included receipts from the real property gains tax that was repealed in 1996,
and receipts from the real property transfer tax that, since 1996, have been
earmarked to support various environmental programs.

Miscellaneous receipts includes license revenues, income from fees and
fines, abandoned property proceeds, investment income, and a portion of the
assessments levied on medical providers. Miscellaneous receipts are expected to
total $1.24 billion in 1999-2000, a decline of $292 million from 1998-99.
Roughly $165 million of this decline is attributable to the ongoing phase-out of
medical provider assessments. In addition, the Executive Budget proposes
eliminating medical provider assessments on April 1, 1999, one year earlier than
planned, which accounts for another $26 million of the year-to-year decline in
miscellaneous receipts (the remainder of the provider assessment savings is
reflected in lower General Fund disbursements).

Transfers to the General Fund consist primarily of tax revenues in excess
of debt service requirements. State sales tax proceeds in excess of amounts
needed to support debt service payments for LGAC account for 82 percent of the
1999-2000 receipts in this category. Transfers to the General Fund decline $63
million in 1999-2000, reflecting lower projected receipts from the real estate
transfer tax.

Projected General Fund Disbursements

The 1999-2000 Financial Plan projects General Fund disbursements and
transfers to other funds of $37.10 billion, an increase of $482 million over
projected spending for the current year. Grants to local governments constitute
approximately 67 percent of all General Fund spending, and include payments to
local governments, non-profit providers and individuals. Disbursements in this
category are projected to

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decrease $87 million (0.4 percent) to $24.81 billion in 1999-2000, in part due
to a $175 million decline in proposed spending for legislative initiatives.

General Fund spending for school aid is projected at $9.99 billion on a
State fiscal year basis, an increase of $292 million (3.0 percent) from the
current fiscal year. The Executive Budget recommends additional funding for
operating aid, building aid, and textbook and computer aids. It also funds the
remainder of aid payable for the 1998-99 school year. These increases are
partially offset by the elimination of categorical grants, reductions in BOCES
aid, and other formula modifications. A new Educational Improvement block grant
replaces categorical programs such as pre-kindergarten and minor maintenance to
give school districts greater flexibility in meeting locally determined needs.

Medicaid spending is estimated to total $5.50 billion in 1999-2000, a
modest decline of $87 million or 1.6 percent from 1998-99. To achieve program
savings, the Executive Budget recommends a series of cost containment actions,
including restructuring rates paid to providers for certain services, shifting
treatments for certain services to outpatient settings, and maximizing allowable
federal funds. At the same time, medical providers would benefit from the
proposed acceleration of the phase-out of provider assessments already scheduled
in law. The State had planned to eliminate provider assessments on April 1,
2000; the Executive Budget proposes eliminating them one year earlier. As a
result, health care providers will not be required to pay $223 million in
assessments in 1999-2000.

Spending on welfare is projected at $1.49 billion, a decline of $41
million (2.7 percent) from 1998-99. Since 1994-95, State spending on welfare has
fallen by $709 million, or 32 percent, driven by significant welfare changes
initiated at the State and federal levels and a large, steady decline in the
number of people receiving benefits. Several trends have contributed to falling
caseloads, including the State's strong economic performance over the past three
years; State, federal and local welfare-to-work initiatives that have expanded
training and support services to assist recipients in becoming self-sufficient;
tightened eligibility review for applicants; and aggressive fraud prevention
measures.

Local assistance spending for Children and Families Services is projected
at $864 million in 19992000, down $42 million (4.7 percent) from 1998-99. The
decline in General Fund spending is offset by higher spending on child care and
child welfare services that is occurring with federal Temporary Assistance for
Needy Families ("TANF") funds, which has allowed the State to lower General Fund
spending while still expanding services in this area.

In Mental Health, the State projects spending of $619 minion in 1999-2000,
an increase of $40 million (7 percent) over 1998-99, including $23 million in
additional funding for the Community Reinvestment Program. Mental Retardation
and Developmental Disabilities spending increases by $17 million to $576
million. Major components of spending growth include an inflation adjustment for
Medicaid programs, annualization of new community services from 1998-99, and the
first year of the NYS-CARES initiative that is projected to invest $129 million
in State funds over the next five years to develop community-based beds for
persons on waiting lists.

Spending for all other local assistance programs will total $5.72 billion
in 1999-2000, a decline of $266 million from 1998-99. Lower spending of $175
million for legislative member items in 1999-2000 accounts for the majority of
the year-to-year change. Proposed actions to restructure the State's tuition
assistance program produce a decline of $17 million from the previous fiscal
year. Unrestricted aid to local governments is estimated at $822 million, $9
million below 1998-99 levels.

State Operations reflect the costs of running the Executive, Legislative
and Judicial branches of government. Spending in this category is projected to
increase $225 million or 3.4 percent above 1998-99, and reflects the annualized
costs of 1998-99 collective bargaining agreements, the decline in federal
receipts

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that offset General Fund spending for mental hygiene programs, the costs of
staffing a new State prison, and growth in the Legislative and Judiciary
budgets. The State's overall workforce is projected to remain stable at
approximately 191,200 persons.

Personal service costs are projected to be $5.01 billion, an increase of
$128 million from the current year. No funding is included in the Financial Plan
for incremental costs from new collective bargaining agreements after the
current labor contracts expire on April 1, 1999. Nonpersonal service is
projected to be $1.87 billion, with the increase of $97 million used primarily
to fund Year 2000 compliance and related activities in the Office for
Technology.

Total spending for general State charges is projected to grow by $47
million (2.1 percent) in 1999-2000. The increase is comprised of higher payments
for health insurance, Court of Claims settlements and taxes on State-owned
lands, offset by decreases for pension contributions and higher reimbursements
for fringe benefit costs charged to positions financed by non-General funds,
which lower General Fund expenses.

Transfers in support of debt service are projected to grow approximately
$185 million or 9 percent in 1999-2000, from $2. 10 billion to $2.29 billion.
The reclassification of SUNY community college debt service ($36 million) from
local assistance accounts for a portion of this annual increase. The remainder
reflects annualized costs from prior borrowings and a portion of the Governor's
proposed debt reduction program which has the effect of increasing costs in the
short-term in order to reduce outstanding debt more rapidly. Transfers in
support of capital projects for 1999-2000 are estimated to total $438 million
and are comprised of $188 million for direct capital spending to finance a
variety of recreational, educational and cultural projects and $250 million as
the second annual deposit to the Debt Reduction Reserve Fund (DRRF) that was
created in 1998-99. Other transfers decline by $71 million from 1998-99, as the
one-time transfers in the current year for the Lottery and Oil Spill Funds do
not recur in 1999-2000.

Closing General Fund Balance

The State is projected to close the 1999-2000 fiscal year with a General
Fund balance of $2.36 billion. The balance is comprised of $1.79 billion that
the Governor is proposing to set aside as a tax reduction reserve, $473 million
in the Tax Stabilization Reserve Fund and $100 million in the Contingency
Reserve Fund. The entire $226 million balance in the Community Projects Fund is
expected to be used in 1999-2000, with $80 million spent to pay for existing
projects and the remaining balance of $146 million, against which there are
currently no appropriations as a result of the Governor's 1998 vetoes, used to
fund other expenditures in 1999-2000.

Non-recurring Resources

The Division of the Budget projects that the 1999-2000 Financial Plan
contains only $33 million in non-recurring resources, or less than one-tenth of
one percent of General Fund disbursements. In 1999-2000, the largest one-time
resources consist of a $15 million loan repayment from the Long Island Power
Authority and $8 million from the anticipated sale of State property at 270
Broadway in New York City. The remaining amounts include various routine
transfers to the General Fund.

Fund Balances

The 1998-99 Financial Plan projects a closing fund balance in the General
Fund of $1.42 billion. This fund balance is composed of a reserve of $761
million available for future needs, a $400 million balance in the TSRF, a $158
million balance in the CPF, and a balance of $100 million in the CRF, after a
projected deposit of $32 million in 1998-99.

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Outyear Projections of Receipts and Disbursements

State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and an updated projection
of $1.11 billion for 2000-01, and a $2.08 billion gap for 2001-02. 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 million less than previously projected,
after application of reserves created as part of the 1998-99 budget process.
Such reserves would not be available against subsequent year imbalances.

These estimates assume that the Legislature will enact the 1999-2000
Executive Budget and accompanying legislation in its entirety. The gaps also
include $500 minion in unspecified annual spending efficiencies, which is
comparable to the Governor's Executive Budget assumptions in previous fiscal
years. Future Financial Plans are also likely to count on savings from
efficiencies, workforce management efforts, aggressive efforts to maximize
federal and other non-General Fund resources, and other efforts to control State
spending. Nearly all the actions proposed by the Governor to balance the
1999-2000 Financial Plan recur and grow in value in future years. The Division
of the Budget projects that, if the projected budget gap for 2000-01 is closed
with recurring actions, the 2001-02 budget gap would be reduced to $963 million
under current projections.

The Executive Budget assumes the use of the $1.79 billion tax reduction
reserve to offset the incremental loss in tax receipts resulting from previously
enacted and proposed tax reductions beginning in 2000-01. The Financial Plan
currently assumes that $589 million of the reserves (about one-third of the
amount available) will be applied in 2000-01, with the remaining $1.2 billion
used in 2001-02. The State may alter how it apportions the reserves across the
three years of the projection period.

The Governor is required by law to propose a balanced budget each year and
Will propose steps necessary to address any potential remaining budget gaps in
subsequent budgets. The Division of the Budget estimates that the State has
closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3 billion in
its 1995-967 1996-97 and 1997-98 fiscal years, respectively, and ended each of
these years with a cash surplus.

Receipts

General Fund receipts fall to an estimated $35.99 billion in 2000-01
reflecting the incremental impact of already enacted tax reductions, the impact
of prior tax refund reserve transactions and the earmarking of receipts for
dedicated highway purposes. Receipts are projected to grow modestly to $36.20
billion in 2001-02, again re receipts growth, as well as the incremental impact
of tax reductions recommended with the Executive Budget.

Personal income tax receipts are projected to decline to $20.72 billion in
2000-01. The decline from 1999-2000 reflects the positive impact of tax refund
reserve transactions on 1999-2000 receipts and reduced growth in underlying
liability. The slowdown in liability growth results from a moderate slowdown in
personal income and wage increases and an end to the rapid escalation in taxable
capital gains realizations. In addition, receipts are reduced by the incremental
value of the STAR tax reduction plan and the required deposit of personal income
tax receipts into the STAR Fund. Personal income tax receipts for 2001-02 are
projected to increase to $20.94 billion. The modest increase results from
continued normal growth in liability offset by increasing deposits to the STAR
Fund.

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Receipts from user taxes and fees are estimated to total $6.88 billion in
2000-01, a decline of $281 million from 1999-2000. This decline results, in
part, from the dedication of an increased portion of motor fuel tax receipts to
the Dedicated Highway and Bridge Trust Fund. Further, receipts growth is reduced
due to the incremental impact of already-enacted tax reductions such as the
elimination of the sales tax on clothing and shoes priced under $110. User taxes
and fees receipts increase to an estimated $7.10 billion by 2001-02. Moderate
economic growth projected over the next several years will keep underlying
growth in the sales tax base in the 4 to 5 percent range over the 2000-01 and
2001-02 periods.

Business tax receipts are estimated to decline to $4.33 billion in 2000-01
as the impact of recently enacted tax reductions begin to take effect. Receipts
are projected to fall to $4.19 billion in 2001-02, reflecting the ongoing effect
of business tax reductions and the recommended changes associated with energy
tax reform and reduction, as well as other business tax reductions proposed in
the 1999-2000 Executive Budget.

Other taxes are projected to decline to $813 million in 2000-01 as the
impact of estate tax reductions and the elimination of the gift tax begin to
affect receipts. Further, the remainder of receipts from the real property gains
tax will fall off as prior year liabilities and assessments are drawn down.
Other tax receipts fall to an estimated $772 million in 2001-02 as the impact of
estate and gift tax reduction provisions enacted in 1997 are fully phased in.

Miscellaneous receipts are estimated to total $1.20 billion in 2000-01, a
decline of $38 million from the prior year. Receipts in this category are
projected to reach $1.17 billion in 2001-02.

Transfers from other funds are estimated to grow to $2.04 billion in
2000-01, including the transfer back to the General Fund of Capital Projects
Fund resources. Transfers fall slightly in 2001 -02 as normal growth in LGAC
transfers associated with the sales tax is offset by declines in other
transfers.

Disbursements

The State currently projects spending to grow by $1.09 billion (2.9
percent) in 2000-01 and an additional $1.8 billion (4.7 percent) in 2001-02.
General Fund spending increases at a higher rate in 2001-02 than in 2000-01,
driven primarily by higher growth rates for Medicaid, welfare, Children and
Families Services, and Mental Retardation, as well as the loss of federal money
that offsets General Fund spending.

Local assistance spending accounts for most of the projected growth in
General Fund spending in the outyears, increasing by $1.04 billion in 2000-01
and $1.46 billion in 2001-02. School aid, which accounts for the largest share
of General Fund spending, is projected to grow by $612 million (6.1 percent) in
2000-01 and $578 million (5.5 percent) in 2001-02. Continuing growth in building
aid and selected operating aid drives most of this higher spending. Other
education spending, particularly in pre-school handicapped programs, is also
expected to grow strongly, increasing by roughly $70 million (8 to 9 percent)
annually, as enrollment growth and higher per pupil costs produce higher growth.

Medicaid is the next largest General Fund program. Spending is expected to
grow by $313 million (5.7 percent) in 2000-01 and $452 million (7.8 percent) in
2001-02. Consistent with national trends, underlying growth in health care costs
is projected at 6.5 percent over the projection period. The State expects
proposed cost containment and managed care to reduce the Medicaid program's
spending base, but not to alter the underlying forces driving the rise in health
care costs. In welfare, spending is expected to increase by less than 3 percent
in 2000-01, but grow at 6 percent in 2001-02 as caseloads stabilize and federal
work participation rules require additional State resources. Spending on
Children and Families Services is expected to increase rapidly in both 2000-01
and 2001 -02, reflecting welfare-to-work investments and the loss of federal
money in 2001-02 that is currently used to offset General Fund spending. Mental
hygiene programs

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continue to grow faster than inflation because of recently enacted community
investment commitments, as well as the continued loss of federal offsets. Most
other programs are expected to grow at historical rates, generally around
inflation.

State operations costs are projected to increase by $179 million (2.6
percent) in 2000-01 and $171 million (2.4 percent) in 2001-02. Most of this
increase reflects the costs of staffing additional correctional facilities, the
loss of federal money used to offset General Fund spending in mental hygiene
agencies, modest inflationary increases in non-personal service costs, and
additional spending for computer systems and technology initiatives. Consistent
with past practice, the State's outyear projections do not assume any new costs
from collective bargaining agreements negotiated after the current round of
contracts expire in April.

General State charges are projected to increase by $95 million in 2000-01
and $76 million in 2001-02. The growth reflects inflationary increases for
health insurance and other benefits for State employees. The projections do not
assume any changes in existing benefits.

Capital project transfers are expected to increase as a result of the
Governor's proposed debt reduction initiatives that drive higher pay-as-you-go
spending in the future. Other transfers show little change in the outyears.

Other Governmental Funds

In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds which are discussed
below. Amounts below do not include other sources and uses of funds transferred
to or from other fund types.

Special Revenue Funds

Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise approximately 41
percent of total governmental funds receipts in the 1998-99 fiscal year,
three-quarters of that activity relates to federally-funded programs.

For 1999-2000, the Financial Plan projects disbursements of $30.54 billion
from Special Revenue Funds ("SRFs") derived from either State or federal
sources, an increase of $537 million or 1.8 percent over 1998-99. Disbursements
from State SRFs are projected at $8.61 billion, an increase of $315 million or
3.8 percent from 1998-99. The STAR program, disbursements for which increase by
$638 million from 1998-99, accounts for most of the year-to-year growth in State
SRF spending. The elimination of medical provider assessments on April 1, 1999
partially offsets this growth. Disbursements from federal SRFS, which account
for approximately three-quarters of all special revenue spending, are estimated
at $21.93 billion in 1999-2000, an increase of $222 million or 1.0 percent from
1998-99. The year-to-year growth in federal SRF spending is primarily due to
increases in federal contributions for Children and Family Assistance ($123
million), education ($170 million), labor ($89 million) and the expanded Child
Health Plus program ($96 million), offset by a decrease in welfare ($259
million).

Capital Projects Funds

Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital

B-11
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construction purposes supported by other revenues. In the 1998-99 fiscal year,
activity in these funds is expected to comprise 5.5 percent of total
governmental receipts.

Disbursements from Capital Projects funds in 1999-2000 are estimated at
$4.41 billion, or $145 million higher than 1998-99. The proposed spending plan
includes: $2.61 billion in disbursements for transportation purposes, including
State and local highway and bridge programs; $709 million for environmental
activities; $348 million for correctional services; $272 million for SUNY and
CUNY; and $271 million for mental hygiene projects.

Approximately 22 percent of capital projects spending in 1999-2000 is
proposed to be financed with State "pay-as-you-go" resources. State-supported
bond issuances, including general obligation bonds and
lease-purchase/contractual obligations, finance 46 percent of capital projects
spending, with federal grants financing the remaining 32 percent.

Debt Service Funds

Debt Service Funds are used to account for the payment of principal and
interest on long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements (see the
section entitled "Debt and Other Financing Activities - Outstanding Debt of the
State and Certain Authorities" in this AIS). This fund type is expected to
comprise 3.8 percent of total governmental fund receipts in the 1998-99 fiscal
year. Receipts in these funds in excess of debt service requirements may be
transferred to the General Fund, Capital Projects Funds and Special Revenue
Funds, pursuant to law.

Disbursements from Debt Service Funds are estimated at $3.68 billion in
1999-2000, an increase of $384 million in debt service costs from 1998-99. The
increase in debt service is primarily attributable to bonds previously issued in
support of the following: $131 million for State and local highway and bridge
programs financed by the Dedicated Highway and Bridge Trust Fund; $80 million
for SUNY and CUNY higher education purposes, and $38 million for the mental
hygiene programs financed through the Mental Health Services Fund. Disbursements
on bonds for SUNY's upstate community colleges, previously appropriated as local
aid, have now been reclassified as debt service spending.

Special Considerations

General

The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of these factors, their impact cannot, as a practical matter,
be included in the assumptions underlying the State's projections at this time.

The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the State.
There can be no assurance that the State economy will not experience

B-12
<PAGE>

results in the current fiscal year that are corresponding material and adverse
effects on the State's projections of receipts and disbursements. For a
discussion of uncertainties in the current economic forecast, see the section
entitled "Economic and Demographics Current Economic Outlook."

Projections of total State receipts in the Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.

Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.

An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action, as indicated in the
section entitled "Current Fiscal Year - Fund Balances." For more information on
litigation pending against the State, see the section entitled "Litigation" in
this AIS.

The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this AIS. In the
past, the State has taken management actions to address potential Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.

Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government have helped to
create projected structural budget gaps for the State. These gaps result from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State would be required to take actions
to increase receipts and/or reduce disbursements as it enacts the budget for
that year, and, under the State Constitution, the Governor is required to
propose a balanced budget each year. There can be no assurance, however, that
the Legislature will enact the Governor's proposals or that the State's actions
will be sufficient to preserve budgetary balance in a given fiscal year or to
align recurring receipts and disbursements in future fiscal years. For example,
the fiscal effects of tax reductions adopted in the last several fiscal years
(including 1998-99) are projected to grow more substantially beyond the 1998-99
fiscal year, with the incremental annual cost of all currently enacted tax
reductions estimated at over $4 billion by the time they are fully effective in
State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.

The Division of Budget believes that its projections of receipts and
disbursements relating to the 1999-2000 Executive Budget, and the assumptions on
which they are based, are reasonable. The projections

B-13
<PAGE>

assume no changes in federal tax law, which could substantially alter the
current receipts forecast. In addition, these projections do not include funding
for new collective bargaining agreements after the current contracts expire on
April 1, 1999. Each percentage increase in employee wages would add roughly $70
million in new Financial Plan costs. Collective bargaining commitments at
current inflationary rates would increase labor costs by approximately $480
million by the end of the projection period.

The State's outyear projections may change substantially as the budget
process for 1999-2000 continues. For example, the Governor will propose
amendments to the 1999-2000 Executive Budget, as permitted under law. These
amendments, which will be reflected in a revised Financial Plan to be released
on or before February 26, 1999, may materially and adversely impact the
projections set forth in this Update and are likely to include additional
funding for public schools. Actual results for the fiscal year may also differ
materially and adversely from the projections set forth in this Update. Finally,
the Legislature may not enact the Governor's proposals or the State's actions
may be insufficient to preserve budgetary balance or to align recurring receipts
and disbursements in either 1999-2000 or in future fiscal years.

The fiscal effects of tax reductions adopted in the last several fiscal
years and those proposed by the Governor in the 1999-2000 Executive Budget are
projected to grow more substantially beyond the 1999-2000 fiscal year. The
incremental annual cost of enacted or proposed tax reductions is estimated to
peak at $2.1 billion in 2000-01, then gradually decline to about $1 billion in
2003-04.

Over the long-term, uncertainties with regard to the economy present the
largest potential risk to future budget balance in New York State. For example,
a downturn in the financial markets or the wider economy is possible, a risk
that is heightened by the lengthy expansion currently underway. The securities
industry is more important to the New York economy than the national economy,
potentially amplifying the impact of an economic downturn. A large change in
stock market performance during the forecast horizon could result in wage and
unemployment levels that are significantly different from those embodied in the
forecast. Merging and downsizing by firms, as a consequence of deregulation or
continued foreign competition, may also have more significant adverse effects on
employment than expected. Finally, a "forecast error" of one percentage point in
the estimated growth of receipts could cumulatively raise or lower results by
over $1 billion by 2002.

An ongoing risk to the State Financial Plan arises from the potential
impact of certain litigation and federal disallowances now pending against the
State, which could produce adverse effects on the State's projections of
receipts and disbursements. The Financial Plan assumes no significant federal
disallowances or other federal actions that could affect State finances. For
more information on certain litigation pending against the State, see the
section entitled "Litigation" in this Update and in the AIS.

To guard against these risks, the State has projected reserves of $2.36
billion in 1999-2000, comprised of $1.79 billion that the Governor is proposing
to set aside as a tax reduction reserve, $473 million in the Tax Stabilization
Reserve Fund and $100 million in the Contingency Reserve Fund.

Year 2000 Compliance

New York State is currently addressing Year 2000 ("Y2K") data processing
compliance issues. Since its inception, the computer industry has used a
two-digit date convention to represent the year. In the year 2000, the date
field will contain "00" and, as a result, many computer systems and equipment
may not be able to process dates properly or may fail since they may not be able
to distinguish between the years 1900 and 2000. The Year 2000 issue not only
affects computer programs, but also the hardware, software and networks they
operate on. In addition, any system or equipment that is dependent on an
embedded chip, such as telecommunication equipment and security systems, may
also be adversely affected.

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<PAGE>

In 1996, the State established the Year 2000 Date Change Initiative to
facilitate and coordinate New York State's Y2K compliance effort. The Office for
Technology ("OFT"), under the direction of the Governor's Office of State
Operations, is responsible for monitoring the State's compliance progress and
for providing assistance and resources to State agencies. Each agency is
responsible for bringing their individual systems into Year 2000 compliance.
Year 2000 compliance has been identified by the Governor as New York State's
number one technology priority.

In 1997, OFF completed a risk assessment of 712 State data processing
systems and prioritized those systems for purposes of Year 2000 compliance. The
State has estimated that investments of at least $140 million will be required
to bring the State's approximately 350 mission critical and high priority
systems into Year 2000 compliance. Mission-critical systems are those that may
impact the public health, safety and welfare of the State and its citizens, and
for which failure could have a material and adverse impact on State operations.
High-priority systems are critical for a State agency to fulfill its mission or
deliver services. The State allocated over $117 million in centralized Year 2000
funding in 1998-99 to those agencies that maintain mission-critical and
high-priority systems. Agencies are also expending funds from their capital
budgets to address the Year 2000 compliance issue. The State is planning to
spend an additional $19 million in 1999-2000 for Year 2000 embedded chip
compliance, and is also making a contingent appropriation available for
unforeseen emergencies. The Year 2000 compliance effort may require additional
funding above amounts assumed in the State Financial Plan, but those amounts are
not assumed to be material.

OFIF is monitoring compliance progress for the State's mission-critical
and high-priority systems and is reporting compliance progress to the Governor's
office on a quarterly basis. As of December 1998, the State had completed 93
percent of overall compliance effort for its mission-critical systems; 18
systems are now Year 2000 compliant and the remaining systems are on schedule to
be compliant by the first quarter of 1999. As of December 1998, the State has
completed 70 percent of overall compliance effort on the high-priority systems;
168 systems are now Year 2000 compliant and the remaining systems are on
schedule to be compliant by the second quarter of 1999. Compliance testing is
expected to be completed by the end of calendar 1999.

The State is also addressing a number of issues related to bringing its
mission critical systems into compliance, including: testing throughout 1999 of
over 800 data exchange interfaces with federal, state, local and private data
partners; completion of an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Year 2000 compliance
status information and assurances.

Since problems could be identified during the compliance testing phase
that could produce compliance delays, the State is also requiring its agencies
to complete contingency plans for priority systems and business processes by the
first quarter of 1999. These plans will be integrated into the State Emergency
Response Plan and coordinated by the State Emergency Management Office. In
addition, the State Public Service Commission has ordered that all State
regulated utilities complete Year 2000 activities for mission-critical systems,
including contingency plans, by July 1, 1999. The State has also been working
with local governments since December 1996 to raise awareness, promote action
and provide assistance with Year 2000 compliance.

While New York State is taking what it believes to be appropriate action
to address Year 2000 compliance, there can be no guarantee that all of the
State's systems and equipment will be Year 2000 compliant and that there will
not be an adverse impact upon State operations or finances as a result. Since
Year 2000 compliance by outside parties is beyond the State's control to
remediate, the failure of outside parties to achieve Year 2000 compliance could
have an adverse impact on State operations or finances as well.

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<PAGE>

Tax Refund Reserve Account

Personal income tax net collections in recent years have been affected by
the pattern of refund payments made and reflect transactions in the tax refund
reserve account. The tax refund reserve account is used to hold moneys available
to pay tax refunds. The Comptroller deposits into this account tax moneys in the
amounts and at the times determined in the discretion of the Commissioner of
Taxation and Finance. The deposit of moneys in the account during a fiscal year
reduces receipts for such fiscal year, and the withdrawal of moneys from the
account increases receipts in the fiscal year of withdrawal. The tax refund
reserve account also includes amounts made available as a result of the LGAC
financing program that are required to be on deposit in this account. Beginning
in 1998-99, a portion of personal income tax collections will be deposited
directly in the School Tax Reduction (STAR) Fund to be used to make payments to
reimburse local governments for their revenue decreases due to the STAR program.

Cash-Basis Results for Prior Fiscal Years

The State reports its financial results on two bases of accounting: the
cash basis, showing receipts and disbursements; and the modified accrual basis,
prescribed by Generally Accepted Accounting Principles (GAAP), showing revenues
and expenditures. These financial terms are described in the Glossary of
Financial Terms in Exhibit A to this Annual Information Statement.

General Fund 1995-96 through 1997-98

The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives most State
taxes and other resources not dedicated to particular purposes. General Fund
moneys are also transferred to other funds, primarily to support certain capital
projects and debt service payments in other fund types. A narrative description
of cash-basis results in the General Fund is presented below. For a description
of the principal State taxes and fees, see Exhibit B to this Annual Information
Statement.

New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes (TRANs). A national recession, followed by the
lingering economic slowdown in New York and the regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last six fiscal years, however, the State has recorded balanced
budgets on a cash basis, with positive fund balances as described below.

1997-98 Fiscal Year

The State ended its 1997-98 fiscal year in balance on a cash basis, with a
General Fund cash surplus as reported by DOB of approximately $2.04 billion. The
cash surplus was derived primarily from higher-than anticipated receipts and
lower spending on welfare, Medicaid, and other entitlement programs.

The General Fund had a closing balance of $638 million, an increase of
$205 million from the prior fiscal year. The balance is held in three accounts
within the General Fund: the Tax Stabilization Reserve Fund (TSRF), the
Contingency Reserve Fund (CRF) and the Community Projects Fund (CPF). The TSRF
closing balance was $400 million, following a required deposit of $15 million
(repaying a transfer made in 1991-92) and an extraordinary deposit of $68
million made from the 1997-98 surplus. The CRF closing balance was $68 million,
following a $27 million deposit from the surplus. The CPF, which finances
legislative initiatives, closed the fiscal year with a balance of $170 million,
an increase of $95 million. The General Fund closing balance did not include
$2.39 billion in the tax refund reserve account, of which $521

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<PAGE>

million was made available as a result of the Local Government Assistance
Corporation (LGAC) financing program and was required to be on deposit on March
31, 1998.

General Fund receipts and transfers from other funds for the 1997-98
fiscal year (including net tax refund reserve account activity) totaled $34.55
billion, an annual increase of $1.51 billion, or 4.57 percent over 199697.
General Fund disbursements and transfers to other funds were $34.35 billion, an
annual increase of $1.45 billion or 4.41 percent.

1996-97 Fiscal Year

The State ended its 1996-97 fiscal year on March 31, 1997 in balance on a
cash basis, with a General Fund cash surplus as reported by DOB of approximately
$1.42 billion. The cash surplus was derived primarily from higher-than-expected
receipts and lower-than-expected spending for social services programs.

The General Fund closing balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. The balance included $317 million in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million remained on deposit in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing balance did not include $1.86 billion in
the tax refund reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit as of
March 31, 1997.

General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of 0.7 percent from the previous
fiscal year (including net tax refund reserve account activity). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.

1995-96 Fiscal Year

The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus, as reported by DOB, of $445 million. The cash surplus was
derived from higher-than-expected receipts, savings generated through agency
cost controls, and lower-than-expected welfare spending.

The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to a $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance included $237
million on deposit in the TSRF. In addition, $41 million was on deposit in the
CRF. The remaining $9 million reflected amounts then on deposit in the Revenue
Accumulation Fund. The General Fund closing balance did not include $678 million
in the tax refund reserve account of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit as of
March 31, 1996.

General Fund receipts and transfers from other funds (including net refund
reserve account activity) totaled $32.81 billion, a decrease of 1.1 percent from
1994-95 levels. General Fund disbursements and transfers to other funds totaled
$32.68 billion for the 1995-96 fiscal year, a decrease of 2.2 percent from
1994-95 levels.

Other Governmental Funds (1995-96 through 1997-98)

Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most

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significant change in the structure of these funds has been the redirection of a
portion of transportation-related revenues from the General Fund to two new
dedicated funds in the Special Revenue and Capital Projects fund types. These
revenues are used to support the capital programs of the Department of
Transportation and the Metropolitan Transportation Authority (MTA).

In the Special Revenue Funds, disbursements increased from $26.26 billion
to $27.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.

Disbursements in the Capital Projects Funds declined over the three year
period from $3.97 billion to $3.56 billion as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased.

Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
continued costs of the LGAC fiscal reform program. The increases were moderated
by the refunding savings achieved by the State over the last several years using
strict present value savings criteria. The growth in LGAC debt service was
offset by reduced short-term borrowing costs reflected in the General Fund (see
"Debt and Other Financing Activities - Local Government Assistance
Corporation").

GAAP-Basis Results for Prior Fiscal Years

The Comptroller prepares a comprehensive annual financial report on a GAAP
basis for governments as promulgated by the Governmental Accounting Standards
Board. The report, generally released in July each year, contains general
purpose financial statements with a Combined Balance Sheet and its Combined
Statement of Revenues, Expenditures and Changes in Fund Balances. These
statements are audited by independent certified public accountants. The
following table summarizes recent governmental funds results on a GAAP basis.
For information regarding the State's account and financial reporting
requirements, see the section entitled "State Organization - Accounting,
Financial Reporting and Budgeting."

General Purpose Financial Statements of the State for the fiscal year
ended March 31, 1998 will be available on or before July 28, 1998. Copies of the
1997 report (and of the 1998 report when it is available) may be obtained from
the Director of Financial Reporting at the Office of the State Comptroller, Gov.
A.E. Smith Building, Albany, N.Y. 12236 (Tel. 518-473-8977).

1997-98 Fiscal Year

The State completed its 1997-98 fiscal year with a combined Governmental
Funds operating surplus of $1.80 billion, which included operating surpluses in
the General Fund ($1.56 billion), in Capital Projects Funds ($232 million) and
in Special Revenue Funds ($49 million), offset in part by an operating deficit
in Debt Service Funds ($43 million).

General Fund

The State reported a General Fund operating surplus of $1.56 million for
the 1997-98 fiscal year, as compared to an operating surplus of $1.93 billion
for the 1996-97 fiscal year. As a result, the State reported

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an accumulated surplus of $567 million in the General Fund for the first time
since it began reporting its operations on a GAAP basis. The 1997-98 fiscal year
operating surplus resulted in part from higher-than-anticipated personal income
tax receipts, an increase in taxes receivable of $681 million, an increase in
other assets of $195 million and a decrease in pension liabilities of $144
million. These gains were partially offset by an increase in payables to local
governments of $308 million and tax refunds payable of $147 million.

Revenues increased $617 million (1.8 percent) over the prior fiscal year,
with increases in personal income, consumption and use, and business taxes, and
decreases reported for other taxes, federal grants and miscellaneous revenues.
Personal income taxes grew $746 million, an increase of nearly 4.2 percent. The
increase in personal income taxes resulted from strong employment and wage
growth and the strong performance by the financial markets during 1997.
Consumption and use taxes increased $334 million, or 5.0 percent, spurred by
increased consumer confidence. Business taxes grew $28 million, an increase of
0.5 percent. Other taxes fell primarily because revenues for estate and gift
taxes decreased. Miscellaneous revenues decreased $380 million, or 12.7 percent
decrease, due to a decline in receipts from the Medical Malpractice Insurance
Association and from medical provider assessments.

Expenditures increased $147 million (0.4 percent) from the prior fiscal
year, with the largest increases occurring in education and social services.
Education expenditures grew $391 million (3.6 percent), mainly due to an
increase in State support for public schools. This growth was offset, in part,
by a reduction in spending for municipal and community colleges. Social services
expenditures increased $233 million (2.6 percent) to fund growth in these
programs. Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (28.8 percent) due to statutory changes in
the payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contributions of $660 million, a result of the
refinancing of the State's pension amortization that occurred in 1997.

Net other financing sources decreased $841 million (68.2 percent) due to
the nonrecurring use of bond proceeds ($769 million) provided by DASNY to pay
the outstanding pension amortization liability incurred in 1997.

Special Revenue, Debt Service and Capital Projects Fund Types

An operating surplus of $49 million was reported for the Special Revenue
Funds for the 1997-98 fiscal year, which increased the accumulated fund balance
to $581 million. Revenues rose by $884 million over the prior fiscal year (3.3
percent) as a result of increases in tax and federal grant revenues.
Expenditures increased $795 million (3.3 percent) as a result of increased local
assistance grants. Net other financing uses decreased $105 million (3.3
percent).

Debt Service Funds ended the 1997-98 fiscal year with an operating deficit
of $43 million and, as a result, the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6 percent) as a result of increases
in dedicated taxes. Debt service expenditures increased $341 million (14.4
percent). Net other financing sources increased $89 million (401.3 percent) due
primarily to savings achieved through advance refundings of outstanding bonds.

An operating surplus of $232 million was reported in the Capital Projects
Funds for the State's 1997-98 fiscal year and, as a result, the accumulated
deficit in this fund type decreased to $381 million. Revenues increased $180
million (8.6 percent) primarily as a result of a $54 million increase in
dedicated tax revenues and an increase of $101 million in federal grants for
transportation and local waste water treatment projects. Expenditures increased
$146 million (4.5 percent) primarily as a result of increased capital
construction spending for transportation and local waste-water treatment
projects. Net other financing sources

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<PAGE>

increased by $ 100 million primarily as a result of a decrease 'in transfers to
certain public benefit corporations engaged in housing programs.

1996-97 Fiscal Year

The State completed its 1996-97 fiscal year with a combined Governmental
Funds operating surplus of $2.1 billion, which included an operating surplus in
the General Fund of $1.9 billion, in the Capital Projects Funds of $98 million
and in the Special Revenue Funds of $65 million, offset in part by an operating
deficit of $37 million in the Debt Service Funds.

General Fund

The State reported a General Fund operating surplus of $1.93 billion for
the 1996-97 fiscal year, as compared to an operating surplus of $380 million for
the prior fiscal year. The 1996-97 fiscal year GAAP operating surplus reflects
several major factors, including the cash basis operating surplus, the benefit
of bond proceeds which reduced the State's pension liability, an increase in
taxes receivable of $493 million, and a reduction in tax refund liabilities of
$196 million. This was offset by an increased payable to local governments of
$244 million.

Revenues increased $1.91 billion (nearly 6.0 percent) over the prior
fiscal year with increases in all revenue categories. Personal income taxes grew
$620 million, an increase of nearly 3.6 percent, despite the implementation of
scheduled tax cuts. The increase in personal income taxes was caused by moderate
employment and wage growth and the strong financial markets during 1996.
Consumption and use taxes increased $179 million or 2.7 percent as a result of
increased consumer confidence. Business taxes grew $268 million, an increase of
5.6 percent, primarily as a result of the strong financial markets during 1996.
Other taxes increased primarily because revenues from estate and gift taxes
increased. Miscellaneous revenues increased $743 million, a 33.1 percent
increase, because of legislated increases in receipts from the Medical
Malpractice Insurance Association and from medical provider assessments.

Expenditures increased $830 million (2.6 percent) from the prior fiscal
year, with the largest increase occurring in pension contributions and State aid
for education spending. Pension contribution expenditures increased $514 million
(198.2 percent) primarily because the State paid off its 1984-85 and 1985-86
pension amortization liability. Education expenditures grew $351 million (3.4
percent) due mainly to an increase in spending for support for public schools
and physically handicapped children offset by a reduction in spending for
municipal and community colleges. Modest increases in other State aid spending
was offset by a decline in social services expenditures of $157 million (1.7
percent). Social services spending continues to decline because of cost
containment strategies and declining caseloads.

Net other financing sources increased $475 million (62.6 percent) due
mainly to bond proceeds provided by the Dormitory Authority of the State of New
York (DASNY) to pay the outstanding pension amortization, offset by elimination
of prior year LGAC proceeds.

Special Revenue, Debt Service and Capital Projects Fund Types

An operating surplus of $65 million was reported for the Special Revenue
Funds for the 1996-97 fiscal year, increasing the accumulated fund balance to
$532 million. Revenues increased $583 million over the prior fiscal year (2.2
percent) as a result of increases in tax and lottery revenues. Expenditures
increased $384 million (1.6 percent) as a result of increased costs for
departmental operations. Net other financing uses decreased $275 million (8.0
percent) primarily because of declines in amounts transferred to other funds.

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<PAGE>

Debt Service Funds ended the 1996-97 fiscal year with an operating deficit
of $37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt service expenditures
increased $47 million (2.0 percent). Net other financing sources decreased $277
million (92.6 percent) due primarily to an increase in payments on advance
refundings.

An operating surplus of $98 million was reported in the Capital Projects
Funds for the State's 1996-97 fiscal year and, as a result, the accumulated fund
deficit decreased to $614 million. Revenues increased $100 million (5.0 percent)
primarily because a larger share of the real estate transfer tax was shifted to
the Environmental Protection Fund and federal grant revenues increased for
transportation and local waste water treatment projects. Expenditures decreased
$359 million (10.0 percent) because of declines in capital grants for education,
housing and regional development programs and capital construction spending. Net
other financing sources decreased by $637 million as a result of a decrease in
proceeds from financing arrangements.

1995-96 Fiscal Year

The State completed its 1995-96 fiscal year with a combined Governmental
Funds operating surplus of $432 million, which included an operating surplus in
the General Fund of $380 million, in the Capital Projects Funds of $276 million
and in the Debt Service Funds of $185 million, offset in part by an operating
deficit of $409 million in the Special Revenue Funds.

General Fund

The State reported a General Fund operating surplus of $380 million for
the 1995-96 fiscal year, as compared to an operating deficit of $1.43 billion
for the prior fiscal year. The 1995-96 fiscal year surplus reflects several
major factors, including the cash-basis surplus and the benefit of $529 million
in LGAC bond proceeds which were used to fund various local assistance programs.
This was offset in part by a $437 million increase in tax refund liability
primarily resulting from the effects of ongoing tax reductions and (to a lesser
extent) changes in accrual measurement policies, and increases in various other
expenditure accruals.

Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal
year with an increase in personal income taxes and miscellaneous revenues offset
by decreases in business and other taxes. Personal income taxes grew $715
million, an increase of 4.3 percent. The increase in personal income taxes was
caused by moderate employment and wage growth and the strong financial markets
during 1995. Business taxes declined $295 million or 5.8 percent, resulting
primarily from changes in the tax law that modified the distribution of taxes
between the General Fund and other fund types, and reduced business tax
liability. Miscellaneous revenues increased primarily because of an increase in
receipts from medical provider assessments.

Expenditures decreased $716 million (2.2 percent) from the prior fiscal
year with the largest decrease occurring in State aid for social services
program and State operations spending. Social services expenditures decreased
$739 million (7.5 percent) due mainly to implementation of cost containment
strategies by the State and local governments, and reduced caseloads. General
purpose and health and environment expenditures grew $139 million (20.2 percent)
and $121 million (33.3 percent), respectively. Health and environment spending
increased as a result of increases enacted in 1995-96. In State operations,
personal service costs and fringe benefits declined $241 million (3.8 percent)
and $55 million (3.6 percent), respectively, due to staffing reductions. The
decline in non-personal service costs of $170 million (8.6 percent) was caused
by a decline in the litigation accrual. Pension contributions increased $103
million (66.4 percent) as a result of the return to the aggregate cost method
used to determine employer contributions.

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<PAGE>

Net other financing sources nearly tripled, increasing $561 million, due
primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.

Special Revenue, Debt Service and Capital Projects Fund Types

An operating deficit of $409 million was reported for Special Revenue
Funds for the 1995-96 fiscal year which decreased the accumulated fund balance
to $468 million. Revenues increased $1.45 billion over the prior fiscal year
(5.8 percent) as a result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds to school districts. Other financing uses increased $693
million (25.1 percent) primarily because of an increase in federal
reimbursements transferred to other funds.

Debt Service Funds ended the 1995-96 fiscal year with an operating surplus
of over $185 million and, as a result the accumulated fund balance increased to
$1.94 billion. Revenues increased $10 million (0.5 percent) because of increases
in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $201 million (9.5 percent). Net other financing sources
increased threefold to $299 million, due primarily to increases in patient
reimbursement revenues.

An operating surplus of $276 million was reported in the Capital Projects
Funds for the State's 1995-96 fiscal year and, as a result, the accumulated
deficit fund balance in this fund type decreased to $712 million. Revenues
increased $260 million (14.9 percent) primarily because a larger share of the
petroleum business tax was shifted from the General Fund to the Dedicated
Highway and Bridge Trust Fund, and due to an increase in federal grant revenues
for transportation and local waste water treatment projects. Capital Projects
Funds expenditures increased $194 million (5.7 percent) in State fiscal year
1995-96 because of increased expenditures for education and health and
environmental projects. Net other financing sources increased by $577 million as
a result of an increased in proceeds from financing arrangements.

Economics and Demographics

This section presents economic information about the State which may be
relevant in evaluating the future prospects of the State. However, the
demographic information and statistical data, which have been obtained from the
sources indicated, do not present all factors which may have a bearing on the
State's fiscal and economic affairs. Further, such information requires economic
and demographic analysis in order to assess the import of the data presented.
The data and analysis may be interpreted differently, according to the economist
or other expert consulted.

Current Economic Outlook

The State Financial Plan is based upon a February 1998 projection by DOB
of national and State economic activity. The information in this section and in
the tables below summarize the national and State economic situation and outlook
upon which projections of receipts and certain disbursements were made for the
1998-99 Financial Plan.

The national economy has maintained a robust rate of growth during the
past six quarters as the expansion, which is well into its seventh year,
continues. Since early 1992, approximately 16 1/2 million jobs have been added
nationally. The State economy has also continued to expand, but growth remains
somewhat slower than in the nation. Although the State has added over 400,000
jobs since late 1992, employment growth in the State has been hindered during
recent years by significant cutbacks in the

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<PAGE>

computer and instrument manufacturing, utility, defense, and banking industries.
Government downsizing has also moderated these job gains.

The State has updated its mid-year forecast of national and State economic
activity through the end of calendar year 2000. At the national level, although
the current projected nominal growth rate for 1999 represents only a small
change from the earlier forecast, in real, inflation-adjusted terms, the annual
growth rate is now anticipated to be significantly higher than had been
previously predicted. However, even with the upward adjustment in the forecast,
economic growth nationally during both 1999 and 2000 is still expected to be
slower than it was during 1998. The financial and economic turmoil which started
in Asia and has spread to other parts of the world is expected to continue to
negatively affect U. S. trade balances throughout most of 1999 and could reduce
U. S. economic growth even more than projected. In addition, growth in domestic
consumption, which has been a major driving force behind the nation's strong
economic performance in recent years, is forecasted to slow in 1999 as consumer
confidence retreats from historic highs and stock market gains cease to provide
massive amounts of extra discretionary income. However, the lower short-term
interest rates which are projected to be in force during 1999 are expected to
help prevent a more severe drop in overall economic growth.

The revised forecast projects real Gross Domestic Product ("GDP") growth
of 2.4 percent in 1999, well below the projected 1998 growth rate of 3.7
percent. In 2000, real GDP growth is expected to continue at a similar pace,
increasing by 2.3 percent. The growth of nominal GDP is projected to decline
from 4.8 percent in 1998 to 3.6 percent in 1999, then rise somewhat to 4.0
percent in 2000. Inflation is expected to exceed the extremely low rate of 1998,
but still stay well controlled, with price increases of slightly over two
percent in both 1999 and 2000. The annual rate of job growth is expected to
decrease from 2.6 percent in 1998 to 2.0 percent in 1999 and 1.5 percent in
2000. Growth in both personal income and wages is also expected to slow somewhat
in 1999 and again in 2000, while corporate profits are projected to continue the
lackluster performance which began in 1998.

The State economic forecast has been modified for 1999 and 2000 from the
one used in earlier updates of the Financial Plan. Continued growth is projected
in 1999 and 2000 for employment, wages, and personal income, although the growth
is expected to moderate from the 1998 pace. However, a continuation of
international financial and economic turmoil may result in a sharper slowdown
than currently projected. Personal income is estimated to have grown by 4.9
percent in 1998, fueled in part by a continued large increase in financial
sector bonus payments at the beginning of the year, and is projected to grow by
4.2 percent in 1999 and 4.0 percent in 2000. Increases in bonus payments in 1999
and 2000 are projected to be modest, a distinct shift from the torrid rate of
the last few years. Overall employment growth is anticipated to continue at a
modest rate, reflecting the slowing growth in the national economy, continued
spending restraint in government, and restructuring in the manufacturing, health
care, social service, and banking sectors.

The forecast for continued growth, and any resultant impact on the State's
1998-99 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment and wages could lead to surprisingly strong growth in
consumer spending. Investments could also remain robust. Conversely, net exports
could plunge even more sharply than expected, with adverse impacts on the growth
of both consumer spending and investment. The inflation rate may differ
significantly from expectations due to the upward pressure of a tight labor
market and the downward pressure of price reductions emanating from the economic
weakness in Asia. In addition, the State economic forecast could over- or
underestimate the level of future bonus payments or inflation growth, resulting
in forecasted average wage growth that could differ significantly from actual
growth. Similarly, the State forecast could fail to correctly account for
declines in banking employment and the direction of employment change that is
likely to accompany telecommunications and energy deregulation.

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<PAGE>

The New York Economy

New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.

Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related services,
such as information processing, law and accounting, is the State's leading
economic sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York and has a noticeably higher proportion of total
jobs than does the rest of the nation.

Manufacturing: Manufacturing employment continues to decline in importance
in New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. The principal manufacturing industries in recent
years produced printing and publishing materials, instruments and related
products, machinery, apparel and finished fabric products, electronic and other
electric equipment, food and related products, chemicals and allied products,
and fabricated metal products.

Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.

Finance, Insurance and Real Estate: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this sector accounts
for under one-tenth of all nonagricultural jobs in the State, it contributes
over one-sixth of all nonfarm labor and proprietors' income.

Agriculture: Farming is an important part of the economy of large regions
of the State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.

Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the employment
accounted for by local governments. Public education is the source of nearly
one-half of total state and local government employment.

The importance of the different sectors of the State's economy relative to
the national economy is shown in the following table, which compares
nonagricultural employment and income by industrial categories for the State and
the nation as a whole. Relative to the nation, the State has a smaller share of
manufacturing and construction and a larger share of service-related industries.
The State's finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.

Economic and Demographic Trends

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<PAGE>

In the calendar years 1987 through 1997, the State's rate of economic
growth was somewhat slower than that of the nation. In particular, during the
1990-91 recession and post-recession period, the economy of the State, and that
of the rest of the Northeast, was more heavily damaged than that of the nation
as a whole and has been slower to recover. The total employment growth rate in
the State has been below the national average since 1987. The unemployment rate
in the State dipped below the national rate in the second half of 1981 and
remained lower until 1991; since then, it has been higher. According to data
published by the US Bureau of Economic Analysis, total personal income in the
State has risen more slowly than the national average since 1988. Total State
nonagricultural employment has declined as a share of national nonagricultural
employment. State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
Because the City is a regional employment center for a multi-state region, State
personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies. The following table compares per capita personal
income for the State and the nation.

Debt and Other Financing Activities

Legal Categories of State Debt and Other Financings

State financing activities include general obligation debt of the State
and State-guaranteed debt, to which the full faith and credit of the State has
been pledged, as well as lease-purchase and contractual-obligation financings,
moral obligation financings and other financings through public authorities and
municipalities, where the State's legal obligation to make payments to those
public authorities and municipalities for their debt service is subject to
annual appropriation by the Legislature. These categories are described in the
Glossary of Financial Terms in Exhibit A and in more detail below.

General Obligation and State-Guaranteed Financing

There are a number of methods by which the State itself may incur debt.
The State may issue general obligation bonds. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State. With the exception of general obligation housing bonds
(which must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.

The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes (TRANs), and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes (BANs). TRANs must mature within one year from
their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990 the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created LGAC (see "Local
Government Assistance Corporation" below). BANs may only be issued for the
purposes and within the amounts for which bonds may be issued pursuant to voter
authorizations. Such BANs must be paid from the proceeds of the sale of bonds in
anticipation of which they were issued or from other sources within two years of
the date of issuance or, in the case of BANs for housing purposes, within five
years of the date of issuance. In order to provide flexibility within these
maximum term limits, the State has utilized the BANs

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<PAGE>

authorization to conduct a commercial paper program to fund disbursements
eligible for general obligation bond financing.

Pursuant to specific constitutional authorization, the State may also
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. State
guaranteed bonds of the Port Authority of New York and New Jersey were fully
retired on December 31, 1996. State guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.

In February 1997, the Job Development Authority (JDA) issued approximately
$85 million of State guaranteed bonds to refinance certain of its outstanding
bonds and notes in order to restructure and improve JDA's capital finances. Due
to concerns regarding the economic viability of its programs, JDA's loan and
loan guarantee activities were suspended in 1995. JDA recently resumed its
lending activities under a revised set of lending programs and underwriting
guidelines. As a result of the structural imbalances in JDA's capital structure,
and defaults in its loan portfolio and loan guarantee program incurred between
1991 and 1996, JDA would have experienced a debt service cash flow shortfall had
it not completed the 1997 refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. The State does not anticipate that it will be called upon to make
any payments pursuant to the State guarantee in the 1998-99 fiscal year.

Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.

Lease-Purchase and Contractual-Obligation Financing

The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments (see "Local Government Assistance Corporation" below).

The State also participates in the issuance of certificates of
participation (COPs) in a pool of leases entered into by the State's Office of
General Services on behalf of several State departments and agencies interested
in acquiring operational equipment, or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.

The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.

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Moral Obligation and Other Financing

Moral obligation financing generally involves the issuance of debt by a
public authority to finance a revenue-producing project or other activity. The
debt is secured by project revenues and includes statutory provisions requiring
the State, subject to appropriation by the Legislature, to make up any
deficiencies which may occur in the issuer's debt service reserve fund. There
has never been a default on any moral obligation debt of any public authority.
The State does not intend to increase statutory authorizations for moral
obligation bond programs. From 1976 through 1987, the State was called upon to
appropriate and make payments totaling $162.8 million to make up deficiencies in
the debt service reserve funds of the Housing Finance Agency (HFA) pursuant to
moral obligation provisions. In the same period, the State also expended
additional funds to assist the Project Finance Agency, the Urban Development
Corporation (UDC) and other public authorities which had moral obligation debt
outstanding. The State has not been called upon to make any payments pursuant to
any moral obligations since the 1986-87 fiscal year and no such requirements are
anticipated during the 1998-99 fiscal year.

In addition to the moral obligation financing arrangements described
above, State law provides for the creation of State municipal assistance
corporations, which are public authorities established to aid financially
troubled localities. The Municipal Assistance Corporation for the City of New
York (NYC MAC) was created in 1975 to provide financing assistance to New York
City. To enable NYC MAC to pay debt service on its obligations, NYC MAC
receives, subject to annual appropriation by the Legislature, receipts from the
4 percent New York State sales tax for the benefit of New York City, the
State-imposed stock transfer tax and, subject to certain prior liens, certain
local assistance payments otherwise payable to New York City. The legislation
creating NYC MAC also includes a moral obligation provision. Under its enabling
legislation, NYC MAC's authority to issue moral obligation bonds and notes
(other than refunding bonds and notes) expired on December 31, 1984. In 1995,
the State created the Municipal Assistance Corporation for the City of Troy
(Troy MAC). The bonds issued by Troy MAC do not include the moral obligation
provisions.

The State also provides for contingent contractual-obligation financing
for the Secured Hospital Program pursuant to legislation enacted in 1985. Under
this financing method, the State entered into service contracts which obligate
the State to pay debt service, subject to annual appropriations, on bonds
formerly issued by the New York State Medical Care Facilities Finance Agency
(MCFFA) and now included as debt of the DASNY in the event there are shortfalls
of revenues from other sources. The State has never been required to make any
payments pursuant to this financing arrangement, nor does it anticipate being
required to do so during the 1998-99 fiscal year. The legislative authorization
to issue bonds under this program expired on March 1, 1998.

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Local Government Assistance Corporation

In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to issue its bonds and notes in an amount to yield
net proceeds not in excess of $4.7 billion (exclusive of certain refunding
bonds). Over a period of years, the issuance of these long-term obligations,
which are to be amortized over no more than 30 years, was expected to eliminate
the need for continued short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent State sales and use tax
to pay debt service on these bonds. The legislation also imposed a cap on the
annual seasonal borrowing of the State at $4.7 billion, less net proceeds of
bonds issued by LGAC and bonds issued to provide for capitalized interest,
except in cases where the Governor and the legislative leaders have certified
the need for additional borrowing and provided a schedule for reducing it to the
cap. If borrowing above the cap is thus permitted in any fiscal year, it is
required by law to be reduced to the cap by the fourth fiscal year after the
limit was first exceeded. This provision capping the seasonal borrowing was
included as a covenant with LGAC's bondholders in the resolution authorizing
such bonds.

As of June 1995, LGAC had issued bonds and notes to provide net proceeds
of $4.7 billion, completing the program. The impact of LGAC's borrowing, as well
as other changes in revenue and spending patterns, is that the State has been
able to meet its cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowings.

1998-99 Borrowing Plan

The State anticipates that its capital programs will be financed, in part
through borrowings by the State and its public authorities in the 1998-99 fiscal
year. The projection of State borrowings for the 1998-99 fiscal year is subject
to change as market conditions, interest rates and other factors vary throughout
the fiscal year.

The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The State also anticipates the
issuance of up to a total of $419 million in Certificates of Participation to
finance equipment purchases (including costs of issuance, reserve funds, and
other costs) during the 1998-99 fiscal year. Of this amount, it is anticipated
that approximately $191 million will be issued to finance agency equipment
acquisitions, including amounts to address Statewide technology issues related
to Year 2000 compliance. Approximately $228 million will also be issued to
finance equipment acquisitions for welfare reform-related information technology
systems.

As described below, efforts to reduce debt, unanticipated delays in the
advancement of certain projects and revisions to estimated proceeds needs will
modestly reduce projected borrowings in 1998-99. The State's 1998-99 borrowing
plan now projects issuances of $331 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANS) and $154
million in general obligation commercial paper. The State has issued $179
million in Certificates of Participation to finance equipment purchases
(including costs of issuance, reserve funds, and other costs) during the 1998-99
fiscal year. Of this amount, it is anticipated that approximately $83 million
will be used to finance agency equipment acquisitions, and $96 million to
address Statewide technology issues related to Year 2000 compliance.
Approximately $228 million for information technology related to welfare reform,
originally anticipated to be issued during the 1998-99 fiscal year, is now
expected to be delayed until 1999-2000.

Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.85 billion, including costs of

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issuance, reserve funds, and other costs, net of anticipated refundings and
other adjustments in 1998-99. Included therein are borrowings by: (i) Dormitory
Authority of the State of New York (DASNY) for the State University of New York
(SUNY); the City University of New York (CUNY); health, mental health and
educational facilities including the State Education Department; new facilities
for the Office of the State Comptroller and the New York State and Local
Retirement Systems; and for parking facilities; (ii) the Thruway Authority for
the Dedicated Highway and Bridge Trust Fund and Consolidated Highway Improvement
Program; (iii) Urban Development Corporation (UDC) (doing business as the Empire
State Development Corporation) for prison and sports facilities; (iv) Housing
Finance Authority (HFA) for housing programs; and (v) the Environmental
Facilities Corporation (EFC) and the Energy Research and Development Authority
(ERDA) for environmental projects. This includes an estimated $247 million to be
issued for the Community Enhancement Facilities Assistance Program (CEFAP) for
economic development purposes, consisting of sports facilities, cultural
institutions, transportation, infrastructure and other community facility
projects. Four public authorities (Thruway Authority, DASN-Y, UDC and HFA) are
authorized to issue bonds to finance a total of $425 million of CEFAP projects
under this program. The 1999-2000 Executive Budget proposes reducing CEFAP by
$75 million to $350 million.

The projection of State borrowings for the 1998-99 fiscal year is subject
to change as market conditions, interest rates and other factors vary through
the end of the fiscal year.

Outstanding Debt of the State and Certain Authorities

For purposes of analyzing the financial condition of the State, debt of
the State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain types of contingent obligations,
including moral-obligation financing, certain contingent contractual-obligation
financing arrangements, and State-guaranteed debt described above, where debt
service is expected to be paid from other sources and State appropriations are
contingent in that they may be made and used only under certain circumstances.

State-Supported Debt Outstanding

General Obligation Bond Programs

The first type of State-supported debt, general obligation debt, is
currently authorized for three programmatic categories: transportation,
environmental and housing. The amount of general obligation bonds and BANs
issued in the 1995-96 through 1997-98 fiscal years (excluding bonds issued to
redeem BANs) were $333 million, $439 million, and $486 million, respectively.
Transportation-related bonds are issued for State highway and bridge
improvements, aviation, highway and mass transportation projects and purposes,
and rapid transit, rail, canal, port and waterway programs and projects.
Environmental bonds are issued to fund environmentally-sensitive land
acquisitions, air and water quality improvements, municipal non-hazardous waste
landfill closures and hazardous waste site cleanup projects. As of March 31,
1998, the total amount of outstanding general obligation debt was $5.03 billion,
including $294 million in BANs.

Lease-Purchase and Contractual-Obligation Financing Programs

The second type of State-supported debt, lease-purchase and
contractual-obligation financing arrangements with public authorities and
municipalities, has been used primarily by the State to finance the State's
highway and bridge program, SUNY and CUNY buildings, health and mental hygiene
facilities, prison construction and rehabilitation, and various other State
capital projects.

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The State has utilized and expects to continue to utilize lease-purchase
and contractual-obligation financing arrangements to finance its capital
programs, in addition to authorized general obligation bonds. Some of the major
capital programs financed by lease-purchase and contractual obligation
agreements are highlighted below.

Transportation. The State Department of Transportation is primarily
responsible for maintaining and rehabilitating the State's system of highways
and bridges, which includes 40,000 State highway lane miles and 7,500 State
bridges. The Department also oversees and funds programs for rail and aviation
projects and programs that help defray local capital expenses associated with
road and bridge projects.

Legislation enacted in 1991 established the Dedicated Highway and Bridge
Trust Fund to provide for the dedication of a portion of the petroleum business
tax and certain other transportation-related taxes and fees for transportation
improvements. Legislation enacted in 1996 authorized a five-year, $12.7 billion
plan for State and local highways and bridges through 1999-2000, to be financed
by a combination of federal grants, pay-as-you-go capital and bond proceeds
supported by the Dedicated Highway and Bridge Trust Fund, and a small amount of
general obligation bonds remaining under previous authorizations. The 1998-99
enacted budget increased this plan to $13 billion.

The State has supported the capital plans of the MTA in part by entering
into service contracts relating to certain bonds issued by the MTA. Legislation
adopted in 1992 and 1993 also authorized payments, subject to appropriation, of
a portion of the petroleum business tax from the State's Dedicated Mass
Transportation Trust Fund to the MTA and authorized it to be used as a source of
payment for bonds to be sold by the MTA to support its capital program. See the
section entitled "Authorities and Localities" for additional information about
the MTA.

Education. The State finances the physical infrastructure of SUNY and CUNY
and their respective community colleges and the State Education Department
through direct State capital spending and through financing arrangements with
the DASNY, paying all capital costs of the senior colleges and sharing equally
with local governments for the community colleges, except that SUNY dormitories
are financed through dormitory fees. The following tables have been adjusted to
reflect DASNY's SUNY Upstate Community Colleges program as State-supported debt.

The 34 SUNY campuses include more than 2,300 buildings including
classrooms, dormitories, libraries, athletic and student facilities and other
buildings of which 84 percent are over 20 years of age. Together with the 30
SUNY community colleges, the SUNY system serves nearly 290,000 full-time
students. The CUNY system is composed of 11 senior colleges and 6 community
colleges that serve approximately 150,000 full-time students.

Mental Hygiene/Health. The State provides care for its citizens with
mental illness, mental retardation, and developmental disabilities, and for
those with chemical dependencies, through the Office of Mental Health (OMH), the
Office of Mental Retardation and Developmental Disabilities (OMRDD) and the
Office of Alcoholism and Substance Abuse Services (OASAS). Historically, this
care has been provided at large State institutions. Beginning in the 1980s the
State adopted policies to provide institutional care to those most in need and
to expand care in community residences. OMRDD has closed 12 of its 20
developmental centers. OMH has reduced its adult institutional population from
22,000 in 1982 to 5,825 at the end of 1997-98.

In 1997, OMH released a "Statewide Comprehensive Plan for Mental Health
Services 1997-2001." The plan presents the programmatic and fiscal strategy of
implementing an integrated community-based system of care, de-emphasizing State
adult inpatient hospitalization. It estimates that the State-operated adult

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inpatient census will decline to a range of 3,700 to 4,700 by the end of the
decade. As OMH approaches its long-term census targets and inpatient bed needs
diminish, plans are underway to develop alternative uses for surplus facilities.
Capital investments for these programs are primarily supported by patient
revenues through financing arrangements with DASNY.

Various capital programs for Department of Health facilities have also
been financed by DASNY using contractual-obligation financing arrangements.

Corrections. During the 10-year period 1983-92, the State's prison system
more than doubled in size due to the unprecedented increase in demand for prison
space. Today, the system houses approximately 70,000 inmates in 70 facilities
with 3,000 buildings. Although the Department of Correctional Services (DOCS)
capital program was focused primarily on rehabilitation of existing facilities
in the early 1990s, continued inmate population growth and projected future
growth indicate the need for both expansion of existing facilities and new
facilities. The 1997-98 budget authorized the addition of approximately 3,100
beds in response to this population growth. The 1998-99 enacted budget
authorized an additional 1,500 beds.

Other Programs. The State also uses lease-purchase and
contractual-obligation financing arrangements for the institutional facilities
of the Office of Children and Family Services (formerly known as the Division
for Youth), and Youth Opportunity Centers; the State's housing programs; and
various environmental, economic development, and State building programs. In
addition, DASNY has issued taxable pension bonds to refinance the balance of a
pre-existing State pension liability, for the purpose of achieving present value
savings.

The following table shows the total amount of authorized and outstanding
State-supported debt as of March 31, 1998. In addition to showing the amounts of
authorized and outstanding general obligation and LGAC debt, the table provides
the amount of authorized and outstanding lease-purchase and contractual
obligation debt by purpose, issuer, and program. Debt authorizations for general
obligation bonds and LGAC are for entire programs which are approved or enacted
all at one time and are expected to be fully issued. Authorizations for
lease-purchase and contractual-obligation debt for the State's capital programs
are generally enacted annually by the Legislature and are usually consistent
with bondable capital projects appropriations. Authorization does not however,
indicate an intent to sell bonds for the entire amount of those authorizations,
because capital appropriations often include projects that do not materialize or
are financed from other sources. For example, there are no current plans for the
Thruway Authority to issue any of the authorizations for the suburban
transportation program or the remaining emergency highway authorizations.

State-Related Debt Outstanding

The category of State-related debt includes the State-supported debt
described above, moral obligation and certain other financings and
State-guaranteed debt. The total State-related debt has decreased during each of
the lost three fiscal years, with substantial decreases in moral obligation
financing.

Debt Service Requirements

The current and future debt service (principal and interest) requirements
on State supported debt outstanding as of March 31, 1998 for the fiscal years
1999-2003 are $3.46 billion, $3.45 billion, $3.37 billion, $3.38 billion, and $3
.13 billion, respectively. The requirements of LGAC and Other Financing
Obligations of public authorities are the gross amounts due from the authorities
to bondholders within the fiscal year when the authority makes the payment. The
amounts shown do not reflect other associated costs or revenues anticipated to
be available, such as interest earnings or capitalized interest. Thus, the
requirements shown are generally in excess of the amounts paid by the State
during the State fiscal year.

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Long-Term Trends

During the prior ten years, State-supported long-term debt service
increased by 9.1 percent annually to $3.20 billion by 1997-98 as available
revenues increased by 3.8 percent annually. The relative comparable growth in
revenues and debt service resulted in increases in the ratio of debt service to
revenues from fiscal years 1988-89 to 1997-98. The ratio is estimated to
increase to 7.25 percent in fiscal year 1998-99.

Principal and interest payments on general obligation bonds and interest
payments on BANs were $749.7 million for the 1997-98 fiscal year, and are
estimated to be $753.4 million for 1998-99. Principal and interest payments on
fixed rate and variable rate bonds issued by LGAC were $326.6 million for the
1997-98 fiscal year, and are estimated to be $345.6 million for 1998-99. State
lease-purchase and contractual-obligation payments (including State installment
payments relating to COPs), classified as "Other Financing Obligations", were
$2.12 billion in fiscal year 1997-98, and are estimated to be $2.40 billion in
fiscal year 1998-99.

Total outstanding State-related debt increased from $24.89 billion at the
end of the 1988-89 fiscal year to $37.00 billion at the end of the 1997-98
fiscal year, an average annual increase of 4.5 percent. State-supported debt
increased from $12.46 billion at the end of the 1988-89 fiscal year to $34.25
billion at the end of the 1997-98 fiscal year, an average annual increase of
11.9 percent. During the prior ten year period, annual personal income in the
State rose from $367.1 billion to $559.1 billion, an average annual increase of
4.8 percent. Thus, State-supported debt grew at a faster rate than personal
income while State-related obligations grew at a slower rate. Expressed in other
terms, the total amount of State-supported debt outstanding grew from 3.4
percent of personal income in the 1988-89 fiscal year to 6.1 percent for the
1997-98 fiscal year while State-related debt outstanding declined from 6.8
percent to 6.6 percent of personal income for the same period. These trends are
expected to continue in the 1998-99 fiscal year, although State-supported debt
outstanding is expected to modestly increase to 6.2 percent of personal income.

State Financial Procedures

The State Budget Process

The requirements of the State budget process are set forth in Article VII
of the State Constitution and the State Finance Law. The process begins with the
Governor's submission of the Executive Budget to the Legislature each January,
in preparation for the start of the fiscal year on April 1. (The submission date
is February 1 in years following a gubernatorial election.) The budget must
contain a complete plan of available receipts and projected disbursements for
the ensuing fiscal year ("State Financial Plan"). The proposed State Financial
Plan must be balanced on a cash basis and must be accompanied by bills that: (i)
set forth all proposed appropriations and reappropriations, (ii) provide for any
new or modified revenue measures, and (iii) make any other changes to existing
law necessary to implement the budget recommended by the Governor.

In acting on the bills submitted by the Governor, the Legislature has the
power to alter both recommended appropriations and proposed changes to
substantive law. The Legislature may strike out or reduce an item of
appropriation recommended by the Governor. The Legislature may add items of
appropriation, provided such additions are stated separately. These additional
items are then subject to line-item veto by the Governor. If the Governor vetoes
an appropriation or a bill (or portion thereof) related to the budget, these can
be reconsidered in accordance with the rules of each house of the Legislature.
If approved by two-thirds of the members of each house, the measure will become
law notwithstanding the Governor's veto.

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Once the appropriation bills and other bills become law, DOB revises the
State Financial Plan to reflect the Legislature's actions, and begins the
process of implementing the budget. Throughout the fiscal year, DOB monitors
actual receipts and disbursements, and may adjust the estimates in the State
Financial Plan. Adjustments may also be made to the State Financial Plan to
reflect changes in the economy, as well as new actions taken by the Governor or
the Legislature. The Governor is required to submit to the Legislature quarterly
budget updates which include a revised cash-basis State Financial Plan, and an
explanation of any changes from the previous State Financial Plan. As required
by the State Finance Law, the Governor updates the State Financial Plan within
30 days of the close of each quarter of the fiscal year, generally issuing
reports by July 30, October 30, and in January, as part of the Executive Budget.

The Legislature may enact, subject to approval by the Governor, additional
appropriation bills or revenue measures, including tax reductions, during any
regular session or, if called into session for that purpose, any special session
of the Legislature. In the event additional appropriation bills or revenue
measures are disapproved by the Governor, the Legislature has authority to
override the Governor's veto upon the vote of two-thirds of the members of each
house of the Legislature. The Governor may present deficiency appropriation
bills to the Legislature near the end of the fiscal year to supplement
inadequate appropriations or to provide new appropriations for purposes not
covered by the regular and supplemental appropriation bills.

Fiscal Controls

The State Constitution requires the Comptroller to audit the accrual and
collection of revenues and receipts of the State. In addition, the Comptroller
is required to audit all official State accounts and all claims against the
State before payment. No such payment may be made unless the Comptroller has
approved it.

Disbursements from the State funds are limited to the lowest of (i)
appropriations, (ii) available cash or (iii) in accordance with appropriate
legal authority, the amounts allocated by the Director of the Budget.
Disbursements requiring federal funding, which must be appropriated, are limited
to the amounts anticipated from federal programs and may not be made in the
absence of appropriate certifications from the Director of the Budget. Contracts
for disbursements in excess of $10,000 require the Comptroller's approval with
approval dependent upon, in most cases, the existence of an appropriation and
the issuance of a certificate of availability by the Director of the Budget. The
Budget Director must review all applications for State participation in
continuing grant-or contract-supported programs, with specified exceptions.
Certain legislative leaders have the opportunity to make recommendations on the
applications.

No appropriation may be increased or decreased by transfer or otherwise,
except by (i) the interchange within a fund, among items of a particular program
or purpose, of moneys appropriated for such program or purpose in such fund,
with limited exceptions, or (ii) the enactment of certain emergency
appropriations. Moneys or other financial resources from one fund may also be
loaned to another fund, only if such loan is repaid in full prior to the end of
the month in which the loan was made, except as provided by law.

In addition, the Governor has traditionally exercised substantial
authority in administering the State Financial Plan by limiting disbursements
after the Legislature has enacted appropriation bills and revenue measures. The
Governor may, primarily through DOB, limit spending by State departments, or
delay construction projects to control disbursements. An important limitation of
the Governor's ability to restrict disbursements is that local assistance
payments, which make up approximately 70 percent of General Fund disbursements
(including operating transfers to other funds), are generally mandated by
statute. The Court of Appeals has held that, even in an effort to maintain a
balanced financial plan, neither the Governor nor the Director of the Budget has
the authority to refuse to make a disbursement mandated by law.

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Investment of State Moneys

The Comptroller is responsible for the investment of substantially all
State moneys. By law, such moneys may be invested only in obligations issued or
guaranteed by the federal government or the State, certain general obligations
of other states, direct obligations of the State's municipalities and
obligations of certain public authorities, certain corporate obligations,
certain bankers' acceptances, and certificates of deposit secured by legally
qualified governmental securities. All securities in which the State invests
moneys held by funds administered within the State Treasury must mature within
seven years of the date they are purchased. Money impounded by the Comptroller
for payment of TRANs may only be invested, subject to the provisions of the
State Finance Law, in (i) obligations of the federal government, (ii)
certificates of deposit secured by such obligations, or (iii) obligations of or
obligations guaranteed by agencies of the federal government as to which the
payment of principal and interest is guaranteed by the federal government.

Accounting, Financial Reporting and Budgeting

Historically, the State has accounted for, reported and budgeted its
operations on a cash basis. Under this form of accounting, receipts are recorded
only at the time money or checks are deposited in the State Treasury, and
disbursements are recorded only at the time a check is drawn. As a result,
actions and circumstances, including discretionary decisions by certain
governmental officials, can affect the timing of payments and deposits and
therefore can significantly affect the cash amounts reported in a fiscal year.
Under cash-basis accounting, all estimates and projections of State receipts and
disbursements relating to a particular fiscal year are of amounts to be
deposited in or disbursed from the State Treasury during that fiscal year,
regardless of the fiscal period to which particular receipts or disbursements
may otherwise be attributable.

The State also has an accounting and financial reporting system based on
GAAP and currently formulates a GAAP financial plan. GAAP for governmental
entities requires use of (i) the modified accrual basis of accounting for
governmental and certain fiduciary fund types to measure changes in financial
position, and (ii) the full accrual basis of accounting for public benefit
corporations, college and university funds (except for depreciation on fixed
assets) and certain fiduciary fund types to measure net income. Under modified
accrual procedures, revenues are recorded when they become both measurable and
available to finance expenditures; expenditures are generally recognized and
recorded when the State incurs a liability to pay for goods or services, or
makes a commitment to make State aid payments, regardless of when actually paid.
Financial statements prepared in accordance with GAAP differ in format from the
State's traditional financial statements in that, among other things, they are
prepared on a modified or full accrual basis, whichever is appropriate, rather
than on a cash basis and include a combined balance sheet, reflect a
reorganization of the State's fund structure and report on the activities of all
funds.

State Government Employment

The State has approximately 191,000 full-time equivalent employees funded
from all funds, including part-time and temporary employees but excluding
seasonal, legislative and judicial employees.

The current size of the State workforce reflects continuing efforts to
streamline operations and improve efficiency. The workforce is now 17.2 percent
smaller than it was eight years ago, when it peaked at 230,600 positions and the
State began its workforce reduction efforts. During the past four fiscal years,
concerted workforce initiatives have resulted in a reduction of about 20,000
positions (more than one half of the overall reduction since 1990), with levels
stabilized in the last fiscal year.

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Negotiating units for State employees are defined by the State Public
Employment Relations Board. Collective bargaining negotiations are conducted by
the Governor's Office of Employee Relations except with respect to employees of
the Judiciary, public authorities and the Legislature. Such negotiations include
terms and conditions of employment except grade classification policies and
certain pension benefits. Approximately 93 percent of the State workforce is
unionized. The remainder of the workforce (about 12,000) is designated as
managerial or confidential and is excluded from collective bargaining. In
practice, however, the results of collective bargaining negotiations are
generally applied to all State employees within the executive agencies. The
State is currently preparing for negotiations with various unions to establish
new agreements since most of the existing contracts will expire on March 31,
1999.

Under the State's Taylor Law, the general statute governing public
employee-employer relations in the State, employees are prohibited from
striking. This form of job action against the State last occurred in 1979 by
employees of the Department of Correctional Services.

State Retirement Systems

General

The New York State and Local Retirement Systems (the Systems) provide
coverage for public employees of the State and its localities (except employees
of New York City and teachers, who are covered by separate plans). The Systems
comprise the New York State and Local Employees Retirement System and the New
York State and Local Police and Fire Retirement System. The Comptroller is the
administrative head of the Systems. State employees made up about 38 percent of
the membership during the 1997-98 fiscal year. There were 2,802 other public
employers participating in the Systems, including all cities (except New York
City), all counties, most towns, villages and school districts (with respect to
nonteaching employees) and a large number of local authorities of the State.

As of March 31, 1998, 582,689 persons were in membership and 284,515
pensioners and beneficiaries were receiving benefits. The State Constitution
considers membership in any State pension or retirement system to be a
contractual relationship, the benefits of which shall not be diminished or
impaired. Members cannot be required to begin making contributions or make
increased contributions beyond what was required when membership began.

Contributions

Funding is provided in large part by employer and employee contributions.
Employers contribute on the basis of the plan or plans they provide for members.
Members joining since mid-1976, other than police and fire members, have been
required to contribute 3 percent of their salaries.

By law, the State makes its annual payment to the Systems on or before
March 1 for the then current fiscal year ending on March 31 based on an estimate
of the required contribution prepared by the Systems. The Director of the Budget
is authorized to revise and amend the estimate of the Systems' bill for purposes
of preparing the State's budget for a fiscal year. Legislation also provides
that any underpayments by the State (as finally determined by the Systems) must
be paid, with interest at the actuarially assumed interest earnings rate, in the
second fiscal year following the year of the underpayment. Similarly, any
overpayment for a fiscal year serves as a credit against the Systems' estimated
bill for the second fiscal year following the fiscal year in which the
overpayment is made.

During the 1997-98 fiscal year, the State paid the Systems' 1997-98
estimated bill of $288.2 million. The difference between the amounts paid on the
estimated bill and the final bill with interest resulted in an

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underpayment of the final bill in the amount of $3.1 million and will be billed
on March 1, 2000 ($2.9 million if paid on September 1, 1999).

Assets and Liabilities

Assets are held exclusively for the benefit of members, pensioners and
beneficiaries. Investments for the Systems are made by the Comptroller as
trustee of the Common Retirement Fund, a pooled investment vehicle. The net
assets available for benefits as of March 31, 1998 were $106.3 billion
(including $1.9 billion in receivables). The present value of anticipated
benefits for current members, retirees, and beneficiaries as of March 31, 1998
was $84.8 billion. For current retirees and beneficiaries alone the amount was
$27.6 billion. Under the funding method used by the Systems, the net assets,
plus future actuarially determined contributions, are expected to be sufficient
to pay for the anticipated benefits of current members, retirees and
beneficiaries.

Authorities and Localities

Public Authorities

The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. For the purposes of this Annual Information
Statement, public authorities refer to public benefit corporations, created
pursuant to State law, other than local authorities. Public authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts and
restrictions set forth in legislative authorization. The State's access to the
public credit markets could be impaired and the market price of its outstanding
debt may be materially and adversely affected if any of its public authorities
were to default on their respective obligations, particularly those using the
financing techniques referred to as State-supported or State-related debt under
the section entitled "Debt and Other Financing Activities" in this AIS. As of
December 31, 1997, there were 17 public authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt, including refunding
bonds, of all State public authorities was $84 billion, only a portion of which
constitutes State-supported or State-related debt.

The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authorities generally pay their operating expenses and debt
service costs from revenues generated by the projects they finance or operate,
such as tolls charged for the use of highways, bridges or tunnels, charges for
public power, electric and gas utility services, rentals charged for housing
units, and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for public authorities that
are described under the section entitled "Debt and Other Financing Activities,"
above. Also, there are statutory arrangements providing for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to public authorities. Although the State has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under these arrangements, the affected
localities may seek additional State assistance if local assistance payments are
diverted. Some authorities also receive moneys from State appropriations to pay
for the operating costs of certain of their programs. As described below, the
MTA receives the bulk of this money in order to provide transit and commuter
services.

Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queens Counties, as part of an estimated $7 billion financing plan. As of the
date of this AIS, LIPA has issued over $5 billion in bonds secured solely by
ratepayer charges. LIPA's debt is not considered either State-supported or
State-related debt.

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Metropolitan Transportation Authority

The MTA oversees the operation of subway and bus lines in New York City by
its affiliates, the New York City Transit Authority and the Manhattan and Bronx
Surface Transit Operating Authority (collectively, the TA). The MTA operates
certain commuter rail and bus services in the New York metropolitan area through
the MTA's subsidiaries, the Long Island Rail Road Company, the Metro-North
Commuter Railroad Company, and the Metropolitan Suburban Bus Authority. In
addition, the Staten Island Rapid Transit Operating Authority, an MTA
subsidiary, operates a rapid transit line on Staten Island. Through its
affiliated agency, the Triborough Bridge and Tunnel Authority (TBTA), the MTA
operates certain intrastate toll bridges and tunnels. Because fare revenues are
not sufficient to finance the mass transit portion of these operations, the MTA
has depended on, and will continue to depend on, operating support from the
State, local governments and TBTA, including loans, grants and subsidies. If
current revenue projections are not realized and/or operating expenses exceed
current projections, the TA or commuter railroads may be required to seek
additional State assistance, raise fares or take other actions.

Since 1980, the State has enacted several taxes - including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax - that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987, State law also has required that the proceeds of a one-quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. In 1993, the State dedicated a portion of certain additional
State petroleum business tax receipts to fund operating or capital assistance to
the MTA. For the 1998-99 fiscal year, State assistance to the MTA is projected
to total approximately $1.3 billion, an increase of $133 million over the
1997-98 fiscal year.

State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of the $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the 1995-99 Capital Program). In July 1997, the Capital Program
Review Board (CPRB) approved the 1995-99 Capital Program (subsequently amended
in August 1997), which supersedes the overlapping portion of the MTA's 1992-96
Capital Program. The 1995-99 Capital Program is the fourth capital plan since
the Legislature authorized procedures for the adoption, approval and amendment
of MTA capital programs and is designed to upgrade the performance of the MTA's
transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed with assistance
from the federal government, the State, the City of New York, and from various
other revenues generated from actions taken by the MTA.

There can be no assurance that all the necessary governmental actions for
future capital programs will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1995-99 Capital Program, or
parts thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 Capital Program is delayed or reduced, ridership and
fare revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.

The City of New York

The fiscal health of the State may also be affected by the fiscal health
of New York City (City), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State may also be
affected by the ability of

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the City and certain entities issuing debt for the benefit of the City to market
their securities successfully in the public credit markets.

The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan (Financial Plan) annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October. For current information on the City's
Financial Plan and its most recent financial disclosure, contact the Office of
the Comptroller, Municipal Building, Room 517, One Centre Street, New York, NY
10007, Attention: Deputy Comptroller for Public Finance.

Fiscal Oversight

In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York (NYC
MAC) to provide financing assistance to the City; the New York State Financial
Control Board (the Control Board) to oversee the City's financial affairs; and
the Office of the State Deputy Comptroller for the City of New York (OSDC) to
assist the Control Board in exercising its powers and responsibilities. A
"control period" existed from 1975 to 1986, during which the City was subject to
certain statutorily-prescribed fiscal controls. The Control Board terminated the
control period in 1986 when certain statutory conditions were met. State law
requires the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million or impaired access to the public credit markets.

Currently, the City and its Covered Organizations (i.e., those
organizations which receive or may receive moneys from the City directly,
indirectly or contingently) operate under the Financial Plan. The City's
Financial Plan summarizes its capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps. The
City's projections set forth in the Financial Plan are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.

To successfully implement its Financial Plan, the City and certain
entities issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
In 1997, the State created the New York City Transitional Finance Authority
(TFA) to finance a portion of the City's capital program because the City was
approaching its State Constitutional general debt limit. Without the additional
financing capacity of the TFA, projected contracts for City capital projects
would have exceeded the City's debt limit during City fiscal year 1997-98.
Despite this additional financing mechanism, the City currently projects that,
if no further action is taken, it will reach its debt limit in City fiscal year
1999-2000. On June 2, 1997, an action was commenced seeking a declaratory
judgment declaring the legislation establishing the TFA to be unconstitutional.
On November 25, 1997 the State Supreme Court found the legislation establishing
the TFA to be constitutional and granted the defendants' motion for summary
judgment. The plaintiffs have appealed the decision. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussion of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.

Monitoring Agencies

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The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans. The reports analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service
requirements, as well as evaluate compliance by the City and its Covered
Organizations with the Financial Plan. According to recent staff reports, while
economic growth in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in City fiscal year 1996-97.
Recent staff reports also indicate that the City projects a substantial surplus
for City fiscal year 1997-98. Although several sectors of the City's economy
have expanded recently, especially tourism and business and professional
services, City tax revenues remain heavily dependent on the continued
profitability of the securities industries and the course of the national
economy. Staff reports have indicated that recent City budgets have been
balanced in part through the use of non-recurring resources and that the City's
Financial Plan tends to rely in part on actions outside its direct control.
These reports have also indicated that the City has not yet brought its
long-term expenditure growth in line with recurring revenue growth and that the
City is likely to continue to face substantial gaps between forecast revenues
and expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office (IBO) has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City. Copies of the most recent staff
reports by the Control Board, OSDC, City Comptroller, and IBO are available by
contacting the Control Board at 270 Broadway, 21st Floor, New York, NY 10007,
Attention: Executive Director, OSDC at 270 Broadway, 23rd Floor, New York, NY
10007, Attention: Deputy Comptroller; the City Comptroller at Municipal
Building, Room 517, One Centre Street, New York, NY 10007, Attention: Deputy
Comptroller for Public Finance; and the IBO at 110 William Street, 14th Floor,
New York, NY 10038, Attention: Director.

Other Localities

Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1998-99 fiscal year.

Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998-99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998-99.

The 1998-99 budget includes an additional $29.4 million in unrestricted
aid targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.

The appropriation and allocation of general purpose local government aid
among localities, including New York City, is currently the subject of
investigation by a State commission. While the distribution of general purpose
local government aid was originally based on a statutory formula, in recent
years both the total amount appropriated and the amounts appropriated to
localities have been determined by the Legislature. A State commission was
established to study the distribution and amounts of general purpose local
government aid and recommend a new formula by June 30, 1999, which may change
the way aid is allocated.

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Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to enabling State
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City that are authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-one localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1996.

Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.

Litigation

General

The legal proceedings listed below involve State finances and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1998-99
fiscal year or thereafter. The State will describe newly initiated proceedings
which the State believes to be material, as well as any material and adverse
developments in the listed proceedings, in updates or supplements to the Annual
Information Statement.

As of the date of this AIS, except as described below, no current
litigation involves the State's authority, as a matter of law, to contract
indebtedness, issue its obligations, or pay such indebtedness when due, or
affects the State's power or ability, as a matter of law, to impose or collect
significant amounts of taxes and revenues.

The State is party to other claims and litigation which its legal counsel
has advised are not probable of adverse court decisions or are not deemed
adverse and material. Although the amounts of potential losses resulting from
this litigation, if any, are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material and adverse effect on the State's financial position in the 1998-99
fiscal year or thereafter.

Adverse developments in the proceedings described below, other proceedings
for which there are unanticipated, unfavorable and material judgments, or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1998-99 Financial Plan. The State believes that the proposed 1998-99
Financial Plan includes sufficient reserves to offset the costs associated with
the payment of judgments that may be required during the 1998-99 fiscal year.
These reserves include (but are not limited to) amounts appropriated for court
of claims payments and projected fund balances in the General Fund (for a
discussion of the State's projected fund balances for the 1998-99 fiscal year,
see the section entitled "Current

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Fiscal Year"). In addition, any amounts ultimately required to be paid by the
State may be subject to settlement or may be paid over a multi-year period.
There can be no assurance, however, that adverse decisions in legal proceedings
against the State would not exceed the amount of all potential 1998-99 Financial
Plan resources available for the payment of judgments, and could therefore
affect the ability of the State to maintain a balanced 1998-99 Financial Plan.

With respect to pending and threatened litigation, the State has reported
liabilities of $872 million for awarded and anticipated unfavorable judgments,
of which $90 million is expected to be paid within the 1998-99 fiscal year. The
remainder, $782 million, is reported as a long-term obligation of the State and
represents an increase of $552 million from the prior year.

State Finance Policies

Insurance Law

Proceedings have been brought by two groups of petitioners challenging
regulations promulgated by the Superintendent of Insurance that established
excess medical malpractice premium rates for fiscal years 1986-87 through
1996-97 (New York State Health Maintenance Organization Conference, Inc., et al
v. Muhl, et al. ["HMO"], and New York State Conference of Blue Cross and Blue
Shield Plans, et al. v. Muhl, et al. ["Blue Cross 'I' and CII'"], Supreme Court,
Albany County). By order filed January 22, 1997, the Court in Blue Cross I
permitted the plaintiffs in HMO to intervene and dismissed the challenges to the
rates for the period prior to 1995-96. By decision dated July 24, 1997, the
Court in Blue Cross I held that the determination made by the Superintendent in
establishing the 1995-96 rate was arbitrary and capricious and directed that
premiums paid pursuant to that determination be returned to the payors. The
State has appealed this decision. The petitioners did not cross appeal. In Blue
Cross II, by amended judgment dated April 2, 1998, the Supreme Court annulled
the regulation setting the 1996-97 premium rate and directed that all 1996-97
excess malpractice premiums be returned to the payors. The State will not be
obligated in either case to pay moneys to any petitioner. Adverse determinations
would result in refunds from the affected insurers.

Tax Law

In New York Association of Convenience Stores, el al. v. Urbach, et al.,
petitioners, New York Association of Convenience Stores, National Association of
Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek Stores, Inc. seek to
compel respondents, the Commissioner of Taxation and Finance and the Department
of Taxation and Finance, to enforce sales and excise taxes imposed pursuant to
Tax Law Articles 12-A, 20 and 28 on tobacco products and motor fuel sold to
non-Indian consumers on Indian reservations. In orders dated August 13, 1996 and
August 24, 1996, the Supreme Court, Albany County, ordered, inter alia, that
there be equal implementation and enforcement of said taxes for sales to
non-Indian consumers on and off Indian reservations, and further ordered that,
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternately, the collection and enforcement of such taxes would
be suspended statewide. Respondents appealed to the Appellate Division, Third
Department, and invoked CPLR 5519(a)(1), which provides that the taking of the
appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, inter alia, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds, and
again invoked the statutory stay. On October 23, 1997, the Court of Appeals
granted petitioners' motion for leave to cross-appeal from the portion

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of the Third Department's decision that deleted the statewide suspension of the
enforcement and collection of the sales and excise taxes on motor fuel and
tobacco. The case was argued before the Court of Appeals on March 24, 1998. On
July 9, 1998, the New York Court of Appeals reversed the order of the Appellate
Division, Third Department, and remanded the matter to the Supreme Court, Albany
County, for further proceedings. The Court held that the petitioners had
standing to assert an equal protection claim, but that their claim did not
implicate racial discrimination. The Court remanded the case to Supreme Court,
Albany County, for resolution of the question of whether there was a rational
basis for the Tax Department's policy of non-enforcement of the sales and excise
taxes on reservation sales of cigarettes and motor fuel to non-Indians. In a
footnote, the Court stated that, in view of its disposition of the case,
petitioners' cross-appeal regarding the statewide suspension of the taxes is
"academic."

Clean Water/Clean Air Bond Act of 1996

In Robert L. Schulz, et al. v. The New York State Executive, et al.
(Supreme Court, Albany County, commenced October 16, 1996), plaintiffs challenge
the enactment of the Clean Water/Clean Air Bond Act of 1996 and its implementing
legislation (1996 Laws of New York, Chapters 412 and 413). Plaintiffs claim,
inter alia, that the Bond Act and its implementing legislation violate
provisions of the State Constitution requiring that such debt be authorized by
law for some single work or purpose distinctly specified therein and forbidding
incorporation of other statutes by reference.

In an opinion dated June 9, 1998, the Court of Appeals affirmed the July
17, 1997 order of the Appellate Division, Third Department, affirming the lower
court dismissal of this case. On September 9, 1998, plaintiff sought review of
this decision from the United States Supreme Court. On November 2, 1998, the
United States Supreme Court denied certiorari.

Line Item Veto

State Programs

Medicaid

Several cases challenge provisions of Chapter 81 of the Laws of 1995 which
alter the nursing home Medicaid reimbursement methodology on and after April 1,
1995. Included are New York State Health Facilities Association, et al. v.
DeBuono, el al., St. Luke's Nursing Center, el al. v. DeBuono, et al., New York
Association of Homes and Services for the Aging v DeBuono et al (three cases),
Healthcare Association of New York State v. DeBuono and Bayberry Nursing Home et
al. v. Pataki, et al. Plaintiffs allege that the changes in methodology have
been adopted in violation of procedural and substantive requirements of State
and federal law.

In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services (DSS) in June 1992 of a home assessment resource
review instrument (HARRI), which is to be used by DSS to determine eligibility
for and the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).

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In several cases, plaintiffs seek retroactive claims for reimbursement for
services provided to Medicaid recipients who were also eligible for Medicare
during the period January 1, 1987 to June 2, 1992. Included are Matter of New
York State Radiological Society v. Wing, Appel v. Wing, E. F. S. Medical
Supplies v. Dowling Kellogg v. Wing, Lifshitz v. Wing, New York State Podiatric
Medical Association v. Wing and New York State Psychiatric Association v. Wing.
These cases were commenced after the State's reimbursement methodology was held
invalid in New York City Health and Hospital Corp. v. Perales. The State
contends that these claims are time-barred. In a judgment dated September 5,
1996, the Supreme Court, Albany County, dismissed Matter of New York State
Radiological Society v. Wing as time-barred. By order dated November 26, 1997,
the Appellate Division, Third Department, affirmed that judgment. By decision
dated June 9, 1998, the Court of Appeals denied leave to appeal. The time in
which to seek further review has expired in the latter case. By decision and
order dated December 15, 1998, the Appellate Division, First Department
dismissed Appel v. Wing, E.F.S. Medical Supplies v. Dowling, Kellogg v. Wing,
Lifshitz v. Wing, New York State Podiatric Medical Association v. Wing and New
York Psychiatric Association v. Wing as time barred.

Several cases, including Port Jefferson Health Care Facility, et al. v.
Wing (Supreme Court, Suffolk County), challenge the constitutionality of Public
Health Law - 2807-d, which imposes a tax on the gross receipts hospitals and
residential health care facilities receive from all patient care services.
Plaintiffs allege that the tax assessments were not uniformly applied, in
violation of federal regulations. In a decision dated June 30, 1997, the Court
held that the 1.2 percent and 3.8 percent assessments on gross receipts imposed
pursuant to Public Health Law -- 2807-d(2)(b)(ii) and 2807-d(2)(b)(iii),
respectively, are unconstitutional. An order entered August 27, 1997 enforced
the terms of the decision. The State has appealed that order. By decision and
order dated August 31, 1998, the Appellate Division, Second Department, affirmed
that order. On September 30, 1998, the State moved for re-argument or, in the
alternative, for a certified question for the Court of Appeals to review. By
order dated January 7, 1999 the motion was denied. A final order was entered in
Supreme Court on January 26, 1999. The time for the State to appeal from the
January 26, 1999 order has not yet expired.

Shelter Allowance

In an action commenced in March 1987 against State and New York City
officials (Jiggetts, et al. v. Bane, et al., Supreme Court, New York County),
plaintiffs allege that the shelter allowance granted to recipients of public
assistance is not adequate for proper housing. In a decision dated April 16,
1997, the Court held that the shelter allowance promulgated by the Legislature
and enforced through DSS regulations is not reasonably related to the cost of
rental housing in New York City and results in homelessness to families in New
York City. A judgment was entered on July 25, 1997, directing, inter alia, that
the State (i) submit a proposed schedule of shelter allowances (for the Aid to
Dependent Children program and any successor program) that bears a reasonable
relation to the cost of housing in New York City; and (ii) compel the New York
City Department of Social Services to pay plaintiffs a monthly shelter allowance
in the full amount of their contract rents, provided they continue to meet the
eligibility requirements for public assistance, until such time as a lawful
shelter allowance is implemented, and provide interim relief to other eligible
recipients of Aid to Dependent Children under the interim relief system
established in this case. The State has appealed to the Appellate Division,
First Department from each and every provision of this judgment except that
portion directing the continued provision of interim relief.

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Civil Rights Claims

In an action commenced in 1980 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found, in 1985, that Yonkers and its public schools were
intentionally segregated. In 1986, the District Court ordered Yonkers to develop
and comply with a remedial educational improvement plan (EIP I). On January 19,
1989, the District Court granted motions by Yonkers and the NAACP to add the
State Education Department, the Yonkers Board of Education, and the State Urban
Development Corporation as defendants, based on allegations that they had
participated in the perpetuation of the segregated school system. On August 30,
1993, the District Court found that vestiges of a dual school system continued
to exist in Yonkers. On March 27, 1995, the District Court made factual findings
regarding the role of the State and the other State defendants (the State) in
connection with the creation and maintenance of the dual school system, but
found no legal basis for imposing liability. On September 3, 1996, the United
States Court of Appeals for the Second Circuit, based on the District Court's
factual findings, held the State defendants liable under 42 USC - 1983 and the
Equal Educational Opportunity Act, 20 USC -- 1701, et seq., for the unlawful
dual school system, because the State, inter alia, had taken no action to force
the school district to desegregate despite its actual or constructive knowledge
of de jure segregation. By order dated October 8, 1997, the District Court held
that vestiges of the prior segregated school system continued to exist and that,
based on the State's conduct in creating and maintaining that system, the State
is liable for eliminating segregation and its vestiges in Yonkers and must fund
a remedy to accomplish that goal. Yonkers presented a proposed educational
improvement plan (EIP II) to eradicate these vestiges of segregation. The
October 8, 1997 order of the District Court ordered that EIP II be implemented
and directed that, within 10 days of the entry of the Order, the State make
available to Yonkers $450,000 to support planning activities to prepare the EIP
II budget for 1997-98 and the accompanying capital facilities plan. A final
judgment to implement EIP II was entered on October 14, 1997. On November 7,
1997, the State appealed that judgment to the Second Circuit. The appeal is
pending. Additionally, the Court adopted a requirement that the State pay to
Yonkers approximately $9.85 million as its pro rata share of the funding of EIP
I for the 1996-97 school year. The requirement for State funding of EIP I was
reduced to an order on December 2, 1997 and reduced to a judgment on February
10, 1998. The State appealed that order to the Second Circuit on December 31,
1997 and amended the notice of appeal after entry of the judgment. That appeal
has been consolidated with the appeal of the EIP II appeal, and is also pending.

On June 15, 1998, the District Court issued an opinion setting forth the
formula for the allocation of the costs of EIP I and EIP II between the State
and the City for the school years 1997-98 through 2005-06. That opinion has not
yet been reduced to an order.

Line Item Veto

In an action commenced in June 1998 by the Speaker of the Assembly of the
State of New York against the Governor of the State of New York (Silver v.
Pataki, Supreme Court, New York County), the Speaker challenges the Governor's
application of his constitutional line item veto authority to certain portions
of budget bills adopted by the State Legislature contained in Chapters 56, 57
and 58 of the Laws of 1998. On July 10, 1998, the State filed a motion to
dismiss this action. By order entered January 7, 1999, the court denied the
State's motion to dismiss. On January 27, 1999, the State appealed that order.

Real Property Claims

On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United States
Court of Appeals for the Second Circuit holding that the Oneida Indians have a
common-law right of action against Madison and Oneida Counties for wrongful
possession of 872 acres of land illegally sold to the State in 1795. At the same
time, however, the

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Court reversed the Second Circuit by holding that a third-party claim by the
counties against the State for indemnification was not properly before the
federal courts. The case was remanded to the District Court for an assessment of
damages, which action is still pending. The counties may still seek
indemnification in the State courts.

In 1998, the United States filed a complaint in intervention in Oneida
Indian Nation of New York. In December 1998, both the United States and the
tribal plaintiffs moved for leave to amend their complaints to assert claims for
250,000 acres, to add the State as a defendant, and to certify a class made up
of all individuals who currently purport to hold title within said 250,000 acre
area. These motions are returnable March 29, 1999.

Several other actions involving Indian claims to land in upstate New York
are also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et
al., and Canadian St. Regis Band of Mohawk Indians, et al. v State of New York
et al., both in the United States District Court for the Northern District of
New York. The Supreme Court's holding in Oneida Indian Nation of New York may
impair or eliminate certain of the State's defenses to these actions but may
enhance others.

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Exhibit A to Annual Information Statement

Glossary of Financial Terms

The following glossary, which is an integral part of this Annual
Information Statement, includes certain terms that are used herein and are
intended for use only in connection with the entire Annual Information
Statement.

Appropriation: An appropriation is a statutory authorization against which
liabilities may be incurred during a specific year, and from which disbursements
may be made, up to a stated amount, for the purposes designated. Appropriations
generally are authorizations, rather than mandates, to spend, and disbursements
from an appropriation need not, and generally do not, equal the amount of the
appropriation. An appropriation represents maximum spending authority.
Appropriations may be adopted at any time during the fiscal year.

Bond Anticipation Note or BANs: A bond anticipation note is a short-term
obligation, the principal of which is paid from the proceeds of the bonds in
anticipation of which such note is issued.

Capital Projects Funds: Capital Projects Funds, one of the four
GAAP-defined governmental fund types, account for financial resources of the
State to be used for the acquisition or construction of major capital facilities
(other than those financed by Special Revenue Funds, Proprietary Funds and
Fiduciary Funds).

Cash Basis Accounting: Accounting, budgeting and reporting of financial
activity on a cash basis results in the recording of receipts at the time money
or checks are deposited in the State Treasury and the recording of disbursements
at the time a check is drawn, regardless of the fiscal period to which the
receipts or disbursements relate.

Certificates of Participation or COPs: Certificates of Participation
represent proportionate interests in certain lease payments made by the State
with respect to equipment or real property of the departments and agencies of
the State. Such lease payments are subject to annual appropriation by the
Legislature and the availability of money to the State for making such payments.

College and University Funds: College and University Funds account for the
operations of both the State University of New York and the senior colleges of
the City University of New York, including the research foundations, endowment
loan fund and capital and debt related activity.

Community Projects Fund or CRF: The State created this fund within the
General Fund in 1996 to fund certain community projects for the Legislature and
the Governor. The State transfers moneys from other General Fund accounts into
the CPF, as provided by law. Spending out of the CPF is governed by specific
appropriations for each account in the Fund.

Contingency Reserve Fund or CRF: This fund was established in 1993 to
assist the State in financing the costs of any extraordinary known or
anticipated litigation. Deposits to this fund are made from the General Fund.

Contractual-Obligation Financing: Contractual-obligation financing is an
arrangement pursuant to which the State makes periodic payments to a public
benefit corporation under a contract having a term not less than the
amortization period of debt obligations issued by the public benefit corporation
in connection with such contract. Payments made by the State are used to pay
debt service on such obligations and are

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subject to annual appropriation by the Legislature and the availability of
moneys to the State for the purposes of making contractual payments.

Debt Reduction Reserve Fund or DRRF: The State created the DRRF in 1998 to
accumulate surplus revenues to pay debt service costs on State-supported bonds
and to retire or defease such bonds. The State will make deposits to the DRRF
from the General Fund. Use of reserve funds requires an appropriation.

Debt Service: Debt service refers to the payment of principal of and
interest on bonds, and interest on bond anticipation notes and tax and revenue
anticipation notes, in accordance with the respective terms thereof.

Debt Service Funds: Debt Service Funds, one of the four GAAP-defined
governmental fund types, account for the accumulation of resources (including
receipts from certain taxes, transfers from other funds and miscellaneous
revenues, such as dormitory room rental fees, which are dedicated by statute for
payment of lease-purchase rentals) for the payment of general long-term debt
service and related costs and payments under lease-purchase and
contractual-obligation financing arrangements.

Deficiency Budget: A deficiency budget provides for appropriations to meet
actual or anticipated obligations in excess of available appropriations or for
needs not foreseen when the original or supplemental budgets were adopted. A
deficiency budget is usually introduced near the end of the fiscal year to which
it relates.

Disbursement: A disbursement is a cash outlay and includes transfers to
other funds.

Executive Budget: The Executive Budget is the Governor's constitutionally
mandated annual submission to the Legislature which contains his recommended
program for the forthcoming fiscal year. The Executive Budget is an overall plan
of recommended appropriations. It projects disbursements and expenditures needed
to carry out the Governor's recommended program and receipts and revenues
expected to be available for such purpose. The recommendations contained in the
Executive Budget serve as the basis for the State Financial Plan (defined below)
which is adjusted after the Legislature acts on the Governor's submission. Under
the State Constitution, the Governor is required each year to propose an
Executive Budget that is balanced on a cash basis.

Expenditure: An expenditure, in GAAP terminology, is a decrease in net
financial resources as measured under the modified accrual basis of accounting.
In contexts other than GAAP, the State uses the term expenditure to refer to a
cash outlay or disbursement.

Fiduciary Funds: Fiduciary Funds refers to a GAAP-defined fund type which
accounts for assets held by the State in a trustee capacity or as agent for
individuals, private organizations and other governmental units and/or other
funds. These funds are custodial in nature and do not involve the measurement of
operations. Although the Executive Budget for a fiscal year generally contains
operating plans for Fiduciary Funds, and their results are included in the
Comptroller's GAAP-based financial statements, they are not included in the
State Financial Plan.

Fiscal Year: The State's fiscal year commences on April 1 and ends on
March 31. The term fiscal year refers to the fiscal year of the State unless the
context clearly indicates otherwise.

Fund Accounting: The accounts of the State are presented on the basis of
GAAP funds and account groups, each of which is considered a separate accounting
entity. The operations of each fund are accounted for with a separate set of
self-balancing accounts that comprise the fund's assets, liabilities, fund
equity, revenues, and expenditures, or expenses, as appropriate. Government
resources are allocated to and

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<PAGE>

accounted for in individual funds based upon the purposes for which they are to
be spent and the means by which spending activities are controlled.

GAAP: GAAP refers to generally accepted accounting principles for state
and local governments, which are the uniform minimum standards of and guidelines
for financial accounting and reporting prescribed by the Governmental Accounting
Standards Board. GAAP requires fund accounting for all government resources and
the modified accrual basis of accounting for measuring the financial position
and changes therein of governmental funds. The modified accrual basis of
accounting recognizes revenues when they become measurable and available to
finance expenditures, and expenditures when a liability to pay for goods or
services is incurred or a commitment to make aid payments is made, regardless of
when actually paid.

General Fund: The General Fund, one of the four GAAP-defined governmental
fund types, is the major operating fund of the State and receives all receipts
that are not required by law to be deposited in another fund, including most
State tax receipts and certain fees, transfers from other funds and
miscellaneous receipts from other sources.

Governmental Funds: Governmental funds refers to a category of
GAAP-defined funds which account for most governmental functions and which, for
the State, include four GAAP-defined governmental fund types: the General Fund,
Special Revenue Funds, Debt Service Funds, and Capital Projects Funds. The
State's projections of receipts and disbursements in the governmental funds
comprise the State Financial Plan.

Interfund Transfers: Under GAAP fund accounting principles, each fund is
treated as a separate fiscal and accounting unit with limitations on the kinds
of disbursements to be made. To comply with these limitations, moneys are moved
from one fund to another to make them available for use in the proper fund, and
are accounted for as "interfund transfers."

Lease-Purchase Financing: Lease-purchase financing is an arrangement
pursuant to which the State leases facilities from a public benefit corporation
or municipality for a term not less than the amortization period of the debt
obligations issued by the public benefit corporation or municipality to finance
acquisition and construction, and pays rent which is used to pay debt service on
the obligations. At the expiration of the lease, title to the facility vests in
the State in most cases. Generally the State's rental payments are expressly
subject to annual appropriation by the Legislature and availability of moneys to
the State for the purposes thereof.

Moral Obligation Financing: Moral obligation financing is an arrangement
pursuant to which the State provides, by statute, that it will pay such money as
may be required to make up any deficiency in a debt service reserve fund
established to assure payment of designated bonds. Moral obligation payments are
subject to appropriation by the Legislature.

Receipts: Receipts consist of cash actually received during the fiscal
year and include transfers from other funds.

Revenue Accumulation Fund: This fund holds certain tax receipts
temporarily before their deposit into other funds.

Revenues: Revenues, in GAAP terminology, are an increase in net financial
resources, as measured for governmental funds under the modified accrual basis
of accounting. In contexts other than GAAP, the State uses the term revenues to
refer to income or receipts.

Short-Term Investment Pool or STIP: The combination of available cash
balances in funds within the State Treasury on a daily basis for investment
purposes.

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Special Revenue Funds: Special Revenue Funds, one of the four GAAP-defined
governmental fund types, account for the proceeds of specific revenue sources
(other than expendable trusts or major capital projects), such as federal
grants, that are legally restricted to specified purposes.

State Financial Plan: The State Financial Plan sets forth projections of
State receipts and disbursements in the governmental fund types for each fiscal
year and is prepared by the Director of the Budget based initially upon the
recommendations contained in the Executive Budget. After the budget is enacted,
the State Financial Plan is adjusted to reflect revenue measures, appropriation
bills and certain related bills enacted by the Legislature. It serves as the
basis for the administration of the State's finances by the Director of the
Budget, and is updated quarterly, or more frequently as necessary, during the
fiscal year.

State Funds: State funds refers to a category of funds which includes the
General Fund and all other State controlled moneys, excluding federal grants.
This category captures all governmental disbursements except spending financed
with federal grants.

Supplemental Budget: A supplemental budget provides additional
appropriations for the support of government made after adoption of the budget
for the fiscal year. Under the State Constitution, the Governor may, with the
consent of the Legislature, submit supplemental appropriations bills at any time
before the close of a legislative session.

Tax and Revenue Anticipation Notes or TRANS: Notes issued in anticipation
of the receipt of taxes and revenues, direct or indirect for the purposes and
within the amounts of appropriations theretofore made.

Tax Refund Reserve Account: The tax refund reserve account is used to hold
moneys available to pay tax refunds. During a given fiscal year, the deposit of
moneys in the account reduces receipts and the withdrawal of moneys from the
account increases receipts. There is no requirement that moneys withdrawn from
this account be replaced.

Tax Stabilization Reserve Fund or TSRF: This fund was created to hold
surplus revenue that can be used in the event of any unanticipated General Fund
deficit. Amounts within this fund can be borrowed to cover any year-end deficit
and must be repaid within six years in no less than three equal annual
installments. The fund balance cannot exceed two percent of General Fund
disbursements for the fiscal year; contributions are limited to two-tenths of
one percent of General Fund disbursements in that year.

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Exhibit B to Annual Information Statement

Principal State Taxes and Fees

Personal income taxes are imposed on the New York income of individuals,
estates and trusts. Personal income taxes will account for 56 percent of
estimated General Fund receipts during the State's 1998-99 fiscal year. The
State tax adheres closely to the definitions of adjusted gross income and
itemized deductions used for federal personal income tax purposes, with certain
modifications. Legislation enacted in 1991 phased out the benefit of graduated
income tax tables for taxpayers with adjusted gross income above $100,000. A
State earned income tax credit is allowed at 20 percent of the federal credit.
Under legislation enacted in 1995 the top tax rate fell to 7.59375 percent for
the 1995 tax year, 7.125 percent for the 1996 tax year, and 6.85 percent for the
1997 tax year and thereafter, and the standard deduction was increased over the
same period. Legislation in 1998 accelerated the credit available to farmers for
property taxes, excluded certain income recovered by holocaust victims, and
increased the dependent care credit for those with incomes under $50,000
beginning in 1999.

User taxes and fees consist of several taxes on consumption, the largest
of which is the State sales and use tax. The sales and use tax applies to the
sale or use within the State of most tangible personal property, commercial and
industrial utility service billings, charges for meals, hotel and motel
occupancy and admission charges, as well as certain services. The State sales
tax rate is 4 percent. Of the 4 percent tax rate, 3 percent is deposited in the
General Fund and 1 percent is deposited to the Local Government Assistance Tax
Fund to meet debt service requirements on Local Government Assistance
Corporation bonds. Receipts in excess of debt service requirements are
transferred back to the General Fund.

Under legislation enacted in 1996, clothing was exempted from the State
sales and use tax for a one week period in January 1997. Other 1996 legislation
exempted receipts of parking facilities owned and operated by municipalities and
local parking authorities, eliminated the sales tax on certain vessels and
aircraft, and eliminated the sales tax on certain printed promotional materials
delivered in New York.

Legislation enacted in 1997 exempted clothing costing less than $100 from
the State's 4 percent sales tax for the weeks of September first through the
seventh in 1997 and 1998 and will make the exemption permanent on December 1,
1999. Beginning September 1, 1997 the law exempted from the sales tax automotive
emissions testing equipment required for tests mandated by the Federal Clean Air
Act. In addition, on December 1, 1997 the sales tax was eliminated on: bulk
sales costing less than 50 cents made through vending machines; coin operated
photocopying; coin operated carwashes; purchase of charter busses; and repair
and maintenance of those busses; hot beverages sold through vending machines and
food and drink sold through vending machines that would be exempt if sold in a
retail store; coin dispensed luggage carts; wine consumed at a wine tasting;
admissions to live circuses; and parking services provided by homeowners
associations, including condominium and co-op shareholders. The legislation also
extended for five years the current exemption from the sales tax of the
incremental cost of an alternative fuel vehicle and adds an exemption for
receipts from the sale of the service of installing alternative fuel vehicle
refueling property and receipts from the retail sale of such property. Finally,
the legislation provided that on March 1, 1999 the amount sales tax vendors are
allowed keep for their sales tax collection services is increased from 1.5
percent of their sales tax liability not to exceed $100 per quarter to 3.5
percent of their sales tax liability not to exceed $150 per quarter.

Legislation in 1998 increased the existing sales tax exemption threshold
for clothing in the September 1, 1998 through September 7, 1998 week from $100
to $500 and added footwear to the list of items exempt. The legislation also
added an eight-day exemption period for such items from January 17, 1999 through
January 23, 1999 and made clothing and footwear costing $110 or less permanently
exempt on December 1, 1999. Other initiatives in the legislation exempted
computer system hardware used to develop

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computer software for sale, telecommunications central office equipment, coin
operated phone charges of less than 25 cents and college textbooks.

The State imposes a tax on cigarettes at the rate of 56 cents per package
of twenty cigarettes and imposes a tax on other tobacco products equal to 20
percent of the wholesale price of such products. The tax rate on cigarettes was
raised from 39 to 56 cents and the tax rate on tobacco products other than
cigarettes was increased from 15 percent to 20 percent in 1993.

Motor fuel and diesel motor fuel taxes are levied at eight cents per
gallon upon the sale, generally for highway use, of gasoline and diesel fuel.
The diesel fuel tax was reduced to eight cents per gallon on January 1, 1996.
Approximately two-thirds of the proceeds of the motor fuel and diesel motor fuel
taxes are earmarked for special funds, and the General Fund receives gasoline
tax revenues attributable to two and one-quarter cents per gallon and diesel
fuel tax revenues attributable to six and one-quarter cents per gallon.

Motor vehicle fees are derived from a variety of sources, including motor
vehicle registration fees and driver licensing fees, which together account for
most motor vehicle fee revenue. From April 1, 1993 to December 31, 1994, 13
percent of registration fee receipts were earmarked to the Dedicated Highway and
Bridge Trust Fund. On January 1, 1995, this percentage rose to 17 percent and on
January 1,1996 (and thereafter) to 20 percent of such receipts. Legislation
enacted in 1997 provided for five-year licenses instead of four-year licenses,
and for the retention of refunds. Legislation enacted in 1998 reduced motor
vehicle registration fees by 25 percent and re-instituted the prior refund
policy and increased the percent of such fees earmarked to the Dedicated Highway
and Bridge Trust Fund to 28 percent on April 1, 1998, 34 percent on July 1, 1998
and to 45.5 percent on February 1, 1999.

The State imposes alcoholic beverage excise taxes at various rates on
liquor, beer, wine and specialty beverages. Separate licensing fees are imposed
on those who sell alcoholic beverages in New York. The fees vary depending on
the type and location of the establishment or premises operated by the licensee,
as well as the class of beverage for which the license is issued. Legislation
enacted in 1998 reduced the excise tax on beer from 16 cents per gallon to 13.5
cents per gallon.

The highway use tax revenue is derived from three sources: the truck
mileage tax, related highway use permit fees and the fuel use tax. The truck
mileage tax is levied on commercial vehicles, at rates graduated by vehicle
weight, based on miles traveled on State highways. Legislation enacted in 1998
will cut the truck mileage tax by 25 percent beginning in January 1999. Highway
use permits are issued triennially at $15 for an initial permit and $4 for a
permit renewal. The fuel use tax is an equitable compliment to the State's motor
fuel tax and sales tax paid by those who purchase fuel in New York. It is levied
on commercial vehicles having three or more axles or a gross vehicle weight of
more than 26,000 pounds. Currently all collections from the highway use tax are
deposited in the Dedicated Highway and Bridge Trust Fund.

The State reduced its tax on non-refillable soda containers from two cents
to one cent as of December 1, 1995. Legislation enacted in 1997 repeals the
remaining 1 cent tax on non-refillable beverage containers on October 1, 1998.

The State imposes a 5 percent auto rental tax on charges for any rental of
passenger cars rented or used in the State, subject to certain exceptions
including leases covering a period of one year or more.

Business taxes include a general business corporation franchise tax as
well as specialized franchise taxes on banks, insurance companies, utilities and
certain transportation and transmission companies, and a cents per-gallon-based
levy on businesses engaged in the sale or importation for sale of various
petroleum products. During the State's 1991-92, 1992-93, and 1993-94 fiscal
years, business taxes were generally

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subject to a 15 percent surcharge. Beginning in 1994 the surcharge was phased
out over a three-year period and has been eliminated since July 1, 1997.

The corporation franchise tax is the largest of the business taxes, and
the State's third largest source of revenue. It is imposed on all domestic
general business corporations and foreign general business corporations which do
business or conduct certain other activities in the State. The tax is imposed,
generally, at a rate of 9 percent of taxable income allocated to New York and at
a rate as low as 8 percent for small businesses. Taxable income is defined as
federal taxable income with certain modifications.

Legislation enacted in 1998 reduces the general business tax rate from 9
percent to 7.5 percent in three steps beginning in 1999; reduced the corporate
alternative minimum tax rate from 3.5 percent to 3 percent in two steps
beginning in 1998; reduced the fixed dollar minimum corporate tax for most small
businesses from $325 to $100 beginning in 1998; reduced the tax rate applied to
Subchapter S corporations by 40 percent or more beginning in 1998; adopted an
investment tax credit for investment in securities trading infrastructure and
institutes tax benefits for investments and employment in emerging technology
companies.

The franchise taxes on public utilities and certain other transmission and
transportation companies are the second largest source of receipts among the
business taxes. These consist of various franchise taxes imposed on public
utilities, including taxes on the utilities' issued stock and taxes on
utilities' intrastate gross earnings and gross income.

Legislation enacted in 1996 provided that as of January 1, 1997, the
franchise tax rate imposed on truckers and railroads was reduced from .75
percent to .6 percent of gross earnings. As of January 1, 1998 truckers and
railroads were allowed to choose between taxation under this tax or taxation
under the general business corporation tax.

Legislation enacted in 1997 reduced the 3.5 percent gross receipts tax
imposed upon gas, electric, and telephone service to 3.25 percent on October 1,
1998 and then to 2.5 percent on January 1, 2000. Local telephone companies and
other franchise taxpayers will realize an additional rate cut of .375 percent in
their franchise tax on July 1, 2000. Also, the franchise tax on trucking and
railroads will be reduced on July 1, 2000 from .6 percent to .375 percent.
Additional 1997 legislation established the Power for Jobs program which made
400 megawatts of low cost power available for job creation and expansion with
the utilities recouping their losses through a tax credit. Legislation enacted
in 1998 expands to 450 megawatts and accelerates the phase-in of the Power for
Jobs program.

Insurance taxes are imposed on insurance corporations, brokers and certain
insurers at a basic rate of 9 percent of entire net income allocable to New
York, based on the level of activity of an insurance company in the State during
the taxable year. In addition, there is a franchise tax on net premiums written
or received by insurance corporations on risks resident or located within the
State, at rates between 0.8 percent and 1.3 percent, depending on policy type,
as well as certain taxes imposed under the Insurance law. Legislation enacted in
1997 provided that on or after January 1, 1998 the overall limit on the combined
taxes of 2.6 percent of premiums is reduced, for life insurance companies, to
2.0 percent and the gross premiums tax on such components is decreased from .8
percent to .7 percent. Also, the legislation provides preferential premium tax
rates to captive insurance companies that insure the primary risks of their
parent and affiliated companies.

The State imposes a franchise tax on banking corporations at a basic tax
rate of 9 percent of entire net income with certain exclusions, and subject to
special rates for institutions with low net worth. The 9 percent rate represents
a reduction from the rate of 12 percent that was in effect until 1985, when the
bank tax was restructured. The 1985 changes were extended through taxable years
beginning before January 1, 2001.

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Legislation enacted in 1997 allows banks a net operating loss deduction which
can be carried forward against the bank franchise tax. This applies to NOL's
sustained on or after January 1, 2001. The legislation also allows banks to form
Subchapter S corporations which will exempt them from taxation under the bank
tax and allow the same tax treatment as other Subchapter S subsidiaries. 1998
legislation authorizes an investment tax credit for the purchase of tangible
personal property used in a bank's normal course of business as a broker or
dealer in connection with the purchase or sale of stocks or bonds.

The State imposes a petroleum businesses tax on the privilege of operating
a petroleum business in the State. It is measured by the quantity of various
petroleum products imported into the State for sale or use. The tax is imposed
at various cents-per-gallon rates depending on the type of petroleum product.
The cents-per-gallon tax rates are indexed to reflect petroleum price changes
but are limited to changes of no more than 5 percent of the tax rate in any one
year. The portion of the receipts from this tax deposited to the General Fund
has declined significantly, reflecting the dedication of receipts to
transportation accounts, and the adoption in 1994,1995, and 1996 of a variety of
tax relief measures. Legislation enacted in 1996, which will be fully phased in
on April 1, 1999, provided for reductions in the petroleum business taxes on
residual petroleum, non-automotive diesel and diesel fuel used by motor vehicles
and railroads, utilities, and commercial enterprises, and the elimination of the
petroleum business taxes imposed on fuel used in manufacturing. In addition, the
legislation also provides reimbursements of the tax paid for aviation gasoline
when the fuel is consumed outside New York.

Other tax revenues include taxes on pari-mutuel wagering, estate and gift
taxes, taxes on real estate transfers and on gains from the sale of certain real
estate where the consideration exceeds $1 million, and certain other minor
taxes.

The State imposes estate taxes on the estates of deceased New York
residents, and on that part of a nonresident's net estate made up of real and
tangible personal property located within New York State, in excess of any gifts
already made. Estate tax rates range from 2 percent of the first $50,000 of net
taxable transfers to 21 percent of net taxable transfers in excess of
$10,100,000. Estate tax liability is computed on the basis of the federal
definition of "gross estate". Reflecting the composition of many decedents'
estates in New York, collections of this tax are heavily influenced by
fluctuations in the value of common stock. Under legislation enacted in 1997 the
State estate tax will be reduced in 1998 and then converted to a pick-up tax on
February 1, 2000. Legislation enacted in 1998 generally extends the provisions
of the 1997 federal statutory changes to New York estates. The most meaningful
provisions extend the benefits available to family-owned businesses, and
property with conservation easements.

Gift taxes are imposed on taxable gifts made during a taxpayee's lifetime
after allowable exclusions. In recent years, certain factors, such as higher
permissible marital deductions and the unification of the estate and gift taxes
and tax credits have resulted in a substantially reduced gift tax base. In 1996,
legislation was enacted to correct a technical problem that prevented some gift
taxpayers from receiving the full advantage of these tax deductions. Under
legislation enacted in 1997 the gift tax will be reduced in 1999 and then
repealed on January 1, 2000.

The real estate transfer tax applies to each real property conveyance,
subject to certain exceptions, at a rate of $2 for each $500 of consideration or
fraction thereof. Legislation enacted in 1995 dedicated a portion of real estate
transfer tax receipts for deposit into the Environmental Protection Fund (EPF).
Legislation enacted in 1996 extended and expanded the tax reductions for the
transfer of property into a real estate investment trust and earmarked all
receipts remaining after deposits in the EPF to the Clean Water / Clean Air Debt
Service Fund. Receipts in excess of the debt service requirements are
transferred back to the General Fund. Legislation enacted in 1998 increases the
amount dedicated to the EPF to $112 million.

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The real property gains tax had been levied at the rate of 10 percent on
gains derived from certain real property transactions where the consideration is
$1 million or more. Legislation adopted in 1996 repealed the real property gains
tax on transfers occurring on or after June 15, 1996; however, some receipts
continue to flow to the General Fund based on transactions occurring prior to
such date.

The State levies pari-mutuel taxes on wagering activity conducted at horse
racetracks and more recently at simulcast theaters and off-track betting parlors
through the State. In previous years the State temporarily reduced its tax rates
and expanded simulcast opportunities and increased purses. Legislation enacted
in 1998 extends the tax cut and simulcast provisions to 2002. In addition to
pari-mutuel taxes, a 4 percent tax is levied on the charge for admissions to
racetracks and simulcast theaters, and a 5.5 percent tax is levied on gross
receipts from boxing and wresting exhibitions, including receipts from broadcast
and motion picture rights.

Miscellaneous receipts and other revenues include various fees, fines,
tuition, license revenues, lottery revenues, investment income, assessments on
various businesses (including healthcare providers), and abandoned property.
Miscellaneous receipts also include minor amounts received from the federal
government and deposited directly in the General Fund. Legislation enacted in
1997 provides for a phase-out of most of the assessments on health care
providers by April 1, 2001. Legislation enacted in 1998 accelerates the phaseout
of the health care provider assessments.

B-54
<PAGE>
PART C

OTHER INFORMATION

ITEM 23. EXHIBITS

Exhibit
Number Description
------ -----------

(a.1) Registrant's Articles of Incorporation.(1)
(a.2) Registrant's Amended and Restated Articles of Incorporation.(3)
(a.3) Registrant's Form of Articles Supplementary.(5)
(a.4) Registrant's Form of Articles Supplementary. (8)
(b.1) Registrant's By-Laws.(1)
(b.2) Registrant's Amended and Restated By-Laws.(3)
(c.) None.
(d.1) Form of Advisory Agreement between Registrant and OFFITBANK with
respect to the High Yield, Global Debt and Emerging Markets
Funds.(3)
(d.2) Form of Advisory Agreement between the Registrant and OFFITBANK
with respect to the Global Convertible, Latin America Equity,
National Municipal, California Municipal and New York Municipal
Funds.(5)
(d.3) Amendment to Advisory Agreement between the Registrant and
OFFITBANK reflecting the change in name of the Latin America
Equity, to Latin America Total Return Fund.(6)
(d.4) Form of Advisory Agreement between Registrant and OFFITBANK U.S.
Government Securities Fund, OFFITBANK Mortgage Securities Fund
and OFFITBANK Total Return Fund.(8)
(e.1) Form of Supplement to the Distribution Agreement between
Registrant and OFFIT Funds Distributor, Inc. with respect to the
Global Convertible, Latin America Equity, National Municipal,
California Municipal and New York Municipal Funds.(5)
(e.2) Amendment to the Distribution Agreement between Registrant and
OFFIT Funds Distributor, Inc. reflecting the change in name of
the Latin America Equity Fund to Latin America Total Return
Fund.(6)
(e.3) Amendment to the Distribution Agreement in connection with the
reclassification of existing shares of each Fund as "Select
Shares" as of the close of business May 1, 1996, and the
creation of Advisor Shares.(7)
(e.4) Distribution Agreement between Registrant and OFFIT Funds
Distributor, Inc., filed herewith.
(f.) None.
(g.1) Form of Custodian Agreement between Registrant and The Chase
Manhattan Bank, N.A. (the "Custodian") with respect to the High
Yield, Global Debt and Emerging Markets Funds.(3)
(g.2) Form of Custodian Agreement between Registrant and the Custodian
with respect to the Global Convertible, Latin America Equity,
National Municipal, California Municipal and New York Municipal
Funds.(5)

C-1
<PAGE>

(g.3) Form of Custodian Agreement between Registrant and The Bank of
New York. (9)
(g.4) Form of Amendment to the Custodian Agreement between Registrant
and The Bank of New York with respect to the Emerging Markets
Fund. (10)
(h.1) Form of Shareholder Servicing Agreement between the Registrant
and Shareholder Servicing Agents.(7)
(h.2) Form of Fund Administration Agreement between Registrant and
BISYS Fund Services.(8)
(h.3) Administration and Accounting Services Agreement between
Registrant and PFPC Inc., filed herewith.
(h.4) Form of Transfer Agency Agreement between Registrant and BISYS
Fund Services.(8)
(h.5) Transfer Agency Agreement between Registrant and PFPC Inc., filed
herewith.
(h.6) Form of Fund Accounting Agreement between Registrant and BISYS
Fund Services.(8)
(i) Opinion and Consent of Piper & Marbury.(3)
(j) Powers of Attorney for Messrs. Landau and Morton.(2)
(k.) None.
(l.1) Form of Share Purchase Agreement between Registrant and Furman
Selz Incorporated with respect to the High Yield, Global Debt and
Emerging Markets Funds.(3)
(l.2) Form of Share Purchase Agreement between Registrant and Furman
Selz Incorporated with respect to the Global Convertible, Latin
America Equity, National Municipal, California Municipal and New
York Municipal Funds.(5)
(l.3) Form of Share Purchase Agreement between the Registrant and OFFIT
Funds Distributor with respect to U.S. Government Securities
Fund, Mortgage Securities Fund and Total Return Fund.(8)
(m.1) Form of Plan Distribution.(2)
(m.2) Amendment to Plan of Distribution.(7)
(n.) None.
(o.) Form of Amended Multiclass Plan Pursuant to Rule 18f-3.(7)

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

(1) Exhibit is incorporated herein by reference to the Registrant's
Registration Statement on Form N-1A, filed October 8, 1993, Registration
Nos. 33-70116 and 811-8036 (the "Registration Statement").

(2) Exhibit is incorporated herein by reference to Pre-Effective Amendment No.
1, filed November 24, 1993 to the Registration Statement.

(3) Exhibit is incorporated herein by reference to Pre-Effective Amendment No.
2, filed January 31 1994, to the Registration Statement.

(4) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 2, filed on August 26, 1994, to the Registration Statement.

(5) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 3, filed on November 25, 1994, to the Registration Statement.

(6) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 6, filed on February 29, 1996, to the Registration Statement.

C-2
<PAGE>

(7) Exhibit is incorporated herein by reference to Post-Effective Amendment
No.7, filed on April 27, 1996, to the Registration Statement.

(8) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 10, filed on February 14, 1997.

(9) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 11, filed on April 30, 1997.

(10) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 12, filed on August 29, 1997.

(11) Exhibit is incorporated herein by reference to Post-Effective Amendment
No. 13, filed on January 29, 1998.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

None.

ITEM 25. INDEMNIFICATION.

Reference is made to Article VII of Registrant's Articles of Incorporation
(Exhibit (a.1) hereto), Article IV of Registrant's By-Laws (Exhibit (b.1)
hereto) and Paragraph V of the Distribution Agreement between Registrant and
OFFIT Funds Distributor, Inc. (Exhibit (e.4) hereto).

Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"), may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

The Adviser provides a wide range of asset management services to individuals,
institutions and retirement benefit plans.

To the knowledge of Registrant, none of the Directors or executive officers of
the Adviser except those described below, are or have been, at any time during
the past two years, engaged in any other business, profession, vocation or
employment of a substantial nature.

C-3
<PAGE>

Principal Occupation or
Other Employment of a
Position with Substantial Nature
Name OFFITBANK During the Past Two Years
- ---- --------- -------------------------

H. Furlong Baldwin Director Chairman of the Board,
Mercantile Safe Deposit & Mercantile Bankshares
Trust Co.
Two Hopkins Plaza
Baltimore, MD 21201

Morris, W. Offit, C.F.A. Director Chairman of the Board
OFFITBANK OFFITBANK
520 Madison Avenue
New York, N.Y. 10022

Marchese Alessandro Director Private Investor
di Montezemolo
200 Murray Place
Southampton, N.Y. 11969

David I. Margolis Director Chairman of the
Coltec Industries Inc. Executive Committee,
430 Park Avenue Coltec Industries Inc.
New York, N.Y. 10022

Harvey M. Meyerhoff Director Chairman of the Board,
Magna Holdings, Inc. Magna Holdings, Inc.
25 South Charles Street
Suite 2100
Baltimore, M.D. 21201

George Randolph Packard Director U.S. - Japan Foundation
U.S. - Japan Foundation
145 East 32nd Street,
12th Floor
New York, NY 10016

Edward V. Regan Director President, The Jerome Levy
45 Rockefeller Plaza Economics Institute of Bard
32nd Floor College
New York, N.Y. 10017
Director Private Investor
B. Lance Sauerteig
130 Edgehill Road
New Haven, CT 06511

Ricardo Steinbruch
Grupo Vichuna
Rua Itacolomi 412 Director
Higilenopolis
Sao Paolo, S.P. Brazil
01239-020

C-4
<PAGE>

ITEM 27. PRINCIPAL UNDERWRITER.

(a) In addition to the Registrant, OFFIT Funds Distributor, Inc.
currently acts as distributor for The OFFITBANK Variable Insurance
Fund, Inc.

(b) The information required by Item 27(b) with respect to each
director, officer or partner of OFFIT Funds Distributor, Inc. is
incorporated by reference to Schedule A on Form BD filed by OFFIT
Funds Distributor, Inc. pursuant to the Securities Exchange Act of
1934 (SEC File No. 8-46960)

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the rules thereunder will be maintained at the offices of:

(1) The OFFITBANK Investment Fund, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(records relating to the Company)

(2) OFFITBANK
520 Madison Avenue
New York, New York 10022
(advisory records)

(3) OFFIT Funds Distributor, Inc.
Four Falls Corporate Center West
Conshohocken, PA 19428-2961
(records of principal underwriter)

ITEM 29. MANAGEMENT SERVICES.

Not applicable.

C-5
<PAGE>

ITEM 30. UNDERTAKINGS.

(a) Registrant undertakes to call a meeting of shareholders for the purpose of
voting upon the question of removal of one or more of Registrant's
directors when requested in writing to do so by the holders of at least
10% of Registrant's outstanding shares of common stock and, in conjunction
with such meeting, to assist in communications with other shareholders in
this regard, as provided under Section 16(c) of the 1940 Act.

(b) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's annual report to shareholders,
upon request and without charge.

C-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 1st day
of March, 1999.

THE OFFITBANK INVESTMENT FUND, INC.

By: /s/ Morris W. Offit
--------------------------
Morris W. Offit, President

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following persons in
the capacities and on the 1st day of March, 1999.

SIGNATURE TITLE
- --------- -----

/s/ Morris W. Offit Director, Chairman of the Board and
- ------------------------------------ President
Morris W. Offit (Principal Executive Officer)

Edward J. Landau* Director
- ------------------------------------
Edward J. Landau

The Very Reverend James Parks Morton* Director
- ------------------------------------
The Very Reverend James Parks Morton

/s/ Wallace Mathai-Davis Treasurer and Secretary
- ------------------------------------ (Principal Financial and Accounting
Wallace Mathai-Davis Officer)

/s/ Morris W. Offit
- ------------------------------------
Attorney-in-fact

- ----------
*Pursuant to Power of Attorney filed with Pre-Effective Amendment No. 1 dated
November 24, 1993.

C-7
<PAGE>

THE OFFITBANK INVESTMENT FUND, INC.

INDEX TO EXHIBITS

Exhibit
Number Description of Exhibit
- ------ ----------------------

(e.4) Distribution Agreement between Registrant and OFFIT Funds Distributor,
Inc.

(h.3) Administration and Accounting Services Agreement between Registrant and
PFPC Inc.

(h.5) Transfer Agency Agreement between Registrant and PFPC Inc.

C-8

<PAGE>
DISTRIBUTION AGREEMENT

This Distribution Agreement is made as of March 19, 1998 between The
OFFITBANK Investment Fund, Inc., a Maryland corporation (herein called the
"Company"), and OFFIT Funds Distributor, Inc. (herein called "Distributor"), a
wholly-owned subsidiary of Provident Distributors, Inc.

WHEREAS, the Company is an open-end, management investment company and is
so registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and

WHEREAS, the Company will offer and maintain multiple investment
portfolios as specified in its Registration Statement on Form N-1A (each
individually a "Fund" and collectively the "Funds"); and

WHEREAS, the Company desires to retain Distributor as distributor for the
Funds to provide for the sale, distribution and redemption of shares of common
stock of the Funds (herein collectively called "Shares"), and Distributor is
willing to render such services;

NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein the parties hereto agree as follows:

I. DELIVERY OF DOCUMENTS

The Company has delivered to Distributor copies of each of the following
documents and shall deliver to it all future amendments and supplements
thereto, if any:

(a) The Company's Charter and all amendments thereto (such Charter, as
presently in effect and as it shall from time to time be amended,
herein called the "Company's Charter");

(b) Bylaws of the Company (such Bylaws, as presently in effect and as
they shall from time to time be amended, herein called the
"Bylaws");

(d) The Company's registration statement under the Securities Act of
1933, as amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the "Commission")
relating to the Shares, and all subsequent amendments thereto (said
registration statement, as presently in effect and as amended or
supplemented from time to time, is herein called the "Registration
Statement");

(e) Notification of Registration of the Company under the 1940 Act on
Form N-8A as

<PAGE>

filed with the Commission; and

(f) Prospectuses and statements of additional information of the Company
and of the Funds (such prospectuses and statements of additional
information, as presently in effect and as they shall from time to
time be amended and supplemented, herein called individually the
"Prospectus" and collectively the "Prospectuses").

II. DISTRIBUTION

1. APPOINTMENT OF DISTRIBUTOR.

The Company hereby appoints Distributor as distributor of the Funds'
Shares and Distributor hereby accepts such appointment and agrees to
render the services and duties set forth in this Section II. The
Distributor shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided herein or
authorized by the Board of Directors of the Company from time to time,
have no authority to act for or represent the Company in any way or
otherwise be deemed its agent. The services furnished by the Distributor
hereunder are not deemed exclusive, and the Distributor shall be free to
furnish similar services to others so long as its services under this
agreement are not impaired thereby.

2. SERVICES AND DUTIES.

(a) The Company agrees to sell through Distributor, as agent, from
time to time during the term of this Agreement, Shares of the
Funds upon the terms and at the current offering price as
described in the applicable Prospectus. Distributor shall act
only on its own behalf as principal in making agreements for
the sale and redemption of Shares, and shall sell Shares only
at the offering price thereof as set forth in the applicable
Prospectus. Distributor shall devote its best efforts to
effect sales of Shares of each of the Funds, but shall not be
obligated to sell any certain number of Shares.

(b) In all matters relating to the sale and redemption of Shares,
Distributor shall act in conformity with the Company's
Charter, Bylaws and Prospectuses and with the instructions and
directions of the Board of Directors of the Company, and shall
conform to and comply with the requirements of the 1933 Act,
the 1940 Act, the regulations of the NASD Regulation, Inc. and
all other applicable federal or state laws and regulations. In
connection with such sales, Distributor acknowledges and
agrees that it is not authorized to provide any information or
make any representations other than as contained in the
Company's Registration Statement and Prospectuses and any
sales literature specifically approved by the Company. The
Company shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to

2
<PAGE>

the Funds and the Shares as Distributor may reasonably
request.

(c) Except to the extent permitted by a plan adopted by the
Company under Rule 12b-1 of the 1940 Act, Distributor shall
bear the cost of (i) printing and distributing any Prospectus
(including any supplement thereto), and (ii) preparing,
printing and distributing any literature, advertisement or
material which is primarily intended to result in the sale of
the Shares; provided, however, that Distributor shall not be
obligated to bear the expenses incurred by the Company in
connection with (1) the preparation and printing of any
supplement or amendment to any Registration Statement or
Prospectus necessary for the continued effective registration
of the Shares under the 1933 Act or any state securities laws;
and (2) the printing and distribution of any Prospectus,
supplement or amendment thereto for existing shareholders of
the Fund described therein.

(d) The Company, or any agent of the Company designated in writing
by the Company, shall be promptly advised of all purchase
orders for Shares received by the Distributor.

(e) The Distributor shall provide the services of certain persons
who may be appointed as officers of the Company by the
Company's Board of Directors.

(f) It is understood that certain expenses to be incurred in
connection with the shares may be paid as provided in a
shareholder service plan or similar plan adopted by the
Company. The Distributor agrees to be responsible for the
operation of such plan in accordance with the terms thereof.

(g) The Company shall have the right at any time to inspect the
records of the Company (including work papers and other
related documents) in the possession of the Distributor.

3. SALES AND REDEMPTIONS.

(a) Shares of the Company are to be sold by the Distributor to
shareholders at the offering price as set forth in the
Prospectuses then in effect.

(b) The Company shall pay all costs and expenses in connection
with the registration of the Shares under the 1933 Act, and
all expenses in connection with maintaining facilities for the
issue and transfer of the Shares and for supplying
information, prices and other data to be furnished by the
Company hereunder, and all expenses in connection with
preparing, printing and distributing the Prospectuses except
as set forth in subsection 2(c) of Section II hereof or in any
other agreement entered into by the Company.

3
<PAGE>

(c) The Company shall execute all documents, furnish all
information and otherwise take all actions which may be
reasonably necessary in the discretion of the Company's
officers in connection with the qualification of the Shares
for sale in such states as Distributor may designate to the
Company and the Company may approve, and the Company shall pay
all filing fees which may be incurred in connection with such
qualification. Distributor shall pay all expenses connected
with its qualification as a dealer under state or federal laws
and, except as otherwise specifically provided in this
Agreement, all other expenses incurred by Distributor in
connection with the sale of the Shares as contemplated in this
Agreement.

(d) Any of the outstanding Shares of the Company may be tendered
for redemption at any time, and the Company agrees to
repurchase or redeem the Shares so tendered in accordance with
the Company's Charter, Bylaws and Prospectuses. The price to
be paid to redeem or repurchase the Shares shall be equal to
the net asset value per Share determined as set forth in the
applicable Prospectus (the "redemption price"). All payments
by the Company hereunder shall be made in the manner set forth
in Section 3(e) below.

(e) The proceeds of any redemption of shares shall be paid by the
Company (or its agent) in accordance with the applicable
provisions of the applicable Prospectus.

(f) The Company shall have the right to suspend the sale of Shares
of any Fund at any time in response to conditions in the
securities markets or otherwise, and to suspend the redemption
of Shares of any Fund at any time as permitted by the 1940 Act
or the rules of the Commission (the "Rules").

(g) The Company reserves the right to reject in its discretion any
order for Shares.

III. LIMITATIONS OF LIABILITY

Distributor shall not be liable for any error of judgement or mistake of
law or for any loss suffered by the Company or any Fund in connection with
the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.

IV. CONFIDENTIALITY

Distributor shall treat confidentially and as proprietary information of
the Company all

4
<PAGE>

records and other information relative to the Company and the Funds and
prior or present shareholders or those persons or entities who respond to
Distributor"s inquiries concerning investment in the Company, and shall
not use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder or under any
other agreement with the Company, except after prior notification to and
approval in writing by the Company, which approval shall not be
unreasonably withheld and may not be withheld where Distributor may be
exposed to civil or criminal contempt proceedings for failure to comply,
when Distributor is requested to divulge such information by duly
constituted authorities, or when Distributor is so requested by the
Company.

V. INDEMNIFICATION

1. COMPANY REPRESENTATIONS.

The Company represents and warrants to Distributor that (a) it is
duly organized as a Maryland corporation and is and at all times
will remain duly authorized to enter into and perform this
Agreement, and (b) at all times the Registration Statement and
Prospectuses will in all material respects conform to the applicable
requirements of the 1933 Act and the Rules and will not include any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, except that no representation or warranty
in this subsection shall apply to statements or omissions made in
reliance upon and in conformity with written information furnished
to the Company by or on behalf of and with respect to Distributor
expressly for use in the Registration Statement or Prospectuses.

2. DISTRIBUTOR REPRESENTATIONS.

Distributor represents and warrants to the Company that (a) it is
duly organized as a Delaware corporation and is and at all times
will remain duly authorized and licensed to carry out its services
as contemplated herein (b) at all times any written information
furnished to the Company by or on behalf of Distributor expressly
for use in the Registration Statement or Prospectuses will not
include any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading and (d) Distributor is at all times during
the term of this Agreement a registered broker-dealer under the
Securities Exchange Act of 1934.

3. COMPANY INDEMNIFICATION.

The Company shall indemnify, defend and hold harmless Distributor,
its several officers and directors, and any person who controls
Distributor within the

5
<PAGE>

meaning of Section 15 of the 1933 Act, from and against any losses,
claims, damages or liabilities, joint or several, to which any of
them may become subject under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, the Prospectuses or any
application or other document executed by or on behalf of the
Company, or arise out of, or are based upon, information furnished
by or on behalf of the Company filed in any state in order to
qualify the Shares under the securities or blue sky laws thereof
("Blue Sky Applications"), or arise out of, or are based upon, the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse Distributor, its several
officers and partners, and any person who controls Distributor
within the meaning of Section 15 of the 1933 Act, for any legal or
other expenses reasonably incurred by any of them in investigating,
defending or preparing to defend any such action, proceeding or
claim; provided, however, that the Company shall not be liable in
any case to the extent that such loss, claim, damage or liability
arises out of, or is based upon, any untrue statement, alleged
untrue statement, or omission or alleged omission made or
information in the Registration Statement, the Prospectuses, any
Blue Sky Application or any application or other document executed
by or on behalf of the Company in reliance upon and in conformity
with written information furnished to the Company by or on behalf of
and with respect to Distributor specifically for inclusion therein.

The Company shall not indemnify any person pursuant to this
subsection 3 of Section V hereof unless the court or other body
before which the proceeding was brought has rendered a final
decision on the merits that such person was not liable by reason of
his willful misfeasance, bad faith or negligence in the performance
of his duties, or his reckless disregard of obligations and duties,
under this Agreement ("disabling conduct") or, in the absence of
such a decision, a reasonable determination (based upon a review of
the facts) that such person was not liable by reason of disabling
conduct has been made by the vote of a majority of a quorum of
directors of the Company who are neither "interested persons" of the
Company (as defined in the 1940 Act) nor parties to the proceeding,
or by an independent legal counsel in a written opinion.

Each Fund shall advance attorneys' fees and other expenses incurred
by any person in defending any claim, demand, action or suit which
is the subject of a claim for indemnification pursuant to this
subsection 3 of Section V hereof, so long as:

(a) such person shall undertake to repay all such advances unless
it is ultimately determined that he is entitled to
indemnification hereunder; and

6
<PAGE>

(b) such person shall provide security for such undertaking, or
the Fund shall be insured against losses arising by reason of
any lawful advances, or a majority of a quorum of the
disinterested, non-party directors of the Company (or an
independent legal counsel in a written opinion) shall
determine based on a review of readily available facts (as
opposed to a full trial-type inquiry) that there is reason to
believe that such person ultimately will be found entitled to
indemnification hereunder.

4. DISTRIBUTOR INDEMNIFICATION

Distributor shall indemnify, defend and hold harmless the Company, each
Fund, the Company's several officers and directors and any person who
controls the Company or any Fund within the meaning of Section 15 of the
1933 Act, from and against any losses, claims, damages or liabilities,
joint or several, to which any of them may become subject under the 1933
Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) arise out of, or are based
upon, any breach of its representations and warranties in subsection 2 of
Section V or its agreements in subsection 2 of the Section II hereof, or
which arise out of, or are based upon, any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement, the Prospectuses, or any application or other document executed
by or on behalf of the Company, or arise out of, or are based upon
information furnished by the Distributor filed in any Blue Sky
Application, or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, which statement
or omission was made in reliance upon and in conformity with information
furnished to the Company or any of its several officers and directors by
or on behalf of and with respect to Distributor specifically for inclusion
therein, and shall reimburse the Company, each Fund, the Company's several
officers and directors, and any person who controls the Company or any
Fund within the meaning of Section 15 of the 1933 Act, for any legal or
other expenses reasonable incurred by any of them in investigating,
defending or preparing to defend any such action, proceeding or claim.

5. GENERAL INDEMNITY PROVISIONS.

No indemnifying party shall be liable under its indemnity agreement
contained in subsection 3 or 4 of Section V hereof with respect to any
claim made against such indemnifying party unless the indemnified party
shall have notified the indemnifying party in writing within a reasonable
time after the summons or other first legal process giving information of
the nature of the claim shall have been served upon the indemnified party
(or after the indemnified party shall have received notice of such service
on any designated agent), but failure to notify the indemnifying party of
any such claim shall not relieve it from any liability which it may
otherwise have to the indemnified party. The indemnifying party shall be

7
<PAGE>

entitled to participate at its own expense in the defense or, if it so
elects, to assume the defense of any suit brought to enforce any such
liability, and if the indemnifying party elects to assume the defense,
such defense shall be conducted by counsel chosen by it and reasonably
satisfactory to the indemnified party. In the event the indemnifying party
elects to assume the defense of any such suit and retain such counsel, the
indemnified party shall bear the fees and expenses of any additional
counsel retained by the indemnified party.

VI. DURATION AND TERMINATION

This Agreement shall become effective as of the date hereof and, unless
sooner terminated as provided herein, shall continue in effect with
respect to each Fund until February 27, 2000. Thereafter, if not
terminated, this Agreement shall continue automatically for successive
terms of one year, provided that such continuance is specifically approved
at least annually (a) by a vote of a majority of those members of the
Board of Directors of the Company who are not parties to this Agreement or
"interested persons" of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (b) by the Board of
Directors of the Company or by vote of a "majority of the outstanding
voting securities" of the Funds as to which the Agreement is effective;
provided, however, that this Agreement may be terminated by the Company at
any time, without the payment of any penalty, by vote of a majority of the
entire Board of Directors of the Company or by a vote of a "majority of
the outstanding voting securities" of such Funds on sixty (60) days' prior
written notice to Distributor, or by Distributor at any time, without the
payment of any penalty, on ninety (90) days' prior written notice to the
Company. This Agreement shall automatically and immediately terminate in
the event of its "assignment". As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meanings as such terms have in the 1940
Act. Any documents, records or work papers prepared by Distributor on
behalf of the Company in order to maintain the regulatory records of the
Funds shall become the property of the Company. In the event of
termination, Distributor shall promptly, upon written request, turn over
such documents, records or work papers to the Company.

VII. AMENDMENT OF THIS AGREEMENT

No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against
whom an enforcement of the change, waiver, discharge or termination is
sought.

VIII. NOTICES

Notices of any kind to be given to the Company hereunder by Distributor
shall be in writing and shall be duly given if mailed or delivered to the
Company at:

8
<PAGE>

The OFFITBANK Investment Fund, Inc.
c/o OFFITBANK
520 Madison Avenue, 27th floor
New York, NY 10022
Attention: Stephen Brent Wells

or such other address or to such individual as shall be so specified by
the one party to the other party.

Notices of any kind to be given to Distributor hereunder by the Company
shall be in writing and shall be duly given if mailed or delivered to
Distributor at:

Monroe Haegele
Provident Distributors, Inc.
Four Falls Corporate Center, 6th Floor
West Conshohocken, PA 19428-2961

or such other address or to such individual as shall be so specified by
the one party to the other party.

IX. MISCELLANEOUS

The obligations of each Fund under this Agreement shall be the several
(and not joint or joint and several) obligations of each Fund. The
captions in this Agreement are included for convenience of reference only
and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of the Agreement
shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby.
Subject to the provisions of Section VI hereof, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and
their respective successors and shall be governed by Delaware law (without
regard to principles of conflicts of law); provided, however, that nothing
herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation of the Commission thereunder. This Agreement may be
executed in two or more parts which together shall constitute a single
agreement.

9
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.

The OFFITBANK Investment Fund, Inc.

By: /s/ Stephen Brent Wells
-----------------------

Provident Distributors, Inc.

By: /s/ Monroe J. Haegele
-----------------------
Chief Executive Officer

<PAGE>

EXHIBIT (h.3)

<PAGE>

ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT

THIS AGREEMENT is made as of March 19, 1998 by and between The
OFFITBANK Investment Fund, Inc., a Maryland corporation (the "Fund"), and
PFPC INC., a Delaware corporation ("PFPC"), which is an indirect wholly owned
subsidiary of PNC Bank Corp.

W I T N E S S E T H :

WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"); and

WHEREAS, the Fund wishes to retain PFPC to provide administration and
accounting services to its investment portfolios listed on Exhibit A attached
hereto and made a part hereof, as such Exhibit A may be amended from time to
time (each a "Portfolio"), and PFPC wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the
parties hereto agree as follows:

1. DEFINITIONS. AS USED IN THIS AGREEMENT:

(a) "1933 ACT" means the Securities Act of 1933, as amended.

(b) "1934 ACT" means the Securities Exchange Act of 1934, as amended.

(c) "AUTHORIZED PERSON" means any officer of the Fund and any
other person duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and listed on the
Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope
of authority may be limited by the Fund by setting forth such limitation in
the Authorized Persons Appendix.

<PAGE>

(d) "CEA" means the Commodities Exchange Act, as amended.

(e) "ORAL INSTRUCTIONS" mean oral instructions received by PFPC
from an Authorized Person or from a person reasonably believed by PFPC to be
an Authorized Person.

(f) "SEC" means the Securities and Exchange Commission.

(g) "SECURITIES LAWS" means the 1933 Act, the 1934 Act, the 1940
Act and the CEA.

(h) "SHARES" mean the shares of beneficial interest of any series
or class of the Fund.

(i) "WRITTEN INSTRUCTIONS" mean written instructions signed by an
Authorized Person and received by PFPC. The instructions, which shall be
timely relative to the action requested, may be delivered by hand, mail,
tested telegram, cable, telex, electronic transmission or facsimile sending
device.

2. APPOINTMENT. The Fund hereby appoints PFPC to provide
administration and accounting services to the each of the Portfolios, in
accordance with the terms set forth in this Agreement. PFPC accepts such
appointment and agrees to furnish such services.

3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable,
will provide PFPC with the following:

(a) certified or authenticated copies of the resolutions of the
Fund's Board of Directors, approving the appointment of PFPC
or its affiliates to provide services to each Portfolio and
approving this Agreement;

(b) a copy of Fund's most recent effective registration statement;

(d) a copy of the distribution agreement with respect to Shares
representing an interest in a Portfolio;

2
<PAGE>

(e) a copy of any additional administration agreement with respect to
a Portfolio;

(f) a copy of any shareholder servicing agreement made in respect of
the Fund or a Portfolio; and

(g) copies (certified or authenticated, where applicable) of any and
all amendments or supplements to the foregoing.

4. COMPLIANCE WITH RULES AND REGULATIONS.

PFPC undertakes to comply with all applicable requirements of the
Securities Laws, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to the duties to be performed by
PFPC hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by the Fund or any Portfolio.

5. YEAR 2000 COMPLIANCE.

PFPC represents and warrants that the electronic data processing
systems and programs that it uses in connection with the provision of
services hereunder will be year 2000 compliant prior to 1999.

6. INSTRUCTIONS.

(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions and Written Instructions.

(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PFPC to be an Authorized Person) pursuant to this
Agreement. PFPC may assume that any Oral Instruction or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote, resolution or
proceeding of the Fund's Board of Directors or of the Fund's shareholders,
unless and until PFPC receives Written Instructions

3
<PAGE>

to the contrary.

(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions (except where such Oral Instructions are given
by PFPC or its affiliates) so that PFPC receives the Written Instructions by
the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not
received by PFPC shall in no way invalidate the transactions or
enforceability of the transactions authorized by the Oral Instructions.
Where Oral Instructions or Written Instructions reasonably appear to have
been received from an Authorized Person, PFPC shall incur no liability to the
Fund in acting upon such Oral Instructions or Written Instructions provided
that PFPC's actions comply with the other provisions of this Agreement.

7. RIGHT TO RECEIVE ADVICE.

(a) ADVICE OF THE FUND. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.

(b) ADVICE OF COUNSEL. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should not take, PFPC
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser or PFPC, at the
option of PFPC).

(c) CONFLICTING ADVICE. In the event of a conflict between
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund and the advice PFPC receives from counsel, PFPC may rely upon
and follow the advice of counsel. In the event PFPC so relies on the advice
of counsel, PFPC remains liable for any action or omission on the part of
PFPC which

4
<PAGE>

constitutes willful misfeasance, bad faith, gross negligence or reckless
disregard by PFPC of any duties, obligations or responsibilities set forth in
this Agreement.

(d) PROTECTION OF PFPC. PFPC shall be protected in any action it
takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from
counsel and which PFPC believes, in good faith, to be consistent with those
directions, advice and Oral Instructions or Written Instructions. Nothing in
this section shall be construed so as to impose an obligation upon PFPC (i)
to seek such directions, advice or Oral Instructions or Written Instructions,
or (ii) to act in accordance with such directions, advice or Oral
Instructions or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PFPC's properly
taking or not taking such action. Nothing in this subsection shall excuse
PFPC when an action or omission on the part of PFPC constitutes willful
misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any
duties, obligations or responsibilities set forth in this Agreement.

8. RECORDS; VISITS.

(a) The books and records pertaining to the Fund and the
Portfolios which are in the possession or under the control of PFPC shall be
the property of the Fund. Such books and records shall be prepared and
maintained as required by the 1940 Act and other applicable securities laws,
rules and regulations. The Fund and Authorized Persons shall have access to
such books and records at all times during PFPC's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by PFPC to the Fund or to an Authorized Person, at the
Fund's expense.

(b) PFPC shall keep the following records:

<PAGE>

(i) all books and records with respect to each Portfolio's
books of account;

(ii) records of each Portfolio's securities transactions; and

(iii) all other books and records as PFPC is required to
maintain pursuant to Rules 31a-1 and 31a-2 of the 1940
Act in connection with the services provided hereunder.

9. CONFIDENTIALITY. PFPC agrees to keep confidential all records of
the Fund and information relating to the Fund and its shareholders, unless
the release of such records or information is otherwise consented to, in
writing, by the Fund. The Fund agrees that such consent shall not be
unreasonably withheld and may not be withheld where PFPC may be exposed to
civil or criminal contempt proceedings or when required to divulge such
information or records to duly constituted authorities.

10. LIAISON WITH ACCOUNTANTS. PFPC shall act as liaison with the
Fund's independent public accountants and shall provide account analyses,
fiscal year summaries, and other audit-related schedules with respect to each
Portfolio. PFPC shall take all reasonable action in the performance of its
duties under this Agreement to assure that the necessary information is made
available to such accountants for the expression of their opinion, as
required by the Fund.

11. DISASTER RECOVERY. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment
failures, PFPC shall, at no additional expense to the Fund, take reasonable
steps to minimize service interruptions. PFPC shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided such loss or interruption is not caused by PFPC's own
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties

6
<PAGE>

or obligations under this Agreement.

12. COMPENSATION. As compensation for services rendered by PFPC during
the term of this Agreement, the Fund, on behalf of each Portfolio, will pay
to PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC.

13. EXPENSES. PFPC shall furnish at its own expense personnel
necessary to perform its obligations under this Agreement. PFPC shall also
provide the items which it is obligated to provide under this Agreement, and
shall pay all compensation, if any, of officers or Directors of the Fund who
are affiliated persons of PFPC or any affiliated corporation of PFPC.

14. INDEMNIFICATION. The Fund, on behalf of each Portfolio, agrees to
indemnify and hold harmless PFPC and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Laws and any state or foreign
securities and blue sky laws, and amendments thereto), and expenses,
including (without limitation) attorneys' fees and disbursements arising
directly or indirectly from any action or omission to act which PFPC takes
(i) at the request or on the direction of or in reliance on the advice of the
Fund or (ii) upon Oral Instructions or Written Instructions. Neither PFPC,
nor any of its affiliates, shall be indemnified against any liability (or any
expenses incident to such liability) arising out of PFPC's or its affiliates
own willful misfeasance, bad faith, gross negligence or reckless disregard of
its duties and obligations under this Agreement. Any amounts payable by the
Fund hereunder shall be satisfied only against the relevant Portfolio's
assets and not against the assets of any other investment portfolio of the
Fund.

15. RESPONSIBILITY OF PFPC.

(a) PFPC shall be under no duty to take any action on behalf of
the Fund or any

7
<PAGE>

Portfolio except as specifically set forth herein or as may be specifically
agreed to by PFPC in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder, to act in good faith
and to use its best efforts, within reasonable limits, in performing services
provided for under this Agreement. PFPC shall be liable for any damages
arising out of PFPC's failure to perform its duties under this Agreement to
the extent such damages arise out of PFPC's willful misfeasance, bad faith,
gross negligence or reckless disregard of such duties, and PFPC shall
indemnify and hold harmless the Fund and each Portfolio from such damages.

(b) Without limiting the generality of the foregoing or of any
other provision of this Agreement, (i) PFPC shall not be liable for losses
beyond its control, provided that PFPC has acted in accordance with the
standard of care set forth above; and (ii) PFPC shall not be liable for (A)
the validity or invalidity or authority or lack thereof of any Oral
Instruction or Written Instruction, notice or other instrument which conforms
to the applicable requirements of this Agreement, and which PFPC reasonably
believes to be genuine; or (B) subject to Section 11, delays or errors or
loss of data occurring by reason of circumstances beyond PFPC's control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots
or failure of the mails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to the Fund or to any
Portfolio for any consequential, special or indirect losses or damages which
the Fund or any Portfolio may incur or suffer by or as a consequence of
PFPC's or any affiliates' performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known by PFPC or
its affiliates.

16. DESCRIPTION OF ACCOUNTING SERVICES ON A CONTINUOUS BASIS.

8
<PAGE>

PFPC will perform the following accounting services with respect to each
Portfolio:

(i) Journalize investment, capital share and income and expense
activities;

(ii) Verify investment buy/sell trade tickets when received from
the investment adviser for a Portfolio (the "Adviser") and
transmit trades to the Fund's custodian (the "Custodian")
for proper settlement;

(iii) Maintain individual ledgers for investment securities;

(iv) Maintain historical tax lots for each security;

(v) Reconcile cash and investment balances of the Fund with the
Custodian, and provide the Adviser with the beginning cash
balance available for investment purposes;

(vi) Update the cash availability throughout the day as required
by the Adviser;

(vii) Post to and prepare the Statement of Assets and Liabilities
and the Statement of Operations;

(viii) Calculate various contractual expenses (E.G., advisory and
custody fees);

(ix) Calculate performance data of the Portfolios for
dissemination to information services covering the
investment company industry;

(x) Monitor the expense accruals and notify an officer of the
Fund of any proposed adjustments;

(xi) Control all disbursements and authorize such disbursements
upon Written Instructions;

(xii) Calculate capital gains and losses;

(xiii) Determine net income;

(xiv) Obtain security market quotes from independent pricing
services approved by the Adviser, or if such quotes are
unavailable, then obtain such prices from the Adviser, and
in either case calculate the market value of each
Portfolio's Investments;

(xv) Transmit or mail a copy of the daily portfolio valuation to
the Adviser;

(xvi) Compute net asset value;

9
<PAGE>

(xvii) As appropriate, compute yields, total return, expense
ratios, portfolio turnover rate, and, if required, portfolio
average dollar-weighted maturity; and

(xviii) Prepare a monthly financial statement, which will include
the following items:

Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.

17. DESCRIPTION OF ADMINISTRATION SERVICES ON A CONTINUOUS BASIS.

PFPC will perform the following administration services with
respect to each Portfolio:

(i) Prepare quarterly broker security transactions summaries;

(ii) Prepare monthly security transaction listings;

(iii) Supply various normal and customary Portfolio and Fund
statistical data as requested on an ongoing basis;

(iv) Prepare for execution and file the Fund's Federal and state
tax returns;

(v) Prepare and file the Fund's semi-annual reports with the SEC
on Form N-SAR;

(vi) Prepare and file with the SEC the Fund's annual,
semi-annual, and quarterly shareholder reports;

(vii) Prepare, coordinate with Fund Counsel and file with the SEC
Post-Effective Amendments to the Fund's Registration
Statement, prepare reports to the Fund's shareholders of
record and the SEC including the preparation and filing of
Notices pursuant to Rule 24f-2 and assist in preparation of
notices of Annual or Special Meetings of Shareholders and
Proxy materials relating to such meetings;

(viii) Monitor each Portfolio's status as a regulated investment
company under Sub-chapter M of the Internal Revenue Code of
1986, as amended;

10
<PAGE>

(ix) Supervise the Fund's transfer agent with respect to the
payment of dividends and other distributions to Shareholders;

(x) Assist with the layout and printing of publicly disseminated
prospectuses and assist with and coordinate layout and
printing of the Fund's semi-annual and annual reports to
shareholders;

(xi) Provide individuals reasonably acceptable to the Fund's
Board of Directors to serve as "non-policy making" officers
of the Fund, who will be responsible for the administration
of certain of the Fund's affairs as determined by the Fund's
Board of Directors;

(xii) Advise the Fund and its Board of Directors on matters
concerning the Fund and its affairs;

(xiii) Obtain and maintain fidelity bonds and directors and
officers/errors and omissions insurance policies for the
Fund in accordance with the requirements of Rules 17g-1 and
17d-1(d)(7) under the 1940 Act as such bonds and policies
are approved by the Fund's Board of Directors;

(xiv) Furnish advice and recommendations with respect to other
aspects of the business and affairs of the Portfolios as the
Fund and PFPC shall determine desirable;

(xv) Assist in monitoring and developing compliance procedures
for the Adviser of each Portfolio which will include, among
other matters, procedures to monitor compliance with each
Portfolio's investment objective, policies, restrictions,
tax matters and applicable laws and regulations;

(xvi) Provide consultation with Fund counsel and the Fund;

(xvii) Coordinate contractual relationships and communications
between the Fund and its contractual service providers;

(xviii) Monitor and maintain the Fund's compliance with the amounts
and conditions of each state qualification; and

(xix) Review for regulatory compliance and coordinate the filing
with the NASD of the sales literature (e.g. advertisements,
brochures and shareholder communications) with respect to
each of the Portfolios.

18. DURATION AND TERMINATION. This Agreement shall continue until
terminated by the Fund on sixty (60) days' prior written notice to PFPC, or
by PFPC on one hundred twenty (120) days

11
<PAGE>

prior written notice to the Fund.

19. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable,
telex or facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be deemed to
have been given three days after it has been mailed. If notice is sent by
messenger, it shall be deemed to have been given on the day it is delivered.
Notices shall be addressed (a) if to PFPC, at 400 Bellevue Parkway,
Wilmington, Delaware 19809; (b) if to the Fund, at 520 Madison Avenue, 27th
Floor, New York, New York, 10022, Attn: Vincent M. Rella; or (c) if to
neither of the foregoing, at such other address as shall have been provided
by like notice to the sender of any such notice or other communication by the
other party.

20. AMENDMENTS. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom
enforcement of such change or waiver is sought.

21. DELEGATION; ASSIGNMENT. PFPC may assign its rights and delegate
its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives
the Fund one hundred twenty (120) days' prior written notice; (ii) the
delegate (or assignee) agrees with PFPC and the Fund to comply with all
relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or
assignee) promptly provide such information as the Fund may request, and
respond to such questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate
(or assignee).

12
<PAGE>

22. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

23. FURTHER ACTIONS. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the
purposes hereof.

24. MISCELLANEOUS.

(a) ENTIRE AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, provided
that the parties may embody in one or more separate documents their
agreement, if any, with respect to delegated duties and Oral Instructions.

(b) CAPTIONS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.

(c) GOVERNING LAW. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard to principles
of conflicts of law.

(d) PARTIAL INVALIDITY. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.

(e) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.

(f) FACSIMILE SIGNATURES. The facsimile signature of any party to
this Agreement shall constitute the valid and binding execution hereof by
such party.

13
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.

PFPC INC.

By: /s/ Clayton Burton
------------------------------

Title: Executive Vice President
---------------------------

The OFFITBANK Investment Fund, Inc.

By: /s/ Vincent Rella
------------------------------

Title: Assistant Treasurer
---------------------------

14
<PAGE>

EXHIBIT A

THIS EXHIBIT A, dated as of March 19, 1998, is Exhibit A to that certain
Administration and Accounting Services Agreement dated as of March 19, 1998
between PFPC Inc. and The OFFITBANK Investment Fund, Inc.

PORTFOLIOS

OFFITBANK California Municipal Fund
OFFITBANK Emerging Markets Fund
OFFITBANK Global Convertible Fund
OFFITBANK High Yield Fund
OFFITBANK Investment Grade Global Debt Fund
OFFITBANK Latin America Equity Fund
OFFITBANK Mortgage Securities Fund
OFFITBANK National Municipal Fund
OFFITBANK New York Municipal Fund
OFFITBANK Total Return Fund
OFFITBANK U.S. Government Securities Fund

15
<PAGE>

AUTHORIZED PERSONS APPENDIX

NAME (Type) SIGNATURE

____________ ____________

<PAGE>

EXHIBIT (h.5)

<PAGE>

TRANSFER AGENCY SERVICES AGREEMENT

THIS AGREEMENT is made as of March 19, 1998 by and between PFPC INC.,
a Delaware corporation ("PFPC"), and The OFFITBANK Investment Fund, Inc., a
Maryland corporation (the "Fund").

W I T N E S S E T H:

WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"); and

WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to its
investment portfolios listed on Exhibit A attached hereto and made a part
hereof, as such Exhibit A may be amended from time to time (each a
"Portfolio"), and PFPC wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:

1. DEFINITIONS. AS USED IN THIS AGREEMENT:

(a) "1933 ACT" means the Securities Act of 1933, as amended.

(b) "1934 ACT" means the Securities Exchange Act of 1934, as amended.

(c) "AUTHORIZED PERSON" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and listed on the
Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PFPC. An Authorized Person's scope of
authority may be limited by the Fund by setting forth such limitation in the
Authorized Persons

<PAGE>

Appendix.

(d) "CEA" means the Commodities Exchange Act, as amended.

(e) "ORAL INSTRUCTIONS" mean oral instructions received by PFPC
from an Authorized Person or from a person reasonably believed by PFPC to be
an Authorized Person.

(f) "SEC" means the Securities and Exchange Commission.

(g) "SECURITIES LAWS" mean the 1933 Act, the 1934 Act, the 1940 Act
and the CEA.

(h) "SHARES" mean the shares of beneficial interest of any series or
class of the Fund.

2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer
agent, registrar, dividend disbursing agent and shareholder servicing agent
to each of the Portfolios in accordance with the terms set forth in this
Agreement. PFPC accepts such appointment and agrees to furnish such
services.

3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will
provide PFPC with the following:

(a) Certified or authenticated copies of the resolutions of the
Fund's Board of Directors, approving the appointment of PFPC
or its affiliates to provide services to each Portfolio and
approving this Agreement;

(b) A copy of the Fund's most recent effective registration
statement;

2
<PAGE>

(d) A copy of the distribution agreement with respect to Shares
representing an interest in a Portfolio;

(e) A copy of any additional administration agreement with
respect to a Portfolio;

(f) A copy of any shareholder servicing agreement made in
respect of the Fund or a Portfolio; and

(g) Copies (certified or authenticated where applicable) of any
and all amendments or supplements to the foregoing.

4. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply
with all applicable requirements of the Securities Laws and any laws, rules
and regulations of governmental authorities having jurisdiction with respect
to the duties to be performed by PFPC hereunder. Except as specifically set
forth herein, PFPC assumes no responsibility for such compliance by the Fund
or any Portfolio.

5. YEAR 2000 COMPLIANCE.

PFPC represents and warrants that the electronic data processing
systems and programs that it uses in connection with the provision of
services hereunder will be year 2000 compliant prior to 1999.

6. INSTRUCTIONS.

(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions and Written Instructions.

(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PFPC to be an

3
<PAGE>

Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral
Instruction or Written Instruction received hereunder is not in any way
inconsistent with the provisions of organizational documents or this
Agreement or of any vote, resolution or proceeding of the Fund's Board of
Directors or of the Fund's shareholders, unless and until PFPC receives
Written Instructions to the contrary.

(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written Instructions
by the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not received
by PFPC shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an
Authorized Person, PFPC shall incur no liability to the Fund in acting upon
such Oral Instructions or Written Instructions provided that PFPC's actions
comply with the other provisions of this Agreement.

7. RIGHT TO RECEIVE ADVICE.

(a) ADVICE OF THE FUND. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.

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<PAGE>

(c) CONFLICTING ADVICE. In the event of a conflict between
directions, advice or Oral Instructions or Written Instructions PFPC receives
from the Fund, and the advice it receives from counsel, PFPC may rely upon
and follow the advice of counsel. In the event PFPC so relies on the advice
of counsel, PFPC remains liable for any action or omission on the part of
PFPC which constitutes willful misfeasance, bad faith, gross negligence or
reckless disregard by PFPC of any duties, obligations or responsibilities set
forth in this Agreement.

(d) PROTECTION OF PFPC. PFPC shall be protected in any action it
takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from
counsel and which PFPC believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions. Nothing in
this section shall be construed so as to impose an obligation upon PFPC (i)
to seek such directions, advice or Oral Instructions or Written Instructions,
or (ii) to act in accordance with such directions, advice or Oral
Instructions or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PFPC's properly
taking or not taking such action. Nothing in this subsection shall excuse
PFPC when an action or omission on the part of PFPC constitutes willful
misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any
duties, obligations or responsibilities set forth in this Agreement.

8. RECORDS; VISITS. The books and records pertaining to the Fund,
which are in the possession or under the control of PFPC, shall be the
property of the Fund. Such books and records shall be prepared and
maintained as required by the 1940 Act and other applicable securities laws,
rules and regulations. The Fund and Authorized Persons shall have access to
such books and records

5
<PAGE>

at all times during PFPC's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records shall be provided
by PFPC to the Fund or to an Authorized Person, at the Fund's expense.

10. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.

6
<PAGE>

13. INDEMNIFICATION. The Fund, on behalf of each Portfolio, agrees to
indemnify and hold harmless PFPC and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Laws and any state and foreign
securities and blue sky laws, and amendments thereto), and expenses,
including (without limitation) attorneys' fees and disbursements, arising
directly or indirectly from (i) any action or omission to act which PFPC
takes (a) at the request or on the direction of or in reliance on the advice
of the Fund or (b) upon Oral Instructions or Written Instructions or (ii) the
acceptance, processing and/or negotiation of checks or other methods utilized
for the purchase of Shares. Neither PFPC, nor any of its affiliates, shall
be indemnified against any liability (or any expenses incident to such
liability) arising out of PFPC's or its affiliates' own willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties and
obligations under this Agreement. Any amounts payable by the Fund hereunder
shall be satisfied only against the relevant Portfolio's assets and not
against the assets of any other investment portfolio of the Fund.

14. RESPONSIBILITY OF PFPC.

(a) PFPC shall be under no duty to take any action on behalf of
the Fund except as specifically set forth herein or as may be specifically
agreed to by PFPC in writing. PFPC shall be obligated to exercise care and
diligence in the performance of its duties hereunder, to act in good faith
and to use its best efforts, within reasonable limits, in performing services
provided for under

7
<PAGE>

this Agreement. PFPC shall be liable for any damages arising out of PFPC's
failure to perform its duties under this Agreement to the extent such damages
arise out of PFPC's willful misfeasance, bad faith, gross negligence or
reckless disregard of such duties, and PFPC shall indemnify and hold harmless
the Fund and each Portfolio from such damages.

(b) Without limiting the generality of the foregoing or of any
other provision of this Agreement, (i) PFPC, shall not be liable for losses
beyond its control, provided that PFPC has acted in accordance with the
standard of care set forth above; and (ii) PFPC shall not be under any duty
or obligation to inquire into and shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PFPC reasonably believes to be
genuine; or (B) subject to Section 11, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood, catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to the Fund for any
consequential, special or indirect losses or damages which the Fund may incur
or suffer by or as a consequence of PFPC's or its affiliates' performance of
the services provided hereunder, whether or not the likelihood of such losses
or damages was known by PFPC or its affiliates.

15. DESCRIPTION OF SERVICES.

(a) SERVICES PROVIDED ON AN ONGOING BASIS, IF APPLICABLE.

8
<PAGE>

(i) Calculate 12b-1 payments;

(ii) Maintain proper shareholder registrations;

(iii) Review new applications and correspond with shareholders to
complete or correct information;

(iv) Direct payment processing of checks or wires;

(v) Prepare and certify stockholder lists in conjunction with
proxy solicitations;

(vi) Countersign share certificates;

(vii) Prepare and mail to shareholders confirmation of activity;

(viii) Provide toll-free lines for direct shareholder use, plus
customer liaison staff for on-line inquiry response;

(ix) Mail duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the
broker-dealer or directly with PFPC;

(x) Provide periodic shareholder lists and statistics to the
Fund;

(xi) Provide detailed data for underwriter/broker confirmations;

(xii) Prepare periodic mailing of year-end tax and statement
information;

(xiii) Notify on a timely basis the investment adviser, accounting
agent, and custodian of fund activity; and

(xiv) Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.

(b) SERVICES PROVIDED BY PFPC UNDER ORAL INSTRUCTIONS OR WRITTEN
INSTRUCTIONS.

(i) Accept and post daily Fund purchases and redemptions;

(ii) Accept, post and perform shareholder transfers and
exchanges;

(iii) Pay dividends and other distributions;

(iv) Solicit and tabulate proxies; and

9
<PAGE>

(v) Issue and cancel certificates (when requested in writing
by the shareholder).

(c) PURCHASE OF SHARES. PFPC shall issue and credit an account of
an investor, in the manner described in the Fund's prospectus, once it
receives:

(i) A purchase order;

(ii) Proper information to establish a shareholder account; and

(iii) Confirmation of receipt or crediting of funds for such
order to the Fund's custodian.

(d) REDEMPTION OF SHARES. PFPC shall redeem Shares only if that
function is properly authorized by the certificate of incorporation or
resolution of the Fund's Board of Directors. Shares shall be redeemed and
payment therefor shall be made in accordance with the Fund's prospectus, when
the recordholder tenders Shares in proper form and directs the method of
redemption. If the recordholder has not directed that redemption proceeds be
wired, when the Custodian provides PFPC with funds, the redemption check
shall be sent to and made payable to the recordholder, unless:

(i) the surrendered certificate is drawn to the order of an
assignee or holder and transfer authorization is signed by
the recordholder; or

(ii) Transfer authorizations are signed by the recordholder when
Shares are held in book-entry form.

When a broker-dealer notifies PFPC of a redemption desired by a customer, and
the Custodian provides PFPC with funds, PFPC shall prepare and send the
redemption check to the broker-dealer and made payable to the broker-dealer
on behalf of its customer.

(e) DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. PFPC shall receive
proper authorization of dividends and capital gain distributions, typically
in the form of a resolution of the

10
<PAGE>

Fund's Board of Directors authorizing their declaration and payment. PFPC
shall issue dividends and capital gain distributions declared by the Fund in
Shares, or, upon shareholder election, pay such dividends and capital gain
distributions in cash, if provided for in the Fund's prospectus. Such
issuance or payment, as well as payments upon redemption as described above,
shall be made after deduction and payment of the required amount of funds to
be withheld in accordance with any applicable tax laws or other laws, rules
or regulations. PFPC shall mail to the Fund's shareholders such tax forms
and other information, or permissible substitute notice, relating to
dividends and capital gain distributions paid by the Fund as are required to
be filed and mailed by applicable law, rule or regulation. PFPC shall
prepare, maintain and file with the IRS and other appropriate taxing
authorities reports relating to all dividends above a stipulated amount paid
by the Fund to its shareholders as required by tax or other law, rule or
regulation.

(f) SHAREHOLDER ACCOUNT SERVICES.

(i) PFPC may arrange, in accordance with the prospectus, for
issuance of Shares obtained through:

- Any pre-authorized check plan; and
- Direct purchases through broker wire orders, checks and
applications.

(ii) PFPC may arrange, in accordance with the prospectus, for a
shareholder's:

- Exchange of Shares for shares of another fund with which the
Fund has exchange privileges;
- Automatic redemption from an account where that shareholder
participates in a automatic redemption plan; and/or
- Redemption of Shares from an account with a checkwriting
privilege.

(g) COMMUNICATIONS TO SHAREHOLDERS. Upon Written Instructions, PFPC
shall mail all communications by the Fund to its shareholders, including:

11
<PAGE>

(i) Reports to shareholders;

(ii) Confirmations of purchases and sales of Fund shares;

(iii) Monthly or quarterly statements;

(iv) Dividend and distribution notices;

(v) Proxy material; and

(vi) Tax form information.

In addition, PFPC will receive and tabulate the proxy cards for the
meetings of the Fund's shareholders.

(h) RECORDS. PFPC shall maintain records of the accounts for each
shareholder showing the following information:

(i) Name, address and United States Tax Identification or
Social Security number;

(ii) Number and class of Shares held and number and class of
Shares for which certificates, if any, have been issued,
including certificate numbers and denominations;

(iii) Historical information regarding the account of each
shareholder, including dividends and distributions paid
and the date and price for all transactions on a
shareholder's account;

(iv) Any stop or restraining order placed against a
shareholder's account;

(v) Any correspondence relating to the current maintenance
of a shareholder's account;

(vi) Information with respect to withholdings; and

(vii) Any information required in order for the transfer agent
to perform any calculations contemplated or required by
this Agreement.

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<PAGE>

(i) LOST OR STOLEN CERTIFICATES. PFPC shall place a stop notice
against any certificate reported to be lost or stolen and comply with all
applicable federal regulatory requirements for reporting such loss or alleged
misappropriation. A new certificate shall be registered and issued only
upon:

(i) The shareholder's pledge of a lost instrument bond or such
other appropriate indemnity bond issued by a surety
company approved by PFPC; and

(ii) Completion of a release and indemnification agreement
signed by the shareholder to protect PFPC and its
affiliates.

(j) SHAREHOLDER INSPECTION OF STOCK RECORDS. Upon a request from
any Fund shareholder to inspect stock records, PFPC will notify the Fund and
the Fund will issue instructions granting or denying each such request.
Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees
and does hereby, release PFPC from any liability for refusal of permission
for a particular shareholder to inspect the Fund's stock records.

(k) WITHDRAWAL OF SHARES AND CANCELLATION OF CERTIFICATES.

Upon receipt of Written Instructions, PFPC shall cancel outstanding
certificates surrendered by the Fund to reduce the total amount of
outstanding shares by the number of shares surrendered by the Fund.

16. DURATION AND TERMINATION. This Agreement shall continue until
terminated by the Fund on sixty (60) days' prior written notice to PFPC, or
by PFPC on one hundred twenty (120) days prior written notice to the Fund.

17. NOTICES. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be

13
<PAGE>

addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware
19809; (b) if to the Fund, at 520 Madison Avenue, 27th Floor, New York, New
York, 10022, Attn: Vincent M. Rella or (c) if to neither of the foregoing, at
such other address as shall have been given by like notice to the sender of
any such notice or other communication by the other party. If notice is sent
by confirming telegram, cable, telex or facsimile sending device, it shall be
deemed to have been given immediately. If notice is sent by first-class
mail, it shall be deemed to have been given three days after it has been
mailed. If notice is sent by messenger, it shall be deemed to have been
given on the day it is delivered.

18. AMENDMENTS. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.

19. DELEGATION; ASSIGNMENT. PFPC may assign its rights and delegate
its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives
the Fund one hundred twenty (120) days' prior written notice; (ii) the
delegate (or assignee) agrees with PFPC and the Fund to comply with all
relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or
assignee) promptly provide such information as the Fund may request, and
respond to such questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate
(or assignee).

20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same

14
<PAGE>

instrument.

21. FURTHER ACTIONS. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the
purposes hereof.

22. MISCELLANEOUS.

(c) GOVERNING LAW. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard to principles
of conflicts of law.

(e) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.

(f) FACSIMILE SIGNATURES. The facsimile signature of any party to
this Agreement shall constitute the valid and binding execution hereof by
such party.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.

PFPC INC.

By: /s/ Clayton Burton
------------------------------------

Title: Executive Vice President
------------------------------------

The OFFITBANK Investment Fund, Inc.

By: /s/ Vincent Rella
------------------------------------

Title: Assistant Treasurer
------------------------------------

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<PAGE>

EXHIBIT A

THIS EXHIBIT A, dated as of March 19, 1998, is Exhibit A to that certain
Transfer Agency Services Agreement dated as of March 19, 1998 between PFPC Inc.
and The OFFITBANK Investment Fund, Inc.

PORTFOLIOS

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<PAGE>

AUTHORIZED PERSONS APPENDIX

NAME (TYPE) SIGNATURE

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