OFFITBANK INVESTMENT FUND INC, 497, 1999-10-20

OFFITBANK INVESTMENT FUND INC
497, 1999-10-20

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<PAGE>

MSD&T SHARES
OF THE OFFIT HIGH YIELD FUND

(THE "FUND")

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.

PROSPECTUS

October 20, 1999

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C>
A LOOK AT GOALS, STRATEGIES, FUND DESCRIPTION
RISKS, EXPENSES AND FINANCIAL Investment Objectives............................................4
HISTORY. Principal Investment Strategies..................................4
Principal Risk Factors...........................................4
Prior Performance................................................5
Fees and Expenses of the Fund....................................6
Financial Highlights.............................................7
Investment Objectives and Principal Strategies...................8
Additional Non-Principal Strategies..............................9
Risks of Investing in the Fund..................................10

DETAILS ON THE MANAGEMENT MANAGEMENT OF THE FUND
AND OPERATIONS OF THE FUND. Investment Adviser..............................................22
Service Provider Chart..........................................24

POLICIES AND INSTRUCTIONS FOR SHAREHOLDER INFORMATION
OPENING, MAINTAINING AND Pricing of Fund Shares..........................................25
CLOSING AN ACCOUNT IN THE FUND. Purchase of MSD&T Shares........................................25
Redemption of MSD&T Shares......................................26
Shareholder Services............................................27
Dividends and Distributions.....................................27
Taxes...........................................................27

DETAILS ON DISTRIBUTION AND DISTRIBUTION ARRANGEMENTS
OTHER SHAREHOLDER SERVICE Multiple Class Structure........................................30
PLANS. Shareholder Serving Plan........................................30

Appendix A: Ratings...........................................A-1
Appendix B: Hedging and Derivatives...........................B-1

FOR MORE INFORMATION................................see back cover
</TABLE>

<PAGE>

[LOGO] MSD&T Shares of the OFFIT High Yield Fund

The OFFIT Investment Fund, Inc. (the "Company") is an open-end, management
investment company offering no-load, non-diversified investment portfolios
including the OFFIT High Yield Fund (the "Fund").

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

MSD&T Shares are being offered through Mercantile-Safe Deposit and Trust Company
and its affiliated and correspondent banks.

The Fund may invest in high yield, high risk debt securities which are
considered speculative and subject to certain risks. See "Risks of Investing in
the Fund." There can be no assurance that the Fund's investment objectives will
be achieved.

<PAGE>

MSD&T SHARES OF THE OFFIT 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 rated below investment grade (i.e. high yield/high risk debt
securities), offering potential returns that are sufficiently high to justify
the greater investment risks. Securities offering the high yield that the Fund
seeks are generally found in mature cyclical or depressed industries and highly
leveraged companies. The Fund also invests in the securities of issuers with an
operating history of more than one year (though the Fund may invest in the
securities of issuers with a shorter operating history). The Fund may invest in
debt securities of any maturity and the interest rates on such securities may be
fixed or floating.

PRINCIPAL RISK FACTORS

- - Investors may lose money.

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

- - 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 than higher rated
securities 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 is subject to interest rate risk. Rising interest rates cause the
prices of debt securities to decrease and falling rates cause the prices of
debt securities to increase. Securities with longer maturities can be more
sensitive to interest rate changes. In effect, the longer the maturity of a
security, the greater the impact a change in interest rates could have on
the security's price.

- - 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.

For more detail on the principal risks summarized here, please see "Risks of
Investing in the Fund" herein.

<PAGE>

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.

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).

* The returns noted above are for a class of shares, the Select Shares, that
is not offered in this prospectus. The returns of the MSD&T Shares would,
however, be substantially similar to those of the Select Shares because the
MSD&T and Select Shares are invested in the same portfolio of securities.
The returns would differ only to the extent that the MSD&T Shares have
higher expenses than Select Shares and your returns would therefore be
lower.

AVERAGE ANNUAL TOTAL RETURNS - COMPARISON

The table below shows how the average annual total returns for Select Shares of
the Fund for the past one calendar year and since inception 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.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 YEAR SINCE INCEPTION
------ ---------------
<S> <C> <C>
Select Shares** 4.49% 9.42%

ML High Yield Index 3.66% 9.15%
</TABLE>

** Commenced operations on March 2, 1994.

<PAGE>

FEES AND EXPENSES OF THE FUND

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.

<TABLE>
<CAPTION>
MSD&T
SHARES
------
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)

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

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets,
shown as a percentage of average net assets)

Advisory fees................................................................... .70%
Distribution (Rule 12b-1) fees (before waivers)................................. None
Other expenses (before waivers/reimbursements)(1)............................... .57%
------
Total annual Fund operating expenses (before waivers/
reimbursements).............................................................. 1.27%
Fee waivers(2).................................................................. .12%
------
Net expenses.................................................................... 1.15%
------
------
</TABLE>

(1) "Other expenses" include audit, administration, custody, shareholder
servicing, legal, registration, transfer agency and miscellaneous other charges.

(2) These fees have been waived by the Adviser and/or Administrator as part of a
contractual arrangement with the Company and such waiver will continue for the
full fiscal year of the Fund.

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%
- - (except for the deduction of fees waived in the first year) the percentage
amounts charged in "Total annual Fund operating expenses" for MSD&T Shares
remain the same over the time periods
- - you redeemed all of your investment at the end of the time period.

<PAGE>

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
MSD&T Shares $129 $403 $697 $1,534
</TABLE>

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 financial highlights tables are intended to help you understand the Fund's
financial performance for the periods presented. The financial highlights tables
below are for a class of shares, the Select Shares, that is not offered in this
prospectus. The financial performance of the MSD&T Shares would be substantially
similar to that of the Select Shares because the MSD&T Shares and Select Shares
invest in the same portfolio of securities. This information below 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 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 Company'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
PriceWaterhouseCoopers LLP, whose report expressed an unqualified opinion on
those statements.

<TABLE>
<CAPTION>
SELECT SHARES
-------------------------------------------------------------------------------------
FOR THE
PERIOD FROM
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR MARCH 2,
ENDED ENDED ENDED ENDED 1994* THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of
Period............................. $ 10.34 $ 10.15 $ 9.92 $ 9.25 $ 10.00(d)
------------- ------------- ------------- ------------- -------------
Net investment income............. 0.88 0.87 0.89 0.90 0.72
Net realized and unrealized gain
(loss)........................... (0.43) 0.31 0.29 0.67 (0.75)
------------- ------------- ------------- ------------- -------------
Total income from investment
(loss) operations.............. 0.45 1.18 1.18 1.57 (0.03)
------------- ------------- ------------- ------------- -------------
Less Dividends and Distribution
from:
Net investment income............. (0.88) (0.87) (0.89) (0.89) (0.72)
Net realized gains................ -- (0.12) (0.06) (0.01) --
------------- ------------- ------------- ------------- -------------
Total dividends and
distributions.................. (0.88) (0.99) (0.95) (0.90) (0.72)
------------- ------------- ------------- ------------- -------------
Net change in net asset value
per share...................... (0.43) 0.19 0.23 0.67 (0.75)
------------- ------------- ------------- ------------- -------------
Net Asset Value, End of Period...... $ 9.91 $ 10.34 $ 10.15 $ 9.92 $ 9.25
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Total Return(a)..................... 4.49% 12.09% 12.46% 17.72% 0.27%(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)....................... $1,739,622 $1,346,553 $ 851,720 $ 479,090 $ 222,317
Ratios to average net assets:
Expenses**...................... 0.84% 0.87% 0.98% 1.05% 1.14%(c)
Net investment income........... 8.67% 8.46% 8.86% 9.38% 8.97%(c)
Portfolio Turnover Rate......... 36% 47% 41% 34% 42%
</TABLE>

- --------------------
* Commencement of operations.

** During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been higher.

(a) Total return is based on the change in net asset value during the period and
assumes reinvestment of all dividends and distributions.

(b) Not annualized.

(d) Initial offering price.

<PAGE>

INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES

The Fund's primary investment objective is high current income. 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 "seasoned" senior securities (as defined below) and
offer sufficiently high potential yields to justify the greater investment risk
or 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. 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.

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 or predecessors have been
operating in their current form generally for more than one year, though the
Fund may invest in securities of issuers having less than one year of operation.
The Fund generally does not invest in original issue high yield securities of
newly 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

<PAGE>

the timely payment of interest and principal, than higher rated securities.
See "Risks of Investing in the Fund -- High Yield, High Risk Debt Securities"
below.

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. The Adviser's choice to employ a temporary
defensive investment strategy may prevent the Fund from achieving its investment
objective.

ADDITIONAL NON-PRINCIPAL STRATEGIES

The Fund's secondary objective is capital appreciation. The Fund seeks to
achieve its objective by investing under normal circumstances, in fixed income
securities that are judged by the Adviser to be more creditworthy than generally
perceived in the marketplace or 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.
In addition, 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 judgement of the Adviser, to be improving.

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 and may be non-performing, in default or arrears. The
Adviser will obtain such securities in cases where it believes that capital
appreciation may be possible.

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.

<PAGE>

RISKS OF INVESTING IN THE FUND

GENERAL

The 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 the 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 the Fund will achieve its investment
objectives.

SECURITIES OF NON-U.S. ISSUERS

The Fund 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 the Fund, and investment techniques in
which it may engage involve risks, including those set forth below.

SOCIAL, POLITICAL AND ECONOMIC FACTORS. Many countries in which the Fund 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 instability
could significantly disrupt the principal financial markets in which the Fund
invests and adversely affect the value of the Fund's 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
Fund, and on market conditions, prices and yields of securities in the Fund's
portfolio. There may be the

<PAGE>

possibility of nationalization or expropriation of assets, or future
confiscatory levels of taxation affecting the Fund. In the event of
nationalization, expropriation or other confiscation, the 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 Fund 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 Fund. 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 Fund 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 Fund.

The Fund 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 the Fund of any restrictions on investments. If, because of
restrictions on repatriation or conversion, the 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.

CURRENCY FLUCTUATIONS. To the extent that the 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 the 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.

11
<PAGE>

Although the Fund values its assets daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The 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 the 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 Fund, 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 Fund will be valued in euros. This
will not affect the investment value of the Fund 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 Fund's 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 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

<PAGE>

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 Fund. 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 1940 Act provisions may
limit the Fund's 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 Fund's 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.

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 Fund 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 Fund
are uninvested and therefore no return is earned. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.

<PAGE>

NON-U.S. SUBCUSTODIANS. Rules adopted under the 1940 Act permit the Fund, to the
extent it invests outside the U.S., to maintain its 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
Fund, in which event the Fund may be precluded from purchasing securities in
which it 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 Fund may make
investments, there may be legal restrictions or limitations on the ability of
the Fund 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 Fund to a risk of loss. Less
information may be available to the Fund than with respect to investments in the
United States and, in certain of these countries, less information may be
available to the Fund 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 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 Fund may invest all or substantially all of their respective 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

<PAGE>

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 Fund 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 Fund with a commensurate effect on the value of their respective shares.
Therefore, an investment in the Fund 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
the 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 the Fund is 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 the 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, the Fund 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 the 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

<PAGE>

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. The Fund may invest in fixed income debt
securities. Changes in market yields will affect the 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, the Fund may have to replace the called security with
a lower yielding security, resulting in a decreased rate of return for the Fund.

SOVEREIGN DEBT SECURITIES. The Fund may invest in sovereign debt securities.
Investing in sovereign debt securities will expose the Fund 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.

<PAGE>

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 Fund 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 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 Fund 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

<PAGE>

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 Fund 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.

CONVERTIBLE SECURITIES

GENERAL. The Fund 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 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 Fund 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.

<PAGE>

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 the 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 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 the 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, the 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.

<PAGE>

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 Fund 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 Fund
is 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 the Fund is required to replace in connection with a short sale
increases, the value of the related securities in the Fund's portfolio will also
increase, although not necessarily in the same proportion.

NON-DIVERSIFIED FUNDS

The Fund is classified as a "non-diversified" fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. The 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, the 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

The Fund 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 the Fund,
or to seek to increase the Fund's income or gain. Limitations on the portion of
the Fund's assets that may be used in connection with the investment strategies
described below are set out in Appendix B to this Prospectus.

The 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"). The Fund's interest rate transactions may take
the form of swaps, caps, floors and collars, and the Fund's currency
transactions may take the

<PAGE>

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
the Fund resulting from securities markets or currency exchange rate
fluctuations, to protect the 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 the Fund's securities or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. The 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 the 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 the Fund's securities. The Fund is not a "commodity pool" (i.e., a
pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is 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 the 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 the 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 the Fund segregate cash, U.S. government securities or other liquid
assets to the extent the Fund's obligations are not otherwise "covered" through
ownership of the underlying security, financial instrument or currency.

To the extent the 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.

The Fund will not be obligated to pursue any of the Hedging and Derivatives
strategies and the Fund makes no representation as to the availability of these
techniques at this time or at any time in the future. In addition, the Fund's
ability to pursue certain of these strategies may be limited by current economic
conditions, the Commodity Exchange Act, as amended, applicable rules and
regulations of the 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 SEC, the CFTC, the Code or
their investment objectives and policies, the Fund may utilize, without
limitation, Hedging and Derivatives.

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 appears in

<PAGE>

Appendix B. Risks associated with Hedging and Derivatives are also described in
Appendix B to this Prospectus.

YEAR 2000

Like other mutual funds, the Fund could be adversely affected if the computer
systems used by its 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 Fund 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 Fund or its shareholders.

In addition, problems processing year 2000 data could also have adverse effects
on the computer systems of the issuers or entities that comprise the Fund's
portfolio securities. If such issuers or entities are unable to properly address
the year 2000 problem, then it could have an adverse effect on the operations of
such issuers, which, in turn, could result in a drop in market value for the
securities and a loss for the Fund. This problem may exist to a greater degree
with respect to investments by the Fund in the securities of non-U.S. issuers.
Generally, non-U.S. issuers have not devoted the resources necessary to properly
address the year 2000 problem. Therefore, the problems noted above for domestic
issuers of securities held by the Fund is likely to be exacerbated for the
securities of non-U.S. issuers.

MANAGEMENT OF THE FUND

INVESTMENT ADVISER

The OFFIT 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 $10.8 billion in assets and serves as investment adviser
to twenty registered investment company portfolios.

On September 1, 1999, OFFITBANK Holdings, Inc., the sole shareholder of
OFFITBANK, merged with the Wachovia Corporation ("Wachovia"). Wachovia is a
leading bank holding company with Wachovia Bank, NA as its principal subsidiary.
At June 30, 1999, Wachovia had $67 billion in assets and ranked 16th among U.S.
banking firms. OFFITBANK will continue to operate under its own name as a
distinct Wachovia company and it is not anticipated that the investment process
or personnel at OFFITBANK will be affected by the merger.

Under the Investment Company Act of 1940, as amended, the advisory agreement
between each Fund and OFFITBANK may have automatically terminated, by its own
terms, as a result of the

<PAGE>

merger. At a Shareholders Meeting on July 30, 1999, shareholders of each Fund
approved a new advisory agreement between each Fund and OFFITBANK to take effect
as of the consummation of the merger to ensure the uninterrupted provision of
services to the Funds.

Stephen T. Shapiro serves as the portfolio manager for the Fund. Mr. Shapiro is
a Managing Director of OFFITBANK and has managed the Fund since March 1994.

For the fiscal year ended December 31, 1998, OFFITBANK received advisory fees
equal to .70% of the Fund's average net assets, after waivers and
reimbursements.

MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY ("MERCANTILE") DOES NOT SERVE AS AN
INVESTMENT ADVISER TO THE FUND AND NEITHER MERCANTILE NOR THE BOARD OF DIRECTORS
OF M.S.D.&T. FUNDS, INC. IS RESPONSIBLE FOR SUPERVISING THE OPERATION OF THE
FUND.

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

23
<PAGE>
<TABLE>
<S><C>

--------------------------------------
SHAREHOLDERS
--------------------------------------

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MSD&T
Distribution and
Shareholder SUNLIFE BUILDING
Services ------------------- -----------------
20 S. CHARLES ST., 5TH FLOOR

BALTIMORE, MD 21201
--------------------------------------

-------------------------------------- ------------------------------------------------
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 the Fund's Shares Handles shareholder services, including
recordkeeping and statements, distribution
-------------------------------------- of dividends and processing of buy and sell
requests.
Asset ------------------------------------------------
Management
--------------------------------------

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

INVESTMENT ADVISER CUSTODIAN

OFFITBANK THE BANK OF NEW YORK

520 MADISON AVENUE ("BONY")

NEW YORK, NY 10022 ------------- 90 WASHINGTON STREET

NEW YORK, NY 10286

Manages the Fund's business and BONY serves as a custodian of the assets of
investment activities. the Fund. The custodian settles all portfolio
trades and collects most of the valuation
data required for calculating the Fund's net
-------------------------------------- asset value ("NAV").
------------------------------------------------
Fund
Operations
--------------------------------------
ADMINISTRATOR AND
FUND ACCOUNTING AGENT

PFPC INC.

400 BELLEVUE PARKWAY ------------------------------------------------------

WILMINGTON, DE 19809

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

--------------------------------------
BOARD OF DIRECTORS

Supervises the Fund's Activities
--------------------------------------
</TABLE>

24
<PAGE>

SHAREHOLDER INFORMATION

PRICING OF FUND SHARES

Shares of the Fund are priced at their net asset value ("NAV"). The NAV of the
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

The 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.
The Fund will effect purchases or redemptions of Fund shares at the next NAV
calculated after receipt of your order or request in proper form.

Foreign and domestic equity securities held by the 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 the 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 the Fund holds foreign equity securities, the calculation of the 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 the
Fund trade on days when the 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.

PURCHASE OF MSD&T SHARES

Clients of Mercantile and its affiliated and correspondent banks (the "Banks")
may purchase MSD&T Shares through their qualified accounts with the Banks and
should contact the Banks directly for appropriate purchase instructions.

Orders for purchases of MSD&T 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. MSD&T Shares are subject to such investment minimums and other
terms and conditions as may be imposed by the Banks from time to time. The Banks
may offer additional services to their

<PAGE>

customers. For further information as to how to purchase MSD&T Shares of the
Fund, you should contact the Company's Distributor.

OTHER PURCHASE INFORMATION

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

Purchases of the 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 MSD&T SHARES

You must place all redemption orders for MSD&T Shares through the Banks in
accordance with instructions or limitations pertaining to your account with the
Banks. Redemption orders for MSD&T 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 Fund, the Banks may charge your account for
redemption services. You should contact the Banks or the Company's Distributor
for further information regarding redemption of MSD&T 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 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 the 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.

<PAGE>

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE. A shareholder who holds MSD&T Shares should consult the
Banks 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 the Fund may be transferred by
writing to The OFFIT 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 Fund declares dividends of substantially all of its net investment income
daily and pays dividends monthly. The Fund distributes, at least annually,
substantially all net capital gains, if any. The 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
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 the Fund. It
is anticipated that expenses incurred by each class of shares of the 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 Fund
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 the 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

The Fund intends to qualify for taxation as a "regulated investment company"
("RIC") under Subchapter M of the Code. If the Fund qualifies as a RIC it 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 the 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.

The 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 the Fund separately,

<PAGE>

rather than to the Company as a whole. In addition, net capital gain, net
investment income and operating expenses will be determined separately for the
Fund.

Dividends, either in cash or reinvested in shares, paid by the Fund from net
investment income will be taxable to you as ordinary income. Whether paid in
cash or additional shares of the Fund, and regardless of the length of time the
shares in the Fund have been owned by you, distributions of net capital gain
which are designated by the 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 the Fund. Such
dividends and distributions may also be subject to state and local taxes.

Exchanges and redemptions of shares in the 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.

Depending on your residence for tax purposes, distributions from the 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
the 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 the 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.

The 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, the
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 the Fund (and received by the
shareholders) on December 31 of the year declared.

The Fund may be subject to certain taxes imposed by foreign countries with
respect to dividends, capital gain and other income. If the Fund qualifies as a
RIC, if certain distribution requirements

<PAGE>

are satisfied and if more than 50% in value of the 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, the 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 Fund may make such an election
in a taxable year in which it is qualified to make the election. For any year
that the Fund makes such an election, an amount equal to the foreign income
taxes paid by the 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, the
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
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 Fund expects 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 the 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 the 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 the 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.

The 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).

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

<PAGE>

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 the Fund
and you should review the more detailed discussion of federal income tax
consideration in the Statement of Additional Information.

DISTRIBUTION ARRANGEMENTS

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

MULTIPLE CLASS STRUCTURE. The Fund offers multiple classes of shares. The major
distinction between the share classes is the service or distribution fee related
to each class. MSD&T Shares must be purchased and redeemed through the Banks,
which are financial institutions that have 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.

<TABLE>
<CAPTION>
FEE PLAN: APPLIES TO: PLAN PURPOSE: FEES:
- --------- ----------- ------------- -----
<S> <C> <C> <C>
Shareholder Servicing Plan MSD&T Shares The Plan is intended to Payments may not exceed
compensate the Banks for 0.25% of the Fund's
shareholder services aggregate average daily
provided to clients of the net assets attributable to
Banks who own MSD&T Shares MSD&T Shares. Holders of
of the Fund. the Fund's MSD&T Shares
bear this expense.

</TABLE>

30
<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 the Fund 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 explicitly noted. The following summarizes the rating
categories used by Moody's for commercial paper:

A-1

<PAGE>

"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.

"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.

A-2

<PAGE>

"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.

"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-3

<PAGE>

"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.

"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

A-4
<PAGE>

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.

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

A-5

<PAGE>

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" - 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

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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.

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"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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APPENDIX B

HEDGING AND DERIVATIVES

The 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 the Fund indicates which, if any, of these
types of transactions may be used by the Fund. The Fund may be unable or limited
in its ability to engage in Hedging and Derivatives by certain factors,
including current economic conditions.

A detailed discussion of Hedging and Derivatives follows below. The
Fund will not be obligated, however, to pursue any of such strategies and the
Fund makes no representation as to the availability of these techniques at this
time or at any time in the future. In addition, the 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.
The 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. The Fund's purchase of a call
option on a

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<PAGE>

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 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.

The 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

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<PAGE>

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 and security, are determined by negotiation of the parties. It is
anticipated that the Fund 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 the 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.
The 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 the 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 the 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, the 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 the 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 the 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.

The 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, the Fund may purchase and
sell put options on securities (whether or not it holds the securities in its
portfolio) and on

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<PAGE>

securities indices, currencies and futures contracts. In selling put options,
the Fund faces the risk that 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, the 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 the 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.

The 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 the 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 the Fund. If the 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.

The Fund will not 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, the 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, the 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." The Fund may enter into currency transactions only with
Counterparties that are deemed creditworthy by the Adviser.

Except as provided in this Prospectus, the 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 the 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. The Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or

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<PAGE>

partially to offset other 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.

The 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, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the 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 the 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 the 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, the 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 the 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

The Fund may be authorized to enter into interest rate, currency and
index swaps and the purchase or sale of related caps, floors and collars. The
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 the Fund anticipates purchasing
at a later date. The 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

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<PAGE>

instruments providing the income the Fund may be obligated to pay. Interest rate
swaps involve the exchange by the 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, the 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. The 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,
the 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 the 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.

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

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<PAGE>

enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the 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, the 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. The 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 the 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 the
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
the 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,
the Fund might not be able to close out a transaction without incurring
substantial losses. Although the 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 the 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 the

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Fund 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 the 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 the 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
the 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 the 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
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered,

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or, 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 the
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 the 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 the
Fund will require the Fund to segregate liquid assets equal to the exercise
price. Except when the 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 the Fund's obligations or to segregate
liquid assets equal to the amount of the Fund's obligations.

OTC options entered into by the 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 the Fund will
not be required to do so. As a result, when the 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 the 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,
the 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. The 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 the 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. The 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. The 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, the
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 OFFIT INVESTMENT FUND, INC.

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

OFFICERS AND DIRECTORS INVESTMENT ADVISER
Dr. Wallace Mathai-Davis OFFITBANK
CHAIRMAN OF THE BOARD, PRESIDENT AND 520 Madison Avenue
DIRECTOR New York, NY 10022-4213

Edward J. Landau DISTRIBUTOR
DIRECTOR OFFIT Funds Distributor, Inc.
Four Falls Corporate Center, 6th Floor
The Very Reverend James Parks Morton West Conshohocken, PA 19428-2961
DIRECTOR
SHAREHOLDER SERVICING AGENT
Stephen M. Peck Mercantile Safe Deposit and Trust Company
DIRECTOR SunLife Building
20 S. Charles Street, 5th Floor
Vincent M. Rella Baltimore, MD 21201
TREASURER
CUSTODIAN
Stephen Brent Wells The Bank of New York
SECRETARY 48 Wall Street
New York, NY 10286
Michael Kagan
ASSISTANT TREASURER LEGAL COUNSEL
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022

ADMINISTRATOR; TRANSFER AND DIVIDEND
DISBURSING AGENT
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 FUND, 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 Fund may be
obtained without charge by contacting:

MSD&T Shares of The OFFIT High Yield Fund
P.O. Box 8701
Wilmington, Delaware 19899
1-800-618-9510

Information about the Fund (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 Fund 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 Company's Investment Company Act File number is 811-08036.

<PAGE>

THE OFFIT INVESTMENT FUND, INC.

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

STATEMENT OF ADDITIONAL INFORMATION

October 20, 1999

The OFFIT Investment Fund, Inc. (the "Company") is an open-end,
management investment company. This Statement of Additional Information
("SAI") provides information about the Company applicable to the M.S.D.&T.
Shares of the High Yield Fund. This information is in addition to the
information that is contained in the Company's Prospectus dated October 20,
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 October 20, 1999 and the
Company's Annual Report dated December 31, 1998, which is hereby incorporated by
reference.

<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS

PAGE
<S> <C>
Organization and Classification.................................................................. 3

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

Additional Risk Considerations................................................................... 12

Fundamental Investment Policies.................................................................. 13

Non-Fundamental Investment Policies.............................................................. 14

Management of the Company........................................................................ 15

Investment Adviser............................................................................... 17

Distributor ..................................................................................... 18

Administration, Fund Accounting, Transfer Agency and Custody Services ........................... 19

Portfolio Transactions........................................................................... 20

Purchase of Shares............................................................................... 21

Redemption of Shares............................................................................. 21

Performance Calculations......................................................................... 22

Additional Information Concerning Dividends, Distributions and Taxes............................. 24

Shareholder Services............................................................................. 31

General Information ............................................................................. 31

Financial Information ........................................................................... 32
</TABLE>

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. The
Fund is non-diversified and offers three classes of shares: Select, Advisor and
M.S.D.&T. Select Shares may be purchased from the Company's distributor, OFFIT
Funds Distributor, Inc., Advisor Shares may be purchased through a Shareholder
Servicing Agent and M.S.D.&T. Shares may be purchased through Mercantile-Safe
Deposit and Trust Company and its affiliated and correspondent banks and
affiliates of State Street Bank and Trust Company.

THE TRANSFER

On March 1, 1994, the High Yield 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 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

REPURCHASE AGREEMENTS

The 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 Fund 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

The 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 Fund
enters into reverse repurchase agreements, it will place in a segregated
custodian account liquid assets having a value equal to the

3
<PAGE>

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 Fund under the 1940 Act.

ASSET-BACKED SECURITIES

The Fund 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 Fund 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 Fund may invest from time to time in mortgage-related securities,
consistent with its investment objective 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

4
<PAGE>

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 the Fund's investment objectives and policies, consider
making investments in such new types of securities.

SHORT SALES

The Fund may make short sales of securities "against the box". A short sale
is a transaction in which the 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, the 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 Fund may invest in convertible securities. The convertible securities
that may 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. 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 Fund has 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 the Fund is called for redemption, the 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 Fund 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

5
<PAGE>

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 Fund's investment policies, the Fund's 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 Fund 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 Fund, to the extent
of its investment in ADRs, will invest predominantly in ADRs sponsored by the
underlying issuers. The Fund, 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.

WARRANTS OR RIGHTS

Warrants or rights may be acquired by the Fund in connection with other
securities or separately, and provide the Fund with the right to purchase at a
later date other securities of the issuer. Warrants or rights acquired by the
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
Fund and may be changed by the Company's Board of Directors without shareholder
approval.

BORROWING

The Fund's borrowings will not exceed 20% of its total assets and is
permitted only for temporary or emergency purposes other than to meet
redemptions. Any borrowing by the Fund may cause greater fluctuation in the
value of its shares than would be the case if the Fund did not borrow. In the
event that the Fund employs leverage, it 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 Fund's net asset value. When
the income and gains on securities purchased with the proceeds of borrowings
exceed the costs of such borrowings, the Fund's 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 Fund's earnings or net asset
values would decline faster than would otherwise be the case.

WHEN ISSUED AND FORWARD COMMITMENT TRANSACTIONS

The 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 the Fund to purchase or sell particular securities at a
set price with payment and delivery taking place beyond the normal settlement
date, allow the 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 the 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
the 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 the Fund than
those received in each transaction.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund 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

6
<PAGE>

traded by currency traders and their customers. The 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 the 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 the Fund's portfolio securities denominated in such foreign currency.
Conversely, when the 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, the Fund may, in the alternative, enter into a forward contract
to sell a different foreign currency for a fixed U.S. dollar amount where the
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"). The 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 the 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 the Fund's commitments with respect to such contracts.
As an alternative to maintaining all or part of the separate account, the Fund
may purchase a call option permitting the 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 the Fund may purchase a put option permitting the 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 the Fund than if
it had not entered into such contracts. If the party with which the 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, the 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, the 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. The Fund has a right to call each loan
and obtain the securities on five business days' notice. To the extent
applicable, the 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

The Fund 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 Fund's investments
in Loans in Latin America and other emerging markets are expected to

7
<PAGE>

be in the form of participations ("Participations") in Loans and assignments
("Assignments") of portions of Loans from third parties. Participations
typically will result in the Fund having a contractual relationship only with
the Lender, not with the borrower. The 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, the
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 the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the 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, the 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. The 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
the Fund purchases Assignments from Lenders, the 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 rights and obligations acquired by the Fund as the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

The 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 the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the 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 the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value. The 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,
the 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, the Fund will not invest more than
25% 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 Fund 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

8
<PAGE>

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

The Fund may invest in zero coupon securities and debt securities
(including convertible debt securities) acquired at a discount. The Fund will
only purchase such securities to the extent consistent with its 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 Fund 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 Fund will only purchase
pay-in-kind bonds that pay all or a portion of their interest in the form of
debt 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 Fund is 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
Fund will elect similar treatment for any market discount with respect to debt
securities acquired at a discount. Accordingly, the Fund 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 the 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 Fund does 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

9
<PAGE>

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 the
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 the 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 the 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.

BRADY BONDS

The Fund may invest in "Brady Bonds", which are debt securities issued or
guaranteed by foreign governments in exchange for existing external defaulted
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.

The 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.

10
<PAGE>

ILLIQUID SECURITIES

The Fund will not 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 the 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 Fund 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 the 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
the Fund's portfolio and report periodically on such decisions to the Board of
Directors.

OTHER INVESTMENT COMPANIES

The Fund reserves the right to invest up to 10% of its total assets in the
securities of other unaffiliated investment companies. The 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. The Fund does not intend 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. The 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.

FUTURE DEVELOPMENTS

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

HEDGING AND DERIVATIVES

The Fund 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. The Fund also may enter into forward foreign

11
<PAGE>

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.

TEMPORARY STRATEGIES

In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, the 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

The 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
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.

12
<PAGE>

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 Fund's 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 Fund's outstanding shares (as defined
below under "General Information - Capital Stock.") The Fund may not:

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;

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

3. purchase or sell commodities or commodity contracts, except that the
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 the 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
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 the 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);

13
<PAGE>

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
the 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 the
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 Fund 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 the Fund's total assets, and (b) the Fund will not purchase portfolio
securities while such outstanding borrowing exceeds 5% of the value of the
Fund's total assets. The Fund 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; the Fund may also make
deposits of margin in connection with futures and forward contracts and options
thereon). Investment restriction (8) is a non-fundamental policy with respect to
the Fund.

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. The Fund may not:

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);

3. invest in stock or bond futures and/or options on futures unless (i)
not more than 5% of the 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%; and

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.

In addition, the Fund 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;

14
<PAGE>

Except with respect to fundamental restriction number 2, and the
restriction on borrowing, 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.

As an investment policy, the Fund will generally manage its investments in
such a way as to satisfy the asset diversification test of the Investment
Company Act of 1940 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 such securities of any one issuer
(other than the 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. However, the
Adviser may in its sole discretion determine that it is in the best interest of
the Fund and its shareholders to not follow this policy.

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 Fund by reviewing and approving agreements with the Fund's service
providers, and mandating policies for the Fund's 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.

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE FUND PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ------------------------------ ------------------------------------
<S> <C> <C>
Dr. Wallace Mathai-Davis Chairman of the Board, President, Managing Director, OFFITBANK (investment
OFFITBANK and Director adviser) (1986-present); one additional
520 Madison Avenue Chairman of the Board, President and
New York, NY 10022 Director position with the OFFIT Fund
Age: 54 Years Complex.

Edward J. Landau Director Of Counsel, Wolf, Block Schorr and
Wolf, Block Schorr and Solis-Cohen LLP Solis-Cohen, LLP (2/1/98-present); Member,
250 Park Avenue Lowenthal, Landau, Fischer & Bring, P.C
New York, NY 10177 (1960-1/31/98); Director, Revlon Group
Age: 71 Years Inc., Revlon Consumer Products Inc.;
Pittsburgh Annealing Box and Clad Metals
Inc.; one additional Director position
with the OFFIT Fund Complex.

The Very Reverend James Parks Morton Director President, Interfaith Center of New York
Interfaith Center of New York (1/1/98- present); formerly Dean of
570 Lexington Avenue Cathedral of St. John the Divine
New York, New York 10022 (1972-1996); one additional Director
Age: 74 Years position with the OFFIT Fund Complex.

</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD WITH THE FUND PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ------------------------------ ------------------------------------
<S> <C> <C>
Stephen M. Peck Director Investment Officer, Gilder Gagnon, Howe &
Gilder Gagnon, Howe & Co. LLC Co. LLC (1989 to present); Director,
1775 Broadway Harnischferger, Inc. and Fresenius Medical
New York, NY 10019 Care; one additional Director position
Age: 64 Years with the OFFIT Fund Complex.

Vincent M. Rella Treasurer Controller, OFFITBANK (investment adviser)
OFFITBANK (1986 to present); one additional Officer
520 Madison Avenue position with the OFFIT Fund Complex.
New York, NY 10022
Age: 46 Years

Stephen Brent Wells Secretary Managing Director, OFFITBANK (investment
OFFITBANK adviser) (1994 to present); one additional
520 Madison Avenue Officer position with the OFFIT Fund
New York, NY 10022 Complex.
Age: 54 Years

Michael Kagan Assistant Treasurer Administrator, OFFITBANK (investment
OFFITBANK adviser) (1998 to present); Administrator,
520 Madison Avenue Bankers Trust (1997); Audit Senior,
New York, NY 10022 PriceWaterhouse LLP (1994-1997); and one
Age: 28 Years additional Officer position with the OFFIT
Fund Complex.

David D. Marky Assistant Treasurer Vice-President and Director of Accounting
PFPC Inc. (1996-present) of PFPC Inc.; Assistant
103 Bellevue Parkway Vice President and Accounting Conversion
Wilmington, DE 19809 Manager (1992-present) of PFPC Inc; one
Age: 33 Years additional Officer position with the OFFIT
Fund Complex.

Gary M. Gardner Assistant Secretary Senior Vice President (1994-present) of
PFPC Inc. PFPC Inc.; Associate General Counsel
400 Bellevue Parkway (1992-1994) of The Boston Company, Inc.;
Wilmington, DE 19809 one additional Officer position with the
Age: 47 Years OFFIT Fund Complex.

David C. Lebisky Assistant Secretary Administrative Officer (1996-present) of
PFPC Inc. PFPC Inc.; Legal Assistant (1994-1996)
400 Bellevue Parkway with the law firm of Drinker Biddle &
Wilmington, DE 19809 Reath; BA Candidate (1990-1994) LaSalle
Age: 27 years University; one additional Officer
position with the OFFIT Fund Complex.
</TABLE>

16
<PAGE>

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 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 $18,750.00 $0 $0 $23,000.00

The Very Reverend
James Parks Morton $18,750.00 $0 $0 $23,000.00
</TABLE>

*For this purpose, the "Fund Complex" consists of The OFFIT Investment Fund,
Inc. and The OFFIT Variable Insurance Fund, Inc., which are all the regulated
investment companies advised by OFFITBANK.
**Mr. Offit resigned as a Director effective September 1, 1999 and was succeeded
by Dr. Wallace Mathai-Davis.

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.

On September 1, 1999, OFFITBANK Holdings, Inc., the sole shareholder of the
Adviser, merged with the Wachovia Corporation ("Wachovia"). Wachovia is a
leading bank holding company with Wachovia Bank, NA as its principal subsidiary.
At June 30, 1999, Wachovia had $67 billion in assets and ranked 16th among U.S.
banking firms. The Adviser will continue to operate under its own name as a
distinct Wachovia company and it is not anticipated that the investment process
or personnel at the Adviser will be affected by the merger.

Under the Investment Company Act of 1940, as amended, the advisory
agreement between each Fund and the Adviser may have automatically terminated,
by its own terms, as a result of the merger. At a Shareholders Meeting on July
30, 1999, shareholders of each Fund approved a new advisory agreement

17
<PAGE>

between each Fund and the Adviser to take effect as of the consummation of the
merger to ensure the uninterrupted provision of services to the Funds.

For its services under the Advisory Agreements, the Adviser receives from
the Fund an advisory fee. The fee is calculated daily and paid monthly based on
the average daily net assets of the Fund, at the annual rate of .85% of the
first $200,000,000, .75% on the next $400,000,000 and .65% of amounts in excess
of $600,000,000 of the Fund's average daily net assets. The Adviser may waive
all or part of its fee from time to time in order to increase the Fund's net
investment income available for distribution to shareholders. The Fund 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 chart below shows the investment advisory fees for the Fund for the
last three fiscal years along with any waivers that reduced the investment
advisory fees. The fees shown were paid by the Fund to OFFITBANK.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
HIGH YIELD 1998 1997 1996
- ---------- ---- ---- ----
<S> <C> <C> <C>
Fees earned $11,091,248 $7,832,049 $4,989,174
Fees waived $0 $0 $0
Net amount of fees paid by the Fund $11,091,248 $7,832,049 $4,989,174
</TABLE>

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.
In order to reimburse the Distributor for its expenses incurred in certain
activities intended to result in the sale of MSD&T Shares of the Fund, the
Company has amended its Plan of Distribution (the "Plan") under Section 12(b) of
the 1940 Act and Rule 12b-1 thereunder. Under the Plan and Distribution
Agreement, the Fund is authorized to spend for the account of MSD&T Shares up to
0.25% of its average daily net assets solely attributable to MSD&T Shares
annually, to reimburse the Distributor for such activities primarily intended to
result in the sale of MSD&T Shares, which are summarized in the Prospectus. For
the fiscal periods ended December 31, 1998, December 31, 1997 and December 31,
1996, no distribution costs were incurred by the Fund.

SHAREHOLDER SERVICING AGENTS

Pursuant to a Shareholder Servicing Plan adopted and amended by the Board
of Directors of the Company, the Company may enter into Shareholder Servicing
Agreements with financial institutions such as Mercantile-Safe Deposit and Trust
Company and its affiliated and correspondent banks and

18
<PAGE>

affiliates of State Street Bank and Trust Company ("Shareholder Servicing
Agents") with respect to MSD&T Shares. Shareholder administrative support
services will be performed by Shareholder Servicing Agents for their customers
who beneficially own MSD&T 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
Fund; transmitting, on behalf of the Company, proxy statements, annual reports,
updating prospectuses and other communications from the Company to the
shareholders of the Fund; 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
the Fund to pay fees to Shareholder Servicing Agents at an annual rate of up to
.25% of the average daily net asset value of MSD&T Shares of 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 the Fund's MSD&T Shares.

ADMINISTRATION, FUND ACCOUNTING, TRANSFER AGENCY AND CUSTODY SERVICES

ADMINISTRATION

PFPC Inc. ("PFPC"), serves as Administrator to the Company. Pursuant to an
Administration and Accounting Services 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 in its capacity as custodian of the Fund.
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 administrative and fund accounting fees for the
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 $1,696,494 $1,676,760 $1,001,474
Fees waived $442,728 $811,392 $485,738
</TABLE>

19
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net amount of fees paid by the Fund $l,253,766 $865,368 $515,736
</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 Bank of New York ("BONY") serves as custodian of the assets of the
Fund. The principal business address of BONY is 48 Wall Street, New York, New
York 10286. Under the Custodian Agreement, the Custodian has agreed to maintain
a separate account in the name of the Fund; hold and disburse portfolio
securities on account of the Fund; collect and receive all income and other
payments and distributions on account of the Fund's portfolio securities; and
make periodic reports to the Company's Board of Directors concerning the Fund's
operations. BONY is authorized under the Custodian Agreement to establish
separate account for the Fund's foreign securities with subcustodians, provided
that BONY remains responsible for the performance of all of its duties under the
Custodian Agreement. Prior to June 27, 1996, The Chase Manhattan Bank served as
the custodian for the Fund.

COUNSEL

Kramer Levin Naftalis & Frankel LLP, whose address is 919 Third Avenue, New
York, NY 10022, serves as counsel to the Company.

INDEPENDENT ACCOUNTANTS

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. When selecting brokers and dealers to handle
the purchase and sale of portfolio securities, the Adviser looks for prompt
execution of the order at a favorable price. Generally, the Adviser works with
recognized dealers in these securities, except when a better price and execution
of the order can be obtained elsewhere. The Fund did not pay any brokerage
commissions for the fiscal years ended December 31, 1996 and December 31, 1997.
For the fiscal year ended December 31, 1998, the Fund paid $3,184 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

20
<PAGE>

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.

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 MSD&T shares of the 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 the Fund, 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 MSD&T shares of the 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 the 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 the Fund, the 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 the Fund at
the beginning of such period. Such commitment is irrevocable without the prior

21
<PAGE>

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
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 the 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 the 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 the Fund. 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 the 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

The 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.

The 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 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.

Because MSD&T Shares have been operating for less than a full calendar
year, average annual total returns are unavailable.

The Fund 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:

22
<PAGE>

Aggregate Total Return = ERV - 1
---
P

In addition to total return, the 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 the 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 the 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.

The 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.

The 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 the 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.

The 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 the 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

23
<PAGE>

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 the 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 the 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
Fund. The following is only a summary of certain additional tax considerations
generally affecting the 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 Fund or the implications to
shareholders, and the discussions here and in the Fund's Prospectus are not
intended as substitutes for careful tax planning. Accordingly, potential
purchasers of shares of the Fund 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

The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the 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 the
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.

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 the 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 the Fund at a market discount (generally, at
a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of 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 the Fund elects otherwise), generally will be treated as
ordinary income or loss.

24
<PAGE>

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 the 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 Fund's
shareholders.

In general, for purposes of determining whether capital gain or loss
recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected 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 the 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, the 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 the Fund on the lapse of, or any gain or loss
recognized by the 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 the 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. The
Fund, however, may elect not to 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.

The 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

25
<PAGE>

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).

The Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If the 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, the Fund 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 the 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.

In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each

26
<PAGE>

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 the 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). The 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 the Fund
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.

FUND DISTRIBUTIONS

The 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 the 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 Fund will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction.

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Ordinary income dividends paid by the 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 the Fund will not be treated as 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).

The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The 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 the 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 the 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.

Investment income that may be received by the 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 the 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 the Fund's assets to be invested in various countries is not
known: If more than 50% of the value of the 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

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<PAGE>

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 the 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 the 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 the 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 the 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 the 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.

The 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 the 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 the 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 redemption of shares of the 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 the 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.

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<PAGE>

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 the Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.

If the income from the 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 the 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 the 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, the 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 the 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 the Fund.

BACKUP WITHHOLDING

The Fund 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 the Fund with the
payee's correct taxpayer identification number, (ii) the IRS notifies the 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.

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<PAGE>

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 Fund.

EXCHANGE PRIVILEGE

A Shareholder who holds MSD&T 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 Fund to another person by written
request to The OFFIT 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 the 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 the Fund,
means the vote of the lesser of (i) 67% of the shares of the Fund represented at
a meeting if the holders of more than 50% of the outstanding shares of the Fund,
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 the Fund of the Company is entitled to such
dividends and distributions out of the income earned on the assets belonging to
the Fund as are declared in the discretion

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<PAGE>

of the Company's Board of Directors. In the event of the liquidation or
dissolution of the Company, shares of a class of the Fund are entitled to
receive the assets allocable to that class of shares of the Fund which are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not belonging to the Fund
which are available for distribution. It is anticipated that expenses incurred
by each class of shares of the 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 October 1, 1999, to the knowledge of the Administrator, the Officers
and the Directors of the Company, as a group, owned less than 1% of the
outstanding voting shares of the Fund. As of October 1, 1999, the were no
persons who owned of record or beneficially 5% or more of the outstanding shares
of any class of the Fund.

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 22, 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.