EXCELSIOR INSTITUTIONAL TRUST, 497, 2000-08-07

EXCELSIOR INSTITUTIONAL TRUST
497, 2000-08-07

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<PAGE>

[GRAPHIC]

Excelsior Institutional Shares

Prospectus

August 1, 2000

Excelsior Institutional Trust

Equity Fund
Value Equity Fund
Optimum Growth Fund
Income Fund
Total Return Bond Fund
International Equity Fund

Investment Adviser
United States Trust Company of New York
U.S. Trust Company

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.

[LOGO OF EXCELSIOR FUNDS]
<PAGE>

Table of Contents

Excelsior Institutional Trust is a mutual fund family that offers shares in
separate investment portfolios (Funds). The Funds have individual investment
goals, strategies and risks. This prospectus gives you important information
about the Institutional Shares of the Funds that you should know before invest-
ing. Please read this prospectus and keep it for future reference.

This prospectus has been arranged into different sections so that you can eas-
ily review this important information. On the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:

<TABLE>
<CAPTION>
Page
<S> <C>
Equity Fund............. 4
Value Equity Fund....... 6
Optimum Growth Fund..... 8
Income Fund............. 10
Total Return Bond Fund.. 12
International Equity
Fund................... 14
More Information About
Risk................... 16
More Information About
Fund Investments....... 17
Purchasing, Selling and
Exchanging Fund
Shares................. 19
Dividends and
Distributions.......... 21
Taxes................... 22
Financial Highlights.... 23
How to Obtain More
Information About
Excelsior Institutional
Trust.................. Back Cover
</TABLE>
<PAGE>

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

Introduction--Risk/Return Information Common To All Funds
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal, strategies and risks for reaching that
goal. The investment managers invest Fund assets in a way that they believe
will help a Fund achieve its goal. Still, investing in each Fund involves risk
and there is no guarantee that a Fund will achieve its goal. An investment man-
ager's judgments about the markets, the economy, or companies may not antici-
pate actual market movements, economic conditions or company performance, and
these judgments may affect the return on your investment. In fact, no matter
how good a job an investment manager does, you could lose money on your invest-
ment in a Fund, just as you could with other investments. A Fund share is not a
bank deposit and it is not insured or guaranteed by the Federal Deposit Insur-
ance Corporation (FDIC) or any government agency.

The value of your investment in a Fund is based on the market prices of the se-
curities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price move-
ments, sometimes called volatility, may be greater or lesser depending on the
types of securities a Fund owns and the markets in which they trade. The effect
on a Fund of a change in the value of a single security will depend on how
widely the Fund diversifies its holdings.

The Adviser's Equity Investment Philosophy
The Adviser manages the Equity Fund, Value Equity Fund and Optimum Growth Fund
with a view toward long-term success. To achieve this success, the Adviser
utilizes two fundamental investment strategies, value and growth. These strate-
gies are combined with "longer-term investment themes" to assess the investment
potential of individual companies. Specific investment selection is a "bottom-
up" approach, guided by these strategies and themes to ensure proper diversifi-
cation, risk control and market focus.

Value
This long-term strategy consists of searching for, identifying and obtaining
the benefits of present or future investment values. For example, such values
may be found in a company's future earnings potential or in its existing re-
sources and assets. Accordingly, the Adviser is constantly engaged in assess-
ing, comparing and judging the worth of companies, particularly in comparison
to the price the markets place on such companies' shares.

Growth
This long-term strategy consists of buying and holding equity securities of
companies which it believes to be of high quality and high growth potential.
Typically, these companies are industry leaders with the potential to dominate
their markets by being low-cost, high-quality producers of products or servic-
es. Usually these companies have an identifiable competitive advantage. The Ad-
viser believes that the earnings growth rate of these companies is the primary
determinant of their stock prices and that efficient markets will reward con-
sistently above average earnings growth with greater-than-average capital ap-
preciation over the long-term.

Themes
To complete the Adviser's investment philosophy in managing the funds, the in-
vestment strategies discussed above are applied in concert with long-term in-
vestment themes to identify investment opportunities. These longer-term themes
are strong and inexorable trends that arise from time to time from economic,
social, demographic and cultural forces. The Adviser also believes that under-
standing the instigation, catalysts and effects of these long-term trends will
enable them to identify companies that are currently or will soon benefit from
these trends.

3
<PAGE>

Equity Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Investing in common
stocks that the Adviser
believes are undervalued in
the market

Investor Profile Investors
seeking growth of capital, and
who are willing to accept the
risks of investing in equity
securities

Investment Objective
The Equity Fund seeks to provide long-term capital appreciation. This objective
may be changed without shareholder approval.

Investment Strategy of the Equity Fund
The Equity Fund invests primarily (at least 65% of its assets) in larger capi-
talization (i.e., companies with market capitalizations over $5 billion) common
stocks of U.S. and, to a lesser extent, foreign companies that the Adviser be-
lieves have value that is not currently reflected in their market prices. The
Adviser generally diversifies the Fund's investments over a variety of indus-
tries and types of companies. The Fund may invest in companies of any size, in-
cluding small, high growth companies.

The Adviser takes a long-term approach to managing the Fund and tries to iden-
tify companies with characteristics that will lead to future earnings growth or
recognition of their true value. In particular, the Adviser looks for companies
that its fundamental analysis indicates are positioned to provide solutions to
or benefit from complex social and economic trends, or whose products are early
in their life cycle and will experience accelerating growth in the future.

Principal Risks of Investing in the Equity Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller capitalization companies. These risks are discussed in
greater detail in the section entitled "More Information About Risk."

The Fund is also subject to the risk that large capitalization U.S. equity se-
curities may underperform other segments of the equity market or the equity
markets as a whole.

4
<PAGE>

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

Performance Information
The bar chart and the performance table below illustrate the risks and volatil-
ity of an investment in the Fund. Of course, the Fund's past performance does
not necessarily indicate how the Fund will perform in the future.

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1996 19.86%
1997 31.72%
1998 24.95%
1999 31.93%
Best Quarter Worst Quarter
22.45% (15.60)%
(12/31/98) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was 2.11%.

This table compares the average annual total return of the Fund's Institutional
Shares for the periods ended December 31, 1999 to those of the Standard & Poors
500 Composite Stock Price Index.

<TABLE>
<CAPTION>
1 Since
Year Inception
----------------------------------------------------------------------------------
<S> <C> <C>
Equity Fund (Institutional Shares) 31.93% 25.73%*

Standard & Poor's 500 Composite Stock Price Index 21.04% 28.54%**
</TABLE>

* Since January 16, 1995
** Since December 31, 1994

What is an Index?
An index measures the market prices of a specific group of securities in a par-
ticular market or securities in a market sector. You cannot invest directly in
an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.65%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.25%
Total Other Expenses 0.65%
-----------------------------------------------------
Total Annual Fund Operating Expenses 1.30%
Fee Waivers and Expense Reimbursements (0.60)%
-----------------------------------------------------
Net Annual Fund Operating Expenses 0.70%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.70%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."

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 Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.

The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs might be different, your approximate costs of
investing $10,000 in the Fund would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$72 $224 $390 $871
</TABLE>

5
<PAGE>

Value Equity Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Investing in common
stocks that the Adviser
believes are undervalued in
the market

Investor Profile Investors
seeking growth of capital, and
who are willing to accept the
risks of investing in equity
securities

Investment Objective
The Value Equity Fund seeks long-term capital appreciation. This objective may
be changed without shareholder approval.

Investment Strategy of the Value Equity Fund
The Value Equity Fund invests primarily (at least 65% of its assets) in common
stocks of U.S. and, to a lesser extent, foreign companies that the Adviser be-
lieves are undervalued, at current market prices. The Adviser generally diver-
sifies the Fund's investments over a variety of industries and may invest in
companies of any size.

In selecting investments for the Fund, the Adviser combines fundamental re-
search with valuation constraints to identify companies trading at what the Ad-
viser believes are reasonable prices and displaying characteristics expected to
lead to greater recognition of true value. The Adviser believes that events
such as restructuring activities and industry consolidations can be the cata-
lysts necessary to realize this value.

Principal Risks of Investing in the Value Equity Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets
and financial resources, and may depend upon a relatively small management
group. Therefore, small cap stocks may be more volatile than those of larger
companies. These securities may be traded over the counter or listed on an ex-
change.

The Fund is also subject to the risk that undervalued equity securities may
underperform other segments of the equity market or the equity markets as a
whole.
6
<PAGE>

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

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1997 27.31%
1998 20.52%
1999 34.73%
Best Quarter Worst Quarter
26.81% (16.32)%
(12/31/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
(1.91)%.

This table compares the average annual total returns of the Fund's Institu-
tional Shares for the periods ended December 31, 1999 to those of the Russell
1000 Value Index and the Russell Mid Cap Value Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------------------------------------------------------------
<S> <C> <C>
Value Equity Fund (Institutional Shares) 34.73% 27.64%*

Russell 1000 Value Index** 7.34% 19.62%***

Russell Mid Cap Value Index** (0.11)% 13.56%***
</TABLE>

* Since June 1, 1996
** The Russell 1000 Value Index measures the performance of the 1,000 largest
U.S. companies based on total market capitalization with lower price-to-
book ratios and lower forecasted growth values. The Russell Mid Cap Value
Index measures the performance of medium-sized, value-oriented securities.
The Indexes are unmanaged and do not reflect any fees or expenses.
*** Since May 31, 1996.

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.65%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.30%
Total Other Expenses 0.70%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.35%
Fee Waivers and Expense Reimbursements (0.55)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.80%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.80%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$82 $255 $444 $990
</TABLE>

7
<PAGE>

Optimum Growth Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Superior,
risk-adjusted total return

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Invests in common
stocks that the Adviser
believes have strong growth
prospects

Investor Profile Investors
seeking total return, and who
are willing to accept the
risks of investing in equity
securities

Investment Objective
The Optimum Growth Fund seeks superior, risk-adjusted total return. This objec-
tive may be changed without shareholder approval.

Investment Strategy of the Optimum Growth Fund
The Optimum Growth Fund invests primarily (at least 65% of its assets) in com-
mon stocks of U.S. companies that the Adviser believes have growth prospects
that exceed those of the overall market. The Fund generally invests in mid- to
large- capitalization companies (i.e., companies with market capitalizations
over $1.5 billion) in a variety of industries.

The Adviser takes a long-term approach to managing the Fund and tries to iden-
tify high quality companies with consistent or rising earnings growth records.
Typically, these companies are industry leaders with the potential to dominate
their markets by being the low cost, high quality producers of products or
services. In addition to its core portfolio selections, the Adviser further di-
versifies Fund investments with a structured segment of issuers included in the
Russell 1000 Growth Index, which includes growth-oriented issuers selected from
among the 1000 largest U.S. issuers. From this universe, the Adviser systemati-
cally selects companies that it believes, based on quantitative screening, com-
plements the Fund's core holdings by reducing portfolio volatility and further
diversifying the Fund.

Principal Risks of Investing in the Optimum Growth Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund also may be subject to risks particular to its investments in medium
capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."

The Fund is also subject to the risk that medium to large capitalization U.S.
equity securities may underperform other segments of the equity market or the
equity markets as a whole.

8
<PAGE>

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

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1997 33.51%
1998 65.23%
1999 44.70%
Best Quarter Worst Quarter
36.46% (6.27)%
(12/31/98) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was 1.41%.

This table compares the average annual total returns of the Fund's Institu-
tional Shares for the periods ended December 31, 1999 to those of the Russell
1000 Growth Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
---------------------------------------------------------------------------------------
<S> <C> <C>
Optimum Growth Fund (Institutional Shares) 44.70% 39.85%*

Russell 1000 Growth Index 33.14% 31.25%**
</TABLE>

* Since June 1, 1996
** Since May 31, 1996

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.65%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.31%
Total Other Expenses 0.71%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.36%
Fee Waivers and Expense Reimbursements (0.56)%
------------------------------------------------------
Net Annual Fund Operating Expenses 0.80%*
</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$82 $255 $444 $990
</TABLE>

9
<PAGE>

Income Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Current
income, consistent with
moderate risk of capital and
liquidity

Investment Focus Investment
grade fixed income securities

Share Price Volatility Medium

Principal Investment
Strategy Investing in
investment grade government
and corporate fixed income
securities

Investor Profile Investors
seeking current income, and
who are willing to accept the
risks of investing in fixed
income securities of varying
maturities

Investment Objective
The Income Fund seeks to provide as high a level of current interest income as
is consistent with moderate risk of capital and maintenance of liquidity. This
objective may be changed without shareholder approval.

Investment Strategy of the Income Fund
The Income Fund invests primarily (at least 65% of its assets) in fixed income
securities issued or guaranteed by the U.S. government, its agencies and in-
strumentalities, and corporate issuers rated at the time of investment in one
of the three highest rating categories by a major rating agency. The Fund may
invest up to 35% of its assets in fixed income securities that are rated below
investment grade. These securities are sometimes called "high yield" or "junk"
bonds. The Fund also may invest a portion of its assets in dollar-denominated
fixed income securities of foreign issuers and mortgage-backed securities.

There is no limit on the Fund's average maturity or on the maximum maturity of
a particular security. The Adviser manages the Fund's average portfolio matu-
rity in light of current market and economic conditions to provide a competi-
tive current yield and reasonable principal volatility. In selecting particular
investments, the Adviser looks for securities that offer relative value, based
on its assessment of real interest rates and the yield curve. The fixed income
securities held by the Fund also may have the potential for moderate price ap-
preciation.

Due to its investment strategy, the Fund may buy and sell securities frequent-
ly. This may result in higher transaction costs and additional capital gains
tax liabilities and may affect the Fund's performance.

Principal Risks of Investing in the Income Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise,
and the volatility of lower rated securities is even greater than that of
higher rated securities.

Junk bonds involve greater risks of default or downgrade and are more volatile
than investment grade securities. Junk bonds involve greater risk of default or
price declines than investment grade securities due to actual or perceived
changes in an issuer's creditworthiness. In addition, issuers of junk bonds may
be more susceptible than other issuers to economic downturns. Junk bonds are
subject to the risk that the issuer may not be able to pay interest or divi-
dends and ultimately to repay principal upon maturity. Discontinuation of these
payments could substantially adversely affect the market value of the security.

The mortgages underlying mortgage-backed securities may be paid off early,
which makes it difficult to determine their actual maturity and therefore cal-
culate how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates.

10
<PAGE>

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

The Fund's U.S. government securities are not guaranteed against price move-
ments due to changing interest rates. Obligations issued by some U.S. govern-
ment agencies are backed by the U.S. Treasury, while others are backed solely
by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources.

The Fund also may be subject to risks particular to its investments in foreign
fixed income securities as well as credit risk. These risks are discussed in
greater detail in the section entitled "More Information About Risk."

The Fund is also subject to the risk that long-term fixed income securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1996 2.51%
1997 9.28%
1998 8.46%
1999 -1.67%
Best Quarter Worst Quarter
4.85% (2.03)%
(6/30/95) (3/31/96)

The Fund's performance for the six month period ending June 30, 2000 was 3.87%.

This table compares the average annual total returns of the Fund's Institu-
tional Shares for the periods ended December 31, 1999 to those of the Lehman
Brothers Intermediate Govt/Credit Bond Index.

<TABLE>
<CAPTION>
1 Since
Year Inception
-------------------------------------------------------------------------------
<S> <C> <C>
Income Fund (Institutional Shares) (1.67)% 6.56%*

Lehman Brothers Intermediate Govt/Credit Bond Index 0.39% 7.09%**
</TABLE>

* Since January 16, 1995
** Since December 31, 1994

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.65%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.25%
Total Other Expenses 0.65%
--------------------------------------------
Total Annual Fund Operating
Expenses 1.30%
Fee Waivers and Expense
Reimbursements (0.80)%
--------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 0.50%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser and Portfolio Manag-
ers."

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$51 $160 $280 $628
</TABLE>

11
<PAGE>

Total Return Bond Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Total return

Investment Focus Investment
grade fixed income securities

Share Price Volatility Medium

Principal Investment
Strategy Investing in
investment grade government
and corporate fixed income
securities

Investor Profile Investors
seeking total return, and who
are willing to accept the
risks of investing in fixed
income securities of varying
maturities

Investment Objective
The Total Return Bond Fund seeks to maximize the total rate of return consis-
tent with moderate risk of capital and maintenance of liquidity. This objective
may be changed without shareholder approval.

Investment Strategy of the Total Return Bond Fund
The Total Return Bond Fund invests primarily (at least 65% of its assets) in
fixed income securities issued or guaranteed by the U.S. government, its agen-
cies and instrumentalities, and corporate issuers rated at the time of invest-
ment in one of the three highest rating categories by a major rating agency.
The Fund also may invest a portion of its assets in dollar-denominated fixed
income securities of foreign issuers and mortgage-backed securities.

There is no limit on the Fund's average maturity or on the maximum maturity of
a particular security. The Adviser manages the Fund by balancing yield, average
maturity and risk in light of its assessment of real interest rates and the
yield curve to provide maximum preservation of purchase power. In selecting
particular investments, the Adviser looks for fixed income securities that of-
fer relative value and potential for moderate price appreciation.

Principal Risks of Investing in the Total Return Bond Fund
The prices of the Fund's fixed income securities respond to economic develop-
ments, particularly interest rate changes, as well as to perceptions about the
creditworthiness of individual issuers, including governments. Generally, the
Fund's fixed income securities will decrease in value if interest rates rise,
and the volatility of lower rated securities is even greater than that of
higher rated securities.

The Fund is also subject to the risk that long-term fixed income securities may
underperform other segments of the fixed income market or the fixed income mar-
kets as a whole.

12
<PAGE>

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

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1996 2.66%
1997 9.23%
1998 9.22%
1999 -2.57%
Best Quarter Worst Quarter
7.03% (2.47)%
(6/30/95) (3/31/96)

The Fund's performance for the six month period ending June 30, 2000 was 4.47%.

This table compares the average annual total returns of the Fund's Institu-
tional Shares for the periods ended December 31, 1999 to those of the Lehman
Brothers Govt/Credit Bond Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
-------------------------------------------------------------------------------------
<S> <C> <C>
Total Return Bond Fund (Institutional Shares) (2.57)% 7.17%*

Lehman Brothers Govt/Credit Bond Index (2.15)% 7.60%**
</TABLE>
* Since January 19, 1995
** Since December 31, 1994

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.65%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
--------------------------------------------
Total Annual Fund Operating
Expenses 1.28%
Fee Waivers and Expense
Reimbursements (0.78)%
--------------------------------------------
Net Annual Fund Operating Expenses 0.50%*
</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$51 $160 $280 $628
</TABLE>

13
<PAGE>

International Equity Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Foreign
equity securities

Share Price Volatility High

Principal Investment
Strategy Investing in a
diversified portfolio of
equity securities of issuers
in developed foreign countries
and, to a lesser extent,
emerging markets

Investor Profile Investors
seeking long-term capital
appreciation, who are willing
to accept the risks of
investing in companies located
in foreign countries

Investment Objective
The International Equity Fund seeks to provide long-term capital appreciation
through investment in a diversified portfolio of marketable foreign securities.
This objective may be changed without shareholder approval.

Investment Strategy of the International Equity Fund
The International Equity Fund invests primarily (at least 65% of its assets) in
equity securities of larger, more established companies located in developed
foreign markets, which include most nations in western Europe and the more de-
veloped nations in the Pacific Basin and Latin America. The Fund may invest to
a lesser extent in less developed countries and regions to capitalize on oppor-
tunities in emerging markets. Emerging market countries are countries that the
World Bank or the United Nations considers to be emerging or developing. The
Adviser generally does not attempt to hedge the effects of currency value fluc-
tuations on the Fund's investments on an on-going basis.

The Adviser selects investments for the Fund by applying a bottom-up investment
approach designed to identify companies that the Adviser expects to experience
sustainable earnings growth and to benefit from global economic trends or prom-
ising technologies or products and whose value is not recognized in the prices
of their securities. The Adviser continuously analyzes companies in a broad
range of foreign markets, giving particular emphasis to each company's scope of
operations and economic ties to one or more specific countries. While the Fund
generally invests in companies in a variety of countries, industries and sec-
tors, the Adviser does not attempt to invest a specific percentage of the
Fund's assets in a given country, region or industry. The Fund will make in-
vestments in companies located in emerging markets only where the Adviser be-
lieves that such companies' growth/appreciation potential transcends their lo-
cation or operations in emerging market countries.

Principal Risks of Investing in the International Equity Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

Investing in foreign countries poses additional risks since political and eco-
nomic events unique to a country or region will affect those markets and their
issuers. These events will not necessarily affect the U.S. economy or similar
issuers located in the United States. In addition, investments in foreign coun-
tries are generally denominated in a foreign currency. As a result, changes in
the value of those currencies compared to the U.S. dollar may affect (posi-
tively or negatively) the value of a Fund's investments. These currency move-
ments may happen separately from and in response to events that do not other-
wise affect the value of the security in the issuer's home country. These vari-
ous risks will be even greater for investments in emerging market countries
since political turmoil and rapid changes in economic conditions are more
likely to occur in these countries.

14
<PAGE>

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Emerging markets may be more likely to experience political turmoil or rapid
changes in market or economic conditions than more developed countries. In ad-
dition, the financial stability of issuers (including governments) in emerging
market countries may be more precarious than in other countries. As a result,
there will tend to be an increased risk of price volatility associated with the
Fund's investments in emerging market countries, which may be magnified by cur-
rency fluctuations relative to the U.S. dollar.

The Fund is also subject to the risk that foreign equity securities may
underperform other segments of the equity market or the equity markets as a
whole.

This bar chart shows changes in the performance of the Fund's Institutional
Shares from year to year.

[GRAPH]
1996 14.75%
1997 -4.59%
1998 10.13%
1999 53.00%
Best Quarter Worst Quarter
40.28% (16.37)%
(12/31/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
(4.99)%.

This table compares the average annual total returns of the Fund's Institu-
tional Shares for the periods ended December 31, 1999 to those of the FT/S&P--
Actuaries World Indices--World Excluding U.S. Index.

<TABLE>
<CAPTION>
1 Since
Year Inception
-----------------------------------------------------------------------------
<S> <C> <C>
International Equity Fund (Institutional Shares) 53.00% 17.44%*

FT/S&P--Actuaries World Indices--World Excluding U.S. Index 31.82% 12.67%**
</TABLE>
* Since January 24, 1995
** Since December 31, 1994

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Shareholder Fees
(paid directly from your investment)

<TABLE>
<S> <C>
Redemption Fee (as a percentage of amount
redeemed, if applicable)* 2.00%
</TABLE>

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.45%
Total Other Expenses 0.85%
---------------------------------------------
Total Annual Fund Operating
Expenses 1.85%
Fee Waivers and Expense
Reimbursements (0.95)%
---------------------------------------------
Net Annual Fund Operating Expenses 0.90%**
</TABLE>

* This redemption fee is charged if you redeem or exchange your shares within
30 days of the date of purchase. See "How to Sell Your Shares" for more in-
formation.
** The Adviser has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding 0.90%, for the pe-
riod commencing on the date of this prospectus and ending March 31, 2001.
For more information about these fees, see "Investment Adviser and Portfo-
lio Managers."

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$92 $287 $498 $1,108
</TABLE>

15
<PAGE>

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More Information About Risk

Equity Risk
(Equity Fund--Value Equity Fund--Optimum Growth Fund--International Equity
Fund)--Equity securities include public and privately issued equity securities,
common and preferred stocks, warrants, rights to subscribe to common stock and
convertible securities, as well as instruments that attempt to track the price
movement of equity indices. Investments in these securities in general are sub-
ject to market risks that may cause their prices to fluctuate over time. The
value of securities convertible into equity securities, such as warrants or
convertible debt, is also affected by prevailing interest rates, the credit
quality of the issuer and any call provision.

Small Cap Risk
(Equity Fund--Value Equity Fund)--The smaller capitalization companies in which
the Funds may invest may be more vulnerable to adverse business or economic
events than larger, more established companies. In particular, these small com-
panies may have limited product lines, markets and financial resources, and may
depend upon a relatively small management group. Therefore, small cap stocks
may be more volatile than those of larger companies.

Mid Cap Risk
(Equity Fund--Value Equity Fund--Optimum Growth Fund)--The medium capitaliza-
tion companies that the Funds may invest in may be more vulnerable to adverse
business or economic events than larger companies. In particular, these compa-
nies may have limited product lines, markets and financial resources, and may
depend on a relatively small management group. Therefore, medium capitalization
stocks may be more volatile than those of larger companies.

Fixed Income Risk
(Income Fund--Total Return Bond Fund)--The market value of fixed income invest-
ments change in response to interest rate changes and other factors. During pe-
riods of falling interest rates, the values of outstanding fixed income securi-
ties generally rise. During periods of rising interest rates, the values of
outstanding fixed income securities generally fall. Moreover, while securities
with longer maturities tend to produce higher yields, the prices of longer ma-
turity securities are also subject to greater market fluctuations as a result
of changes in interest rates. As the average maturity or duration of a security
lengthens, the risk that the price of such security will become more volatile
increases. Duration approximates the price sensitivity of a security to changes
in interest rates. In contrast to maturity which measures only time until final
payment, duration combines consideration of yield, interest payments, final ma-
turity and call features.

Call Risk
(Income Fund--Total Return Bond Fund)--During periods of falling interest
rates, certain debt obligations with high interest rates may be prepaid (or
"called") by the issuer prior to maturity. This may cause a Fund's average
weighted maturity to fluctuate, and may require a Fund to invest the result-
ing proceeds at lower interest rates.

Credit Risk
(Income Fund--Total Return Bond Fund)--The possibility that an issuer will be
unable to make timely payments of either principal or interest.

Event Risk
(Income Fund--Total Return Bond Fund)--Securities may suffer declines in
credit quality and market value due to issuer restructurings or other fac-
tors. This risk should be reduced because of a Fund's multiple holdings.

(Income Fund)--High-Yield, Lower Rated Securities (or "junk bonds") are sub-
ject to additional risks associated with investing in high-yield securities,
including:

. Greater risk of default or price declines due to changes in the issuer's
creditworthiness.
. A thinner and less active market which may increase price volatility and
limit the ability of a Fund to sell these securities at their carrying
values.
. Prices for high-yield, lower rated securities may be affected by investor
perception of issuer credit quality and the outlook for economic growth,
such that prices may move independently of interest rates and the overall
bond market.

Mortgage-Backed Securities
(Income Fund--Total Return Bond Fund)--Mortgage-backed securities are fixed in-
come securities representing an interest in a pool of underlying mortgage
loans. They are sensitive to changes in interest rates, but may respond to
these changes differently from other fixed income securities due to the possi-
bility of prepayment of the underlying mortgage loans. As a result, it may not
be possible to determine in advance the actual maturity date or average life of
a mortgage-backed security.

16
<PAGE>

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Rising interest rates tend to discourage refinancings, with the result that the
average life and volatility of the security will increase, exacerbating its de-
crease in market price. When interest rates fall, however, mortgage-backed se-
curities may not gain as much in market value because of the expectation of ad-
ditional mortgage prepayments that must be reinvested at lower interest rates.
Prepayment risk may make it difficult to calculate the average maturity of a
portfolio of mortgage-backed securities and, therefore, to assess the volatil-
ity risk of that portfolio.

Technology Risk
(Equity Fund--Value Equity Fund--Optimum Growth Fund--Income Fund)--The Funds
may invest in securities of issuers engaged in the technology sector of the
economy. These securities may underperform stocks of other issuers or the mar-
ket as a whole. To the extent that the Funds invest in issuers conducting busi-
ness in the technology market sector, the Funds are subject to legislative or
regulatory changes, adverse market conditions and/or increased competition af-
fecting the market sector. Competitive pressures may significantly impact the
financial condition of technology companies. For example, an increasing number
of companies and new product offerings can lead to price cuts and slower sell-
ing cycles, and many of these companies may be dependent on the success of a
principal product, may rely on sole source providers and third-party manufac-
turers, and may experience difficulties in managing growth. In addition, secu-
rities of technology companies may experience dramatic price movements that
have little or no basis in fundamental economic conditions. As a result, a
Fund's investment in technology companies may subject it to more volatile price
movements.

Foreign Security Risks
(All Funds)--Investments in securities of foreign companies or governments can
be more volatile than investments in U.S. companies or governments. Diplomatic,
political, or economic developments, including nationalization or appropria-
tion, could affect investments in foreign countries. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets. In ad-
dition, the value of securities denominated in foreign currencies, and of divi-
dends from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or govern-
ments generally are not subject to uniform accounting, auditing, and financial
reporting standards comparable to those applicable to domestic U.S. companies
or governments. Transaction costs are generally higher than those in the U.S.
and expenses for custodial arrangements of foreign securities may be somewhat
greater than typical expenses for custodial arrangements of similar U.S. secu-
rities. Some foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is recov-
erable, the non-recovered portion will reduce the income received from the se-
curities comprising the portfolio.

Currency Risk
(All Funds)--Investments in foreign securities denominated in foreign curren-
cies involve additional risks, including:

. A Fund may incur substantial costs in connection with conversions between
various currencies.
. Only a limited market currently exists for hedging transactions relating to
currencies in certain emerging markets.

More Information About Fund Investments
In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and engage
in other investment practices. These investments and strategies, as well as
those described in this prospectus, are described in detail in our Statement of
Additional Information.

The investments and strategies described in this prospectus are those that we
use under normal conditions. During adverse economic, market or other condi-
tions, each Fund may take temporary defensive positions such as investing up to
100% of its assets in investments that would not ordinarily be consistent with
a Fund's objective. The Fund may not achieve its objective when so invested. A
Fund will do so only if the Adviser believes that the risk of loss outweighs
the opportunity for capital gains or higher income. Of course, a Fund cannot
guarantee that it will achieve its investment goal.

Investment Adviser
United States Trust Company of New York and U.S. Trust Company (together, U.S.
Trust or the Adviser) serve as investment adviser to each Fund. United States
Trust Company of New York is a state-chartered bank and trust company and a
member bank of the Federal Reserve System. U.S. Trust Company is a Connecticut
state bank and trust company. Each is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company.

17
<PAGE>

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U.S. Trust Corporation is a wholly-owned subsidiary of The Charles Schwab Cor-
poration ("Schwab"). Charles R. Schwab is the founder, Chairman and Co-Chief
Executive Officer and a Director and significant shareholder of Schwab. As a
result of his positions and share ownership, Mr. Schwab may be deemed to be a
controlling person of Schwab and its subsidiaries. Through its principal sub-
sidiary Charles Schwab & Co., Inc., Schwab is one of the nation's largest fi-
nancial services firms and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets.

U.S. Trust is one of the oldest investment management companies in the country.
Since 1853, U.S. Trust has been a leader in wealth management for sophisticated
investors providing trust and banking services to individuals, corporations and
institutions, both nationally and internationally, including investment manage-
ment, estate and trust administration, financial planning, corporate trust and
agency banking, and personal and corporate banking. On December 31, 1999, U.S.
Trust had approximately $86 billion in aggregate assets under management.
United States Trust Company of New York has its principal offices at 114 W.
47th Street, New York, NY 10036. U.S. Trust Company has its principal offices
at 225 High Ridge Road, East Building, Stamford, CT 06905.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

U.S. Trust and its affiliates advise and manage assets for their private cli-
ents and funds, some of which have investment objectives and policies similar
to Excelsior Funds. U.S. Trust and its affiliates will not have any obligation
to make available or use any information regarding these proprietary investment
activities for the benefit of the Funds. The research department of U.S. Trust
prepares research reports that are utilized by these Funds, wealth managers of
U.S. Trust and Schwab and its affiliates. It is U.S. Trust's intention to dis-
tribute this information as simultaneously as possible to all recipients. How-
ever, where the investment manager of an Excelsior Fund prepares such research,
that Fund may and often does receive and act upon that information before it is
disseminated to other parties, which in turn may have a negative effect on the
price of the securities subject to research.

The Board of Trustees of Excelsior Institutional Trust supervises the Adviser
and establishes policies that the Adviser must follow in its management activi-
ties.

For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
Equity Fund 0.45%
Value Equity Fund 0.50%
Optimum Growth Fund 0.52%
Income Fund 0.25%
Total Return Bond Fund 0.27%
International Equity Fund 0.44%
</TABLE>

Portfolio Managers
Leigh H. Weiss has served as portfolio manager for the Equity Fund since Janu-
ary 1996. Mr. Weiss is a Managing Director and Senior Portfolio Manager of U.S.
Trust and has been with U.S. Trust since 1993. Mr. Weiss is primarily responsi-
ble for the day to day management of the Equity Fund's portfolio. Research,
analyses, trade execution and other facilities provided by U.S. Trust and other
personnel also play a significant role in portfolio management and performance.

All investment decisions for the Optimum Growth Fund and Value Equity Fund are
made by a committee of investment professionals and no persons are primarily
responsible for making recommendations to that committee. United States Trust
Company of New York provides its investment advisory services to the Optimum
Growth Fund primarily through its Campbell Cowperthwait division.

Alexander R. Powers has served as portfolio manager for the Income and Total
Return Bond Funds since Decem- ber 1996. Mr. Powers is a Managing Director of
U.S. Trust's Taxable Fixed-Income Investments and has been with U.S. Trust
since July 1996. From 1988 to 1996, Mr. Powers was the Manager of Taxable
Fixed- Income Investments at Chase Asset Management. Mr. Powers is primarily
responsible for the day to day management of the Income and Total Return Bond
Funds' portfolios. Research, analyses, trade execution and other facilities
provided by U.S. Trust and other personnel also play a significant role in
portfolio management and performance.

Rosemary Sagar has served as portfolio manager for the International Equity
Fund since December 1998. Ms. Sagar is the Managing Director of U.S. Trust's
Global Investment Division and she has been with U.S. Trust since 1996. From
1991 to 1996, Ms. Sagar was Senior Vice President for international equity in-
vestments for General Electric Investments Corp. in Stamford, CT. Ms. Sagar is

18
<PAGE>

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

primarily responsible for the day to day management of the International Equity
Fund's portfolio. Research, analyses, trade execution and other facilities pro-
vided by U.S. Trust and other personnel also play a significant role in portfo-
lio management and performance.

Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange Institutional Shares of the Funds.

Institutional Shares
. No sales charge
. No 12b-1 fees
. No minimum initial or subsequent investment

Institutional Shares are offered only to financial institutions investing for
their own or their customers' accounts. For information on how to open an ac-
count and set up procedures for placing transactions call (800) 881-9358 (from
overseas, call (617) 557-8280). Customers of financial institutions should con-
tact their institutions for information on their accounts.

How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone

To purchase shares directly from us, please call (800) 881-9358 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to Ex-
celsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire, write your check, payable in
U.S. dollars, to "Excelsior Institutional Trust" and include the name of the
appropriate Fund(s) on the check. A Fund cannot accept third-party checks,
credit card checks or cash. To purchase shares by wire, please call us for in-
structions. Federal funds and registration instructions should be wired through
the Federal Reserve System to:

The Chase Manhattan Bank
ABA#021000021
Excelsior Institutional Trust
Credit DDA 910-2-733046
Account Registration
Account Number
Wire Control Number

Investors making initial investments by wire must promptly complete the en-
closed application and forward it to the address indicated on the application.
Investors making subsequent investments by wire should follow the above in-
structions.

You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its proce-
dures. Your broker or institution may charge a fee for its services, in addi-
tion to the fees charged by the Fund. You will also generally have to address
your correspondence or questions regarding a Fund to your institution.

The Funds' distributor may institute promotional incentive programs for deal-
ers, which will be paid for by the distributor out of its own assets and not
out of the assets of the Funds. Under any such program, the distributor may
provide incentives, in the form of cash or other compensation, including mer-
chandise, airline vouchers, trips and vacation packages, to dealers selling
shares of a Fund. If any such program is made available to any dealer, it will
be made available to all dealers on the same terms.

General Information
You may purchase shares on any day that the New York Stock Exchange (NYSE) and
the Adviser are open for business (a "Business Day"). Presently, the only Busi-
ness Days on which the Adviser is closed and the NYSE is open are Veterans' Day
and Columbus Day. A Fund may reject any purchase request if it is determined
that accepting the request would not be in the best interests of the Fund or
its shareholders.

The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase request in good or-
der. We consider requests to be in "good order" when all required documents are
properly completed, signed and received.

Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So,
for you to receive the current Business Day's NAV, a Fund must receive your
purchase request in good order before 4:00 p.m., Eastern time.

19
<PAGE>

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How We Calculate NAV
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund.

In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are un-
reliable, fair value prices may be determined in good faith using methods ap-
proved by the Board of Trustees. Fixed income investments with remaining matu-
rities of 60 days or less generally are valued at their amortized cost, which
approximates their market value.

Some Funds may hold securities that are listed on foreign exchanges. These se-
curities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of these securities may change on days when
you cannot purchase or sell Fund shares.

How to Sell Your Fund Shares
You may sell shares directly by:
. Mail, or
. Telephone

Holders of Institutional Shares may sell shares by following the procedures es-
tablished when they opened their account or accounts. If you have questions,
call (800) 881-9358 (from overseas, call (617) 557-8280).

You may sell your shares by sending a written request for redemption to:

Excelsior Institutional Trust
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Please be sure to indicate the number of shares to be sold, identify your ac-
count number and sign the request.

If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell (sometimes called "re-
deem") your shares on any Business Day by contacting a Fund directly by tele-
phone at (800) 881-9358 (from overseas, call (617) 557-8280). Shares will not
be redeemed by the Fund unless all required documents have been received by the
Fund.

If you would like to sell $50,000 or more of your shares, or any amount if the
proceeds are to be sent to an address other than the address of record, please
notify the Fund in writing and include a signature guarantee by a bank or other
financial institution (a notarized signature is not sufficient).

The sale price of each share will be the next NAV determined after the Fund re-
ceives your request in good order.

A redemption fee of 2% of the value of the shares redeemed or exchanged will be
imposed on shares of the International Equity Fund redeemed or exchanged 30
days or less after their date of purchase. The redemption fee is intended to
limit short-term trading in the Fund or, to the extent that short-term trading
persists, to impose the costs of that type of activity on the shareholders who
engage in it. The redemption fee will be paid to the Fund. The Fund reserves
the right, at its discretion, to waive, modify or terminate the redemption fee.
No redemption fee will be charged on redemptions and exchanges involving (i)
those that occur as a result of a bona fide investment policy committee deci-
sion of a recognized financial institution with respect to an asset allocation
program, (ii) shares acquired through the reinvestment of dividends or capital
gains distributions, (iii) shares redeemed as part of a systematic withdrawal
plan that represent 4% or less of the investor's investment subject to the plan
accounts, or (iv) shares maintained through employee pension benefit plans sub-
ject to the Employee Retirement Income Security Act that offer the Excelsior
Funds as an investment vehicle. For purposes of omnibus accounts, the redemp-
tion fee will be determined at the sub-account level.

Receiving Your Money
Normally, we will send your sale proceeds the Business Day after we receive
your request in good order. Your proceeds can be wired to your bank account or
sent to you by check. If you recently purchased your shares by check, redemp-
tion proceeds may not be available until your check has cleared (which may take
up to 15 days from your date of purchase).

Redemptions in Kind
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise, we might pay all or part of
your redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). It is highly unlikely that your shares
would ever be redeemed in kind, but if they were you would proba-

20
<PAGE>

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bly have to pay transaction costs to sell the securities distributed to you, as
well as taxes on any capital gains from the sale as with any redemption.

Involuntary Sales of Your Shares
If your account balance drops below $500 because of redemptions, you may be re-
quired to sell your shares. But, we will always give you at least 60 days'
written notice to give you time to add to your account and avoid the sale of
your shares.

Suspension of Your Right to Sell Your Shares
A Fund may suspend your right to sell your shares if the NYSE restricts trad-
ing, the SEC declares an emergency or when U.S. Trust and the custodian are
closed. More information about this is in our Statement of Additional Informa-
tion.

How to Exchange Your Shares
You may exchange your shares on any Business Day for Institutional Shares of
any portfolio of Excelsior Institutional Trust, or for Institutional Shares of
the Money or Government Money Funds of Excelsior Funds, Inc. In order to pro-
tect other shareholders, we may limit your exchanges to no more than six per
year. We may also reject any exchange request if we determine that such ex-
change is not in the best interests of a Fund or its shareholders. Shares can
be exchanged directly by mail, or by telephone if you previously selected the
telephone exchange option on the account application.

If you recently purchased shares by check, you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your
date of purchase). This exchange privilege may be changed or canceled at any
time.

When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request in good order.

There is a 2.00% redemption fee on shares of the International Equity Fund ex-
changed within 30 days of purchase. See "How to Sell Your Fund Shares" above
for more information.

Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Funds have certain safeguards
and procedures to confirm the identity of callers and the authenticity of in-
structions, the Funds are not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with a Fund over the telephone, you will
generally bear the risk of any loss.

Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Funds
shares. Some of these organizations may charge a fee for these transactions.
These intermediaries may authorize other organizations to accept purchase, re-
demption and exchange requests for Fund shares. These requests are normally ex-
ecuted at the NAV next determined after the intermediary receives the request
in good order. Authorized intermediaries are responsible for transmitting re-
quests and delivering funds on a timely basis.

Shareholder Servicing
The Funds are permitted to pay an administrative servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange request and providing periodic account state-
ments. The shareholder servicing fee may be up to 0.40% of the average daily
net asset value of Fund shares held by clients of a shareholder organization.

Dividends and Distributions
Each Fund distributes its income as follows:

<TABLE>
<S> <C>
Equity Fund Declared and Paid Quarterly
Value Equity Fund Declared and Paid Quarterly
Optimum Growth Fund Declared and Paid Quarterly
Income Fund Declared Daily and Paid Monthly
Total Return Bond Fund Declared Daily and Paid Monthly
International Equity Fund Declared and Paid Semi-annually
</TABLE>

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.

Dividends and distributions for shares held of record by U.S. Trust and its af-
filiates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions

21
<PAGE>

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will be paid in the form of additional Fund shares unless you elect to receive
payment in cash. To elect cash payment, you must notify the Fund in writing
prior to the date of the distribution. Your election will be effective for div-
idends and distributions paid after the Fund receives your written notice. To
cancel your election, simply send the Fund written notice.

Taxes
Each Fund will distribute substantially all of its taxable income including its
net capital gain (the excess of long-term capital gain over short-term capital
loss), if any. Distributions you receive from a Fund will generally be taxable
regardless of whether they are paid in cash or reinvested in additional shares.
Distributions attributable to the net capital gain of a Fund will be taxable to
you as long-term capital gain, regardless of how long you have held your
shares. Other fund distributions will generally be taxable as ordinary income.

You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though,
as an economic matter, the distribution simply constitutes a return of capital.
This is known as "buying into a dividend."

You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. To aid in computing your tax basis, you generally should retain your ac-
count statements for the periods during which you held shares.

Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.

It is expected that the Funds will be subject to foreign withholding taxes with
respect to dividends or interest, if any, received from sources in foreign
countries. In the case of the International Equity Fund, it may make an elec-
tion to treat a proportionate amount of such taxes as constituting a distribu-
tion to each shareholder, which would allow each shareholder either (1) to
credit such proportionate amount of taxes against U.S. federal income tax lia-
bility or (2) to take such amount as an itemized deduction.

Shareholders may also be subject to state and local taxes on distributions and
redemptions. State income taxes may not apply however, to the portions of each
Fund's distributions, if any, that are attributable to interest on federal se-
curities or interest on securities of the particular state or localities within
the state.

The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are nonres-
ident aliens, foreign trusts or estates, or foreign corporations or partner-
ships, may be subject to different United States federal income tax treatment.
You should consult your tax adviser for further information regarding federal,
state, local and/or foreign tax consequences relevant to your specific situa-
tion.

More information about taxes is in the Statement of Additional Information.

22
<PAGE>

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

Financial Highlights
The tables that follow present performance information about Institutional
Shares of the Fund. This information is intended to help you understand the
Fund's financial performance for the past five years, or, if shorter, the pe-
riod of the Fund's operations. Some of this information reflects financial in-
formation for a single Fund share. The total returns in the table represent the
rate that you would have earned (or lost) on an investment in a Fund, assuming
you reinvested all of your dividends and distributions. This information has
been audited by Ernst & Young LLP, independent public auditors. Their report,
along with the Fund's financial statements, are incorporated by reference into
our Statement of Additional Information. You can obtain the annual report,
which contains more performance information, at no charge by calling (800) 881-
9358 (from overseas, call (617) 557-1755).

EQUITY FUND

<TABLE>
<CAPTION>
Year
Year Ended March 31, Ten Months Ended Ended May
------------------------- March 31, 31,
2000 1999 1998 1997(/1/) 1996(/2/)
------- ------- ------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 14.96 $ 12.69 $ 9.65 $ 8.93 $ 7.73
------- ------- ------- ------- ------
Investment Operations:
Net investment income.. 0.02 0.04 0.05 0.05 0.11
Net realized and
unrealized gain....... 3.73 2.47 4.67 0.86 1.20
------- ------- ------- ------- ------
Total from Investment
Operations............ 3.75 2.51 4.72 0.91 1.31
------- ------- ------- ------- ------
Distributions:
From net investment
income................ (0.03) (0.04) (0.06) (0.07) (0.11)
From net realized
gains................. (1.20) (0.20) (1.62) (0.12) --
------- ------- ------- ------- ------
Total Distributions.... (1.23) (0.24) (1.68) (0.19) (0.11)
------- ------- ------- ------- ------
Net Asset Value, End of
Period................. $ 17.48 $ 14.96 $ 12.69 $ 9.65 $ 8.93
======= ======= ======= ======= ======
Total Return............ 25.75% 20.13% 51.58% 10.22%(/3/) 17.04%
Ratios/Supplemental Data
Ratios to Average Net
Assets
Net Expenses........... 0.70% 0.70% 0.70% 0.70%(/5/) 0.36%
Gross Expenses(/4/).... 0.90% 0.90% 0.90% 0.92%(/5/) 1.49%
Net Investment Income.. 0.13% 0.28% 0.46% 0.70%(/5/) 1.32%
Portfolio Turnover
Rate................... 27% 37% 26% 32%(/5/) 113%
Net Assets at End of
Period (in millions)... $211.60 $180.11 $138.33 $118.56 $23.50
</TABLE>
------
Notes:
(1) The Fund changed its fiscal year end to March 31.
(2) Commencement of operations.
(3) Not annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.
(5) Annualized.

23
<PAGE>

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

VALUE EQUITY FUND

<TABLE>
<CAPTION>
Year Ended March 31,
---------------------- June 1, 1996(/1/)
2000 1999 1998 to March 31, 1997
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $15.33 $16.12 $11.33 $10.00
------ ------ ------ ------
Investment Operations:
Net investment income.............. 0.06 0.13 0.11 0.08
Net realized and unrealized gain... 6.34 0.52 5.59 1.31
------ ------ ------ ------
Total from Investment Operations... 6.40 0.65 5.70 1.39
------ ------ ------ ------
Distributions:
From net investment income......... (0.09) (0.12) (0.11) (0.06)
From net realized gains............ (0.32) (1.32) (0.80) --
------ ------ ------ ------
Total Distributions................ (0.41) (1.44) (0.91) (0.06)
------ ------ ------ ------
Net Asset Value, End of Period...... $21.32 $15.33 $16.12 $11.33
====== ====== ====== ======
Total Return........................ 41.92% 4.80% 51.67% 13.91%(/2/)
Ratios/Supplemental Data
Ratios to Average Net Assets
Net Expenses....................... 0.80% 0.70% 0.70% 0.70%(/3/)
Gross Expenses(/4/)................ 0.95% 0.97% 1.00% 1.12%(/3/)
Net Investment Income.............. 0.31% 0.87% 0.81% 0.94%(/3/)
Portfolio Turnover Rate............. 45% 55% 51% 64%(/3/)
Net Assets at End of Period (in
millions).......................... $53.98 $39.31 $34.77 $23.69
</TABLE>
------
Notes:
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.

24
<PAGE>

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

OPTIMUM GROWTH FUND

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------- June 1, 1996(/1/) To
2000 1999 1998 March 31, 1997
------- ------ ------ --------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 27.55 $16.33 $10.19 $10.00
------- ------ ------ ------
Investment Operations:
Net investment income...... (0.05) -- (/5/) 0.03 0.05
Net realized and unrealized
gain (loss)............... 7.21 11.22 6.15 0.17
------- ------ ------ ------
Total from Investment
Operations................ 7.16 11.22 6.18 0.22
------- ------ ------ ------
Distributions:
From net investment
income.................... -- -- (/5/) (0.04) (0.03)
From net realized gains.... (3.88) -- (/5/) -- --
------- ------ ------ ------
Total Distributions........ (3.88) -- (/5/) (0.04) (0.03)
------- ------ ------ ------
Net Asset Value, End of
Period..................... $ 30.83 $27.55 $16.33 $10.19
======= ====== ====== ======
Total Return................ 27.66% 68.74% 60.85% 2.23%(/2/)
Ratios/Supplemental Data
Ratios to Average Net Assets
Net Expenses............... 0.80% 0.71% 0.70% 0.70%(/3/)
Gross Expenses(/4/)........ 0.93% 0.93% 0.97% 1.11%(/3/)
Net Investment Income...... (0.18%) 0.00% 0.23% 0.66%(/3/)
Portfolio Turnover Rate..... 44% 22% 19% 20%(/3/)
Net Assets at End of Period
(in millions).............. $ 85.89 $88.05 $51.44 $27.18
</TABLE>
------
Notes:
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.
(5) Amount represents less than $0.01 per share.

25
<PAGE>

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

INCOME FUND

<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------- Ten Months Ended Year Ended
2000 1999 1998 March 31, 1997(/1/) May 31, 1996(/2/)
------ ------ ------ ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 7.00 $ 7.23 $ 6.90 $ 6.99 $ 7.33
------ ------ ------ ------ ------
Investment Operations:
Net investment income.. 0.41 0.40 0.44 0.38 0.51
Net realized and
unrealized gain
(loss)................ (0.33) 0.03 0.35 (0.01) (0.27)
------ ------ ------ ------ ------
Total from Investment
Operations............ 0.08 0.43 0.79 0.37 0.24
------ ------ ------ ------ ------
Distributions:
From net investment
income................ (0.41) (0.41) (0.44) (0.38) (0.51)
In excess of net
investment income..... -- -- (/6/) -- (/6/) -- --
From net realized
gains................. -- (0.25) (0.02) (0.08) (0.07)
------ ------ ------ ------ ------
Total Distributions.... (0.42) (0.66) (0.46) (0.46) (0.58)
------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $ 6.66 $ 7.00 $ 7.23 $ 6.90 $ 6.99
====== ====== ====== ====== ======
Total Return............ 1.16% 5.94% 11.78% 5.39%(/3/) 3.18%
Ratios/Supplemental Data
Ratios to Average Net
Assets
Net Expenses........... 0.50% 0.50% 0.50% 0.50%(/5/) 0.26%
Gross Expenses(/4/).... 0.90% 0.91% 0.91% 0.96%(/5/) 1.35%
Net Investment Income.. 6.08% 5.57% 6.14% 6.50%(/5/) 6.99%
Portfolio Turnover
Rate................... 125% 196% 190% 107%(/5/) 67%
Net Assets at End of
Period (in millions)... $99.21 $67.24 $61.38 $51.08 $24.01
</TABLE>
------
Notes:
(1) The Fund changed its fiscal year end to March 31.
(2) Commencement of operations.
(3) Not annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.
(5) Annualized.
(6) Amount represents less than $0.01 per share.

26
<PAGE>

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

TOTAL RETURN BOND FUND

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------- Ten Months ended Year Ended
2000 1999 1998 March 31, 1997(/1/) May 31, 1996(/2/)
------- ------- ------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 7.32 $ 7.51 $ 7.16 $ 7.18 $ 7.47
------- ------- ------- ------- ------
Investment Operations:
Net investment income.. 0.41 0.42 0.44 0.37 0.48
Net realized and
unrealized gain
(loss)................ (0.31) 0.03 0.41 0.01 (0.17)
------- ------- ------- ------- ------
Total from Investment
Operations............ 0.10 0.45 0.85 0.38 0.31
------- ------- ------- ------- ------
Distributions:
From net investment
income................ (0.41) (0.42) (0.44) (0.37) (0.48)
From net realized
gains................. -- (0.20) (0.06) (0.03) (0.12)
In excess of net
realized gains........ -- (0.02) -- -- --
------- ------- ------- ------- ------
Total Distributions.... (0.41) (0.64) (0.50) (0.40) (0.60)
------- ------- ------- ------- ------
Net Asset Value, End of
Period................. $ 7.01 $ 7.32 $ 7.51 $ 7.16 $ 7.18
======= ======= ======= ======= ======
Total Return............ 1.47% 6.07% 12.21% 5.29%(/3/) 4.20%
Ratios/Supplemental Data
Ratios to Average Net
Assets
Net Expenses........... 0.50% 0.50% 0.50% 0.50%(/5/) 0.32%
Gross Expenses(/4/).... 0.88% 0.89% 0.90% 0.92%(/5/) 1.33%
Net Investment Income.. 5.85% 5.53% 5.95% 6.08%(/5/) 6.47%
Portfolio Turnover
Rate................... 115% 234% 196% 200%(/5/) 127%
Net Assets at End of
Period (in millions)... $264.67 $251.61 $167.71 $138.40 $65.02
</TABLE>
------
Notes:
(1) The Fund changed its fiscal year end to March 31.
(2) Commencement of operations.
(3) Not annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.
(5) Annualized.

27
<PAGE>

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

INTERNATIONAL EQUITY FUND

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------ Ten Months Ended Year Ended
2000 1999 1998 March 31, 1997(/1/) May 31, 1996(/2/)
------- ------- ------ ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 8.45 $ 9.67 $ 9.03 $ 8.99 $ 7.88
------- ------- ------ ------ ------
Investment Operations:
Net investment income.. 0.01 0.16 0.09 0.01 0.09
Net realized and
unrealized gain
(loss)................ 5.39 (0.79) 0.79 0.21 1.20
------- ------- ------ ------ ------
Total from Investment
Operations............ 5.40 (0.63) 0.88 0.22 1.29
------- ------- ------ ------ ------
Distributions:
From net investment
income................ (0.03) (0.16) (0.07) (0.06) (0.12)
In excess of net
investment income..... -- -- (0.02) (0.03) --
From net realized
gains................. (0.04) (0.30) (0.15) (0.09) (0.06)
In excess of net
realized gains........ -- (0.13) -- -- --
------- ------- ------ ------ ------
Total Distributions.... (0.07) (0.59) (0.24) (0.18) (0.18)
------- ------- ------ ------ ------
Net Asset Value, End of
Period................. $ 13.78 $ 8.45 $ 9.67 $ 9.03 $ 8.99
======= ======= ====== ====== ======
Total Return............ 64.29% (6.60)% 9.90% 2.41%(/3/) 16.58%
Ratios/Supplemental Data
Ratios to Average Net
Assets
Net Expenses........... 0.90% 0.90% 0.90% 0.90%(/5/) 0.60%
Gross Expenses(/4/).... 1.45% 1.53% 1.43% 1.49%(/5/) 2.05%
Net Investment Income.. 0.11% 1.18% 1.05% 0.45%(/5/) 1.71%
Portfolio Turnover
Rate................... 43% 107% 52% 45%(/5/) 19%
Net Assets at End of
Period (in millions)... $124.06 $ 78.80 $40.44 $38.47 $24.52
</TABLE>
------
Notes:
(1) The Fund changed its fiscal year end to March 31.
(2) Commencement of operations.
(3) Not annualized.
(4) Expense ratios before waiver of fees and reimbursement of expenses (if any)
by the investment adviser and administrators.
(5) Annualized.

28
<PAGE>

Excelsior Institutional Trust

Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the fol-
lowing:

Statement of Additional Information (SAI)
The SAI dated August 1, 1999 includes detailed information about Excelsior In-
stitutional Trust. The SAI is on file with the SEC and is incorporated by ref-
erence into this prospectus. This means that the SAI, for legal purposes, is a
part of this prospectus.

Annual and Semi-Annual Reports
These reports contain additional information about the Funds' investments. The
Annual Report also lists each Fund's holdings and contains information from the
Funds' managers about strategies, and recent market conditions and trends.

To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 881-9358 (from overseas, call (617) 557-8280)

By Mail: Excelsior Institutional Trust P.O. Box 2798 Boston, Massachusetts
02208-2798

By Internet: http://www.excelsiorfunds.com

From the SEC: You can also obtain the SAI or the Annual and Semi-Annual re-
ports, as well as other information about Excelsior Institutional Trust, from
the EDGAR Database on the SEC's website ("http://www.sec.gov"). You may review
and copy documents at the SEC Public Reference Room in Washington, DC (for in-
formation on the operation of the Public Reference Room, call 202-942-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference Sec-
tion, Washington, DC 20549-0102. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
[email protected]. Excelsior Institutional Trust's Investment Company Act reg-
istration number is 811-8490.
<PAGE>

Excelsior Domestic Equity Funds

Prospectus

August 1, 2000

Excelsior Funds, Inc.
Excelsior Institutional Trust

Blended Equity Fund
Large Cap Growth Fund
Optimum Growth Fund
Small Cap Fund
Value and Restructuring Fund
Value Equity Fund
Energy and Natural Resources Fund
Real Estate Fund
Technology Fund

Investment Adviser
United States Trust Company of New York
U.S. Trust Company

The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.

[LOGO OF EXCELSIOR FUNDS]
<PAGE>

Table of Contents

Excelsior Funds, Inc. and Excelsior Institutional Trust are mutual fund fami-
lies that offer shares in separate investment portfolios which have individual
investment goals, strategies and risks. This prospectus gives you important in-
formation about the Blended Equity, Large Cap Growth, Small Cap, Value and Re-
structuring, Energy and Natural Resources, Real Estate and Technology Funds of
Excelsior Funds, Inc. and the Optimum Growth and Value Equity Funds of Excel-
sior Institutional Trust (each, a Fund) that you should know before investing.
The Optimum Growth and Value Equity Funds offer two classes of shares: Shares,
which are offered in this prospectus, and Institutional Shares, which are of-
fered in a separate prospectus. Please read this prospectus and keep it for fu-
ture reference.

<TABLE>
<CAPTION>
Page
<S> <C>
Blended Equity Fund.................................................. 4
Large Cap Growth Fund................................................ 6
Optimum Growth Fund.................................................. 8
Small Cap Fund....................................................... 10
Value And Restructuring Fund......................................... 12
Value Equity Fund.................................................... 14
Energy And Natural Resources Fund.................................... 16
Real Estate Fund..................................................... 18
Technology Fund...................................................... 20
More Information About Risk.......................................... 22
More Information About Fund Investments.............................. 23
Investment Adviser................................................... 23
Portfolio Managers................................................... 24
Purchasing, Selling And Exchanging Fund Shares....................... 24
Distribution Of Fund Shares.......................................... 27
Dividends And Distributions.......................................... 27
Taxes................................................................ 28
Financial Highlights................................................. 29
How to Obtain More Information About Excelsior Funds................. Back Cover
</TABLE>
<PAGE>

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

Introduction -- Risk/Return
Information Common to the Funds

Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.

Each Fund has its own investment goal, strategies and risks for reaching that
goal. The investment managers invest Fund assets in a way that they believe
will help a Fund achieve its goal. Still, investing in each Fund involves risk
and there is no guarantee that a Fund will achieve its goal. An investment man-
ager's judgments about the markets, the economy, or companies may not antici-
pate actual market movements, economic conditions or company performance, and
these judgments may affect the return on your investment. In fact, no matter
how good a job an investment manager does, you could lose money on your invest-
ment in the Fund, just as you could with other investments. A Fund share is not
a bank deposit and is not insured or guaranteed by the Federal Deposit Insur-
ance Corporation (FDIC) or any government agency.

The Adviser's Equity Investment Philosophy:
The Adviser manages each of the Fund's investments with a view toward long-term
success. To achieve this success, the Adviser utilizes two fundamental invest-
ment strategies, value and growth. These strategies are combined with "longer-
term investment themes" to assess the investment potential of individual compa-
nies. Specific investment selection is a "bottom-up" approach, guided by these
strategies and themes to ensure proper diversification, risk control and market
focus.

Value:
This long-term strategy consists of searching for, identifying and obtaining
the benefits of present or future investment values. For example, such val-
ues may be found in a company's future earnings potential or in its existing
resources and assets. Accordingly, the Adviser is constantly engaged in as-
sessing, comparing and judging the worth of companies, particularly in com-
parison to the price the markets place on such companies' shares.

Growth:
This long-term strategy consists of buying and holding equity securities of
companies which it believes to be of high quality and high growth potential.
Typically, these companies are industry leaders with the potential to domi-
nate their markets by being low-cost, high-quality producers of products or
services. Usually these companies have an identifiable competitive advan-
tage. The Adviser believes that the earnings growth rate of these companies
is the primary determinant of their stock prices and that efficient markets
will reward consistently above average earnings growth with greater-than-av-
erage capital appreciation over the long-term.

Themes:
To complete the Adviser's investment philosophy in managing the funds, the
investment strategies discussed above are applied in concert with long-term
investment themes to identify investment opportunities. These longer-term
themes are strong and inexorable trends arising from time to time from eco-
nomic, social, demographic and cultural forces. The Adviser also believes
that understanding the instigation, catalysts and effects of these long-term
trends will enable it to identify companies that are currently or will soon
benefit from these trends.

3
<PAGE>

Blended Equity Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Invests in common
stocks that the Adviser
believes are undervalued in
the market

Investor Profile Investors
seeking growth of capital, and
who are willing to accept the
risks of investing in equity
securities

Investment Objective
The Blended Equity Fund seeks long-term capital appreciation by investing in
companies that represent good long-term values not currently recognized in the
market prices of their securities.

Investment Strategy of the Blended Equity Fund
The Blended Equity Fund invests primarily (at least 65% of its assets) in large
capitalization (i.e., companies with market capitalizations over $5 billion)
common stocks of U.S. and, to a lesser extent, foreign companies that the Ad-
viser believes have value that is not currently reflected in their market pric-
es. The Adviser generally diversifies the Fund's investments over a variety of
industries and types of companies. The Fund may invest in companies of any
size, including small, high growth companies.

The Adviser takes a long-term approach to managing the Fund and tries to iden-
tify companies with characteristics that will lead to future earnings growth or
recognition of their true value. The Adviser looks for companies that are posi-
tioned to provide solutions to or benefit from complex social and economic
trends, or whose products are early in their life cycle and will experience ac-
celerating growth in the future. In addition, the Adviser invests a smaller
portion of the Fund's assets in a quantitatively selected segment of large cap-
italization U.S. companies designed to complement the Fund's core holdings by
reducing portfolio volatility and further diversifying the Fund. In considering
whether to sell one or more portfolio holdings, the Adviser will generally seek
to minimize the tax impact of any such sale(s).
Principal Risks of Investing in the Blended Equity Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund is also subject to the risk that undervalued common stocks may
underperform other segments of the equity market or the equity markets as a
whole.

4
<PAGE>

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

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]
1990 -12.28%
1991 34.98%
1992 16.56%
1993 16.34%
1994 0.22%
1995 28.93%
1996 19.88%
1997 29.73%
1998 28.70%
1999 22.74%
Best Quarter Worst Quarter
22.44% (19.21)%
(12/31/98) (9/30/90)

The Fund's performance for the six month period ending June 30, 2000 was 3.30%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Standard & Poor's 500 Composite Stock
Price Index.

<TABLE>
<CAPTION>
5 10
1 Year Years Years
-----------------------------------------------------------------------
<S> <C> <C> <C>
Blended Equity Fund 22.74% 25.93% 17.64%
Standard & Poor's 500 Composite Stock Price Index 21.04% 28.54% 18.20%
</TABLE>

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.75%**
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.21%
Total Other Expenses 0.61%
-----------------------------------------------------
Total Annual Fund Operating
Expenses 1.36%
Fee Waivers and Expense Reimbursements (0.31)%
-----------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.05%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser" and "Distribution of
Fund Shares."

** The investment advisory fee for this Fund was reduced as of August 1, 2000
from a flat fee of 0.75% of average daily net assets to the following: 0.75%
of average daily net assets of the first $1 billion of assets; 0.70% of the
next $500 million of average daily net assets; and 0.65% of average daily
net assets over $1.5 billion.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

5
<PAGE>

Large Cap Growth Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Superior,
risk-adjusted total return

Investment Focus Common stocks
of large U.S. companies

Share Price Volatility High

Principal Investment
Strategy Invests in common
stocks of large companies that
the Adviser believes have
above-average growth prospects

Investor Profile Investors
seeking total return, and who
are willing to accept the
risks of investing in equity
securities of larger companies

Investment Objective
The Large Cap Growth Fund seeks superior, risk-adjusted total return by invest-
ing in larger companies whose growth prospects, in the opinion of the Adviser,
appear to exceed that of the overall market. This objective may be changed
without shareholder approval.

Investment Strategy of the Large Cap Growth Fund
The Large Cap Growth Fund invests primarily (at least 65% of its assets) in
common stocks of large U.S. companies with market capitalizations over $5 bil-
lion that the Adviser believes have above-average growth prospects.

The Adviser takes a long-term approach to managing the Fund and invests in com-
panies with characteristics that it believes will lead to future earnings
growth or recognition of their true value. In selecting particular investments,
the Adviser applies a bottom-up investment approach designed to identify the
best companies in the most rapidly growing industries. Frequently, these are
well established companies that are positioned to provide solutions to or bene-
fit from complex social and economic trends. However, the Fund also may invest
in smaller, high growth companies when the Adviser expects their earnings to
grow at an above-average rate.

Principal Risks of Investing in the Large Cap Growth Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund also may be subject to risks particular to its investments in smaller
capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."

The Fund is also subject to the risk that large capitalization growth stocks
may underperform other segments of the equity market or the equity markets as a
whole.

6
<PAGE>

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

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]
1998 67.04%
1999 47.47%
Best Quarter Worst Quarter
39.37% (9.28)%
(12/31/98) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was 2.92%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 1000 Growth Index.

<TABLE>
<CAPTION>
1 Since
Year Inception
----------------------------------------------------------------------------------------------
<S> <C> <C>
Large Cap Growth Fund 47.47% 50.22%*

Russell 1000 Growth Index 33.14% 32.20%**
</TABLE>

* Since October 1, 1997
** Since September 30, 1997

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.75%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.26%
Total Other Expenses 0.66%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.41%
Fee Waivers and Expense Reimbursements (0.36)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

7
<PAGE>

Optimum Growth Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Superior,
risk-adjusted total return

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Invests in common
stocks that the Adviser
believes have strong growth
prospects

Investor Profile Investors
seeking total return, and who
are willing to accept the
risks of investing in equity
securities

Investment Objective
The Optimum Growth Fund seeks superior, risk-adjusted total return. This
objective may be changed without shareholder approval.

Investment Strategy of the Optimum Growth Fund
The Optimum Growth Fund invests primarily (at least 65% of its assets) in com-
mon stocks of U.S. companies that the Adviser believes have growth prospects
that exceed those of the overall market. The Fund generally invests in mid- to
large-capitalization companies (i.e., companies with market capitalizations
over $1.5 billion) in a variety of industries.

The Adviser takes a long-term approach to managing the Fund and tries to
identify high quality companies with consistent or rising earnings growth
records. Typically, these companies are industry leaders with the potential to
dominate their markets by being the low cost, high quality producers of
products or services. In addition to its core portfolio selections, the Adviser
further diversifies Fund investments with a structured segment of issuers
included in the Russell 1000 Growth Index, which includes growth-oriented
issuers selected from among the 1000 largest U.S. issuers. From this universe,
the Adviser systematically selects companies that it believes, based on
quantitative screening, complements the Fund's core holdings by reducing
portfolio volatility and further diversifying the Fund.

The Fund is also subject to the risk that medium to large capitalization U.S.
stocks may underperform other segments of the equity market or the equity mar-
kets as a whole.

The Fund also may be subject to risks particular to its investment in medium
capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."

8
<PAGE>

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

This bar chart shows changes in the performance of the Fund's shares from year
to year.

[GRAPH]
1997 33.08%
1998 64.66%
1999 44.26%
Best Quarter Worst Quarter
36.33% (6.08)%
(12/31/98) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was 1.29%.

This table compares the average annual total returns of the Fund's shares for
the periods ended December 31, 1999 to those of the Russell 1000 Growth Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------------------------------------------------------------------
<S> <C> <C>
Optimum Growth Fund (Shares) 44.26% 39.41%*
Russell 1000 Growth Index 33.14% 31.25%**
</TABLE>

* Since June 1, 1996
** Since May 31, 1996

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.65%
Distribution (12b-1) Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.31%
Total Other Expenses 0.71%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.61%
Fee Waivers and Expense Reimbursements (0.56)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and
distributions. Although your actual costs might be different, your approximate
costs of investing $10,000 in the Fund would be:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

9
<PAGE>

Small Cap Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Capital
appreciation

Investment Focus Equity
securities of small cap U.S.
issuers

Share Price Volatility High

Principal Investment
Strategy Investing in equity
securities of smaller
companies that are expected to
achieve substantial long-term
earnings growth

Investor Profile Investors
seeking capital appreciation,
and who are willing to
tolerate the risks of
investing in smaller companies

Investment Objective
The Small Cap Fund seeks long-term capital appreciation by investing primarily
in companies with capitalization of $1.5 billion or less.

Investment Strategy of the Small Cap Fund
The Small Cap Fund invests primarily (at least 65% of its assets) in equity se-
curities of smaller U.S.-based companies that are in the early stages of devel-
opment and which the Adviser believes have the potential to achieve substantial
long-term earnings growth.

In selecting investments for the Fund, the Adviser applies a bottom-up invest-
ment approach designed to identify innovative companies whose potential is not
yet reflected in their market values. Generally, the Fund invests in companies
with market capitalizations of $1.5 billion or less, but the Adviser also con-
siders, to a lesser degree, larger or more mature companies engaged in new or
higher growth operations that the Adviser believes will result in accelerated
earnings growth.

Principal Risks of Investing in the Small Cap Fund
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate substantially from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of se-curities issued by such companies may suffer a
decline in response. These fac-tors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund is also subject to the risk that small capitalization growth stocks
may underperform other segments of the equity market or the equity markets as a
whole.

10
<PAGE>

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

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]
1993 27.91%
1994 5.30%
1995 22.81%
1996 -2.30%
1997 14.21%
1998 -12.38%
1999 29.71%
Best Quarter Worst Quarter
25.80% (24.77)%
(12/31/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
20.95%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 2000 Index.

<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Fund 29.71% 9.26% 11.17%*
Russell 2000 Index 21.26% 16.70% 14.16%*
</TABLE>

* Since December 31, 1992

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.32%
Total Other Expenses 0.72%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.32%
Fee Waivers and Expense Reimbursements (0.27)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

11
<PAGE>

Value and Restructuring Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Investing in common
stocks of companies which the
Adviser believes are
undervalued by the market and
whose share price are expected
to benefit from the value
created through restructuring
or industry consolidation

Investor Profile Investors
seeking long-term capital
appreciation, and who are
willing to bear the risks of
investing in equity securities

Investment Objective
The Value and Restructuring Fund seeks long-term capital appreciation by in-
vesting in companies which will benefit from their restructuring or redeploy-
ment of assets and operations in order to become more competitive or profit-
able.

Investment Strategy of the Value and Restructuring Fund
The Value and Restructuring Fund invests primarily (at least 65% of its assets)
in common stocks of U.S. and, to a lesser extent, foreign companies whose share
price, in the opinion of the Adviser, does not reflect the economic value of
the company's assets, but where the Adviser believes restructuring efforts or
industry consolidation will serve to highlight the true value of the company.

In choosing investments for the Fund, the Adviser looks for companies where re-
structuring activities, such as consolidations, outsourcing, spin-offs or reor-
ganizations, will offer significant value to the issuer and increase its in-
vestment potential. The Adviser may select companies of any size for the Fund
and the Fund invests in a diversified group of companies across a number of
different industries.

Principal Risks of Investing in the Value and Restructuring Fund
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund also may be subject to risks particular to its investments in foreign
and medium capitalization companies. These risks are discussed in greater de-
tail in the section entitled "More Information About Risk."

The Fund is also subject to the risk that equity securities of issuers expected
to experience a restructuring or business combination may underperform other
segments of the equity market or the equity markets as a whole.

12
<PAGE>

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

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]

1993 39.95%
1994 2.60%
1995 38.80%
1996 25.05%
1997 33.56%
1998 10.32%
1999 41.97%
Best Quarter Worst Quarter
28.03% (20.46)%
(12/31/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
(0.65)%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 1000 Value Index.

<TABLE>
<CAPTION>
5 Since
1 Year Years Inception
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value and Restructuring Fund 41.97% 29.42% 26.61%*
Russell 1000 Value Index 7.34% 23.07% 18.44%*
</TABLE>

* Since December 31, 1992

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.36%
Total Other Expenses 0.76%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.36%
Fee Waivers and Expense Reimbursements (0.31)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

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 Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell
your shares at the end of the period.

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

13
<PAGE>

Value Equity Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Common stocks
of U.S. companies

Share Price Volatility High

Principal Investment
Strategy Investing in common
stocks that the Adviser
believes are undervalued by
the market

Investor Profile Investors
seeking growth of capital, and
who are willing to accept the
risks of investing in equity
securities

Investment Objective
The Value Equity Fund seeks long-term capital appreciation. This objective may
be changed without shareholder approval.

Investment Strategy of the Value Equity Fund
The Value Equity Fund invests primarily (at least 65% of its assets) in common
stocks of U.S. and, to a lesser extent, foreign companies that the Adviser be-
lieves are undervalued at current market prices. The Adviser generally diversi-
fies the Fund's investments over a variety of industries and the Fund may in-
vest in companies of any size, including small, high growth companies.

The Fund is also subject to the risk that its undervalued equity securities may
underperform other segments of the equity market or the equity markets as a
whole.

14
<PAGE>

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

This bar chart shows changes in the performance of the Fund's shares from year
to year.

[GRAPH]
1997 27.31%
1998 20.11%
1999 34.44%
Best Quarter Worst Quarter
26.76% (16.39)%
(12/31/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
(2.00)%.

This table compares the average annual total returns of the Fund's shares for
the periods ended December 31, 1999 to those of the Russell 1000 Value Index
and the Russell Mid Cap Value Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
--------------------------------------------------
<S> <C> <C>
Value Equity Fund (Shares) 34.44% 27.36%*
Russell 1000 Value Index** 7.34% 19.62%***
Russell Mid Cap Value Index ** (0.11)% 13.56%***
</TABLE>

* Since June 1, 1996
** The Russell 1000 Value Index measures the performance of the 1,000 largest
U.S. companies based on total market capitalization, with lower price-to-
book ratios and lower forecasted growth values. The Russell Mid Cap Value
Index measures the performance of medium-sized, value-oriented securities.
The Indexes are unmanaged and do not reflect any fees or expenses.
*** Since May 31, 1996

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 0.65%
Distribution (12b-1) Fees 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.30%
Total Other Expenses 0.70%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.60%
Fee Waivers and Expense Reimbursements (0.55)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------------------------------------
<S> <C> <C> <C> <C>
$107 $334 $579 $1,283
</TABLE>

15
<PAGE>

Energy and Natural Resources Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Long-term
capital appreciation

Investment Focus Equity
securities of U.S. and foreign
energy and natural resources
companies

Share Price Volatility High

Principal Investment
Strategy Investing in equity
securities of U.S. and foreign
issuers engaged in the energy
and natural resources groups
of industries

Investor Profile Investors
seeking long-term growth of
capital, and who are willing
to accept the risks of
investing in a non-diversified
portfolio of energy and
natural resources companies

Investment Objective
The Energy and Natural Resources Fund seeks long-term capital appreciation by
investing primarily in companies that are in the energy and other natural re-
sources groups of industries. The Fund may also invest, to a more limited ex-
tent, in gold and other precious metal bullion and coins.

Investment Strategy of the Energy and Natural Resources Fund
The Energy and Natural Resources Fund invests primarily (at least 65% of its
assets) in equity securities of U.S. and, to a lesser extent, foreign companies
engaged in the energy and natural resources industries. These companies include
those engaged in the discovery, development, production or distribution of en-
ergy or other natural resources and companies that develop technologies and
furnish energy and natural resource supplies and services to these companies.
In selecting investments for the Fund, the Adviser takes a long-term approach
and seeks to identify companies whose value is not recognized in the prices of
their securities or with characteristics that will lead to above-average earn-
ings growth.

Energy companies normally will constitute a significant portion of the Fund's
investments, and the Fund typically invests at least 50% of its assets in crude
oil, petroleum and natural gas companies. The Fund also may invest a portion of
its assets in precious metals, such as gold bullion, and companies engaged in
the production of precious metals. The Fund invests in companies of any size,
including small, high growth companies.

Principal Risks of Investing in the Energy and Natural Resources Fund
The Fund is subject to the risk that the securities of issuers engaged in the
energy and natural resources industries that the Fund purchases will
underperform other market sectors or the market as a whole. To the extent that
the Fund's investments are concentrated in issuers conducting business in the
same industry, the Fund is subject to legislative or regulatory changes, ad-
verse market conditions and/or increased competition affecting that industry.
The values of natural resources are affected by numerous factors including
events occurring in nature and international politics. For instance, events in
nature (such as earthquakes or fires in prime natural resources areas) and po-
litical events (such as coups or military confrontations) can affect the over-
all supply of a natural resource and thereby the value of companies involved in
such natural resource.

Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's securities
may fluctuate substantially from day to day. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund.

The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller

16
<PAGE>

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

capitalization companies. These risks are discussed in greater detail in the
section entitled "More Information About Risk."

The Fund is non-diversified, which means that it may invest in the securities
of relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political/regulatory occurrence affecting one or
more of these issuers, and may experience increased volatility due to its in-
vestments in those securities.

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]
1993 14.69%
1994 -2.70%
1995 20.11%
1996 38.38%
1997 18.31%
1998 -15.87%
1999 27.40%
Best Quarter Worst Quarter
20.04% (13.83)%
(9/30/97) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
25.49%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Standard & Poor's 500 Composite Stock
Price Index.

<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy and Natural Resources
Fund 27.40% 16.08% 13.00%*

Standard & Poor's 500
Composite Stock Price Index 21.04% 28.54% 21.52%*
</TABLE>

* Since December 31, 1992

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C>
Management Fees 0.60%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.37%
Total Other Expenses 0.77%
------------------------------------------------------
Total Annual Fund Operating
Expenses 1.37%
Fee Waivers and Expense Reimbursements (0.12)%
------------------------------------------------------
Net Annual Fund Operating
Expenses 1.25%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.25%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser" and "Distribution of
Fund Shares."

<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$127 $397 $686 $1,511
</TABLE>

17
<PAGE>

Real Estate Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Current income
and long-term capital
appreciation

Investment Focus Equity
securities of companies
engaged in the real estate
business

Share Price Volatility High

Principal Investment
Strategy Investing in equity
securities of real estate
investment trusts (REITs) and
other issuers engaged in the
real estate industry

Investor Profile Investors
seeking current income and
long-term growth of capital,
and who are willing to accept
the risks of investing in a
non-diversified portfolio of
real estate issuers
Investment Objective
The Real Estate Fund seeks current income and long-term capital appreciation by
investing in real estate investment trusts and other companies principally en-
gaged in the real estate business. This objective may be changed without share-
holder approval.

Investment Strategy of the Real Estate Fund
The Real Estate Fund invests primarily (at least 65% of its assets) in REITs
and other publicly-traded equity securities of U.S. and, to a lesser extent,
foreign companies engaged in the real estate industry. REITs pool investors'
funds for investment directly in real estate (equity REITs), real estate loans
(mortgage REITs), or a combination of the two (hybrid REITs). The Fund intends
to invest primarily in equity and hybrid REITs. REITs generally are income pro-
ducing investments. The Fund also invests in other issuers engaged in the real
estate business, such as developers, mortgage lenders and servicers, construc-
tion companies and building material suppliers.

The Adviser takes a long-term approach to managing the Fund and seeks to iden-
tify companies with characteristics that will lead to above-average earnings
growth. The Adviser analyzes demographic and macroeconomic factors to determine
regional allocations. Based on its regional allocations, the Adviser selects
particular investments based on its analysis of valuation relative to under-
lying real estate values.

Principal Risks of Investing in the Real Estate Fund
The Fund is subject to the risk that the securities of issuers in the real es-
tate industry that the Fund purchases will underperform other market sectors or
the market as a whole. To the extent that the Fund's investments are concen-
trated in issuers conducting business in the same industry, the Fund is subject
to legislative or regulatory changes, adverse market conditions and/or in-
creased competition affecting that industry.

The Fund's investments in the securities of REITs and companies principally en-
gaged in the real estate industry may subject the Fund to the risks associated
with the direct ownership of real estate. Risks commonly associated with the
direct ownership of real estate include fluctuations in the value of underlying
properties and defaults by borrowers or tenants. In addition to these risks,
REITs are dependent on specialized management skills and some REITs may have
investments in relatively few properties, or in a small geographic area or a
single type of property. These factors may increase the volatility of the
Fund's investments in REITs.

18
<PAGE>

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

The Fund also may be subject to risks particular to its investments in foreign
companies. These risks are discussed in greater detail in the section entitled
"More Information About Risk."

This bar chart shows changes in the Fund's performance from year to year.

[GRAPH]

1998 -13.55%
1999 -7.30%
Best Quarter Worst Quarter
10.79% (8.87)%
(6/30/99) (9/30/98)

The Fund's performance for the six month period ending June 30, 2000 was
12.91%.

This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Morgan Stanley REIT Index.

<TABLE>
<CAPTION>
Since
1 Year Inception
---------------------------------------------
<S> <C> <C>
Real Estate Fund (7.30)% (8.02)%*
Morgan Stanley REIT Index (4.55)% (9.39)%**
</TABLE>

* Since October 1, 1997
** Since September 30, 1997

Fund Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares.

Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.32%
Total Other Expenses 0.72%
------------------------------------------------------
Total Annual Fund Operating Expenses 1.72%
Fee Waivers and Expense Reimbursements (0.52)%
------------------------------------------------------
Net Annual Fund Operating Expenses 1.20%*
</TABLE>

* The Adviser has contractually agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.20%, for the period
commencing on the date of this prospectus and ending March 31, 2001. For more
information about these fees, see "Investment Adviser" and "Distribution of
Fund Shares."

<TABLE>
<CAPTION>
1 10
Year 3 Years 5 Years Years
--------------------------------
<S> <C> <C> <C> <C>
$122 $381 $660 $1,455
</TABLE>

19
<PAGE>

Technology Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal Superior long-
term growth of capital

Investment Focus Common stocks
of technology companies

Share Price Volatility High

Principal Investment
Strategy Invests in common
stocks of companies expected
to benefit from the
development, advancement and
use of technology

Investor Profile Investors
seeking long-term growth of
capital, and who are willing
to accept the risks of
investing in a non-diversified
portfolio of technology
companies
Investment Objective
The Technology Fund seeks superior, long-term growth of capital. This objective
may be changed without shareholder approval.

Investment Strategy of the Technology Fund
The Fund seeks to achieve its objective by investing in companies engaged in
the innovation, development or advancement of technology and whose long-term
growth prospects, in the Adviser's opinion, appear to exceed the overall mar-
ket. These companies may be in a variety of industries, and may include com-
puter hardware, software, electronic components and systems, telecommunica-
tions, internet, biotechnology, media and information services companies or
other companies that use technology extensively in the development of new or
improved products or processes. Under normal market conditions, the Technology
Fund invests at least 65% of its assets in the equity securities of U.S. and,
to a lesser extent, foreign technology companies. The Fund may invest in compa-
nies of any size, including small, high growth companies.

In selecting investments for the Fund, the Adviser takes a long-term approach
and seeks to identify technology companies whose value is not recognized in the
prices of their securities or with characteristics that will lead to above-av-
erage earnings growth.

The Fund seeks capital appreciation as its principal investment strategy.

Principal Risks of Investing in the Technology Fund
The Fund is subject to the risk that the securities of issuers engaged in the
technology sector of the economy that the Fund purchases will underperform
other market sectors or the market as a whole. To the extent that the Fund's
investments are concentrated in issuers conducting business in the same tech-
nology market sector, the Fund is subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that market
sector. Competitive pressures may significantly impact the financial condition
of technology companies. For example, an increasing number of companies and new
product offerings can lead to price cuts and slower selling cycles, and many of
these companies may be dependent on the success of a principal product, may
rely on sole source providers and third-party manufacturers, and may experience
difficulties in managing growth. In addition, securities of technology compa-
nies may experience dramatic price movements that have little or no basis in
fundamental economic conditions. As a result, the Fund's investment in technol-
ogy companies may subject it to more volatile price movements than a more di-
versified securities portfolio.

20
<PAGE>

-------------------------------------------------------------
negatively affected by industry and/or economic trends and developments. The
prices of securities issued by such companies may suffer a decline in response.
These factors contribute to price volatility, which is the principal risk of
investing in the Fund.

The Fund also may be subject to risks particular to its investments in foreign,
medium and smaller capitalization companies. These stocks may be more volatile
than other equity securities, and the risks associated with them are discussed
in greater detail in the section entitled "More Information About Risk."

Performance Information
There is no performance information for the Technology Fund because the Fund
does not have a full calendar year of operations.

Fund Fees and Expenses
Every mutual fund has operating expenses to pay for services such as profes-
sional advisory, shareholder, administration and custody services and other
costs of doing business. This table describes the fees and expenses that you
may pay if you buy and hold shares of the Fund.

Annual Fund Operating Expenses (expenses that are deducted from Fund assets)

<TABLE>
<S> <C> <C>
Management Fees 1.00%
Other Expenses
Administrative Servicing Fee 0.25%
Other Operating Expenses 0.25%
Total Other Expenses 0.50%
------------------------------------------------------
Total Annual Fund Operating
Expenses 1.50%
Fee Waivers and Expense Reimbursements (0.25)%
------------------------------------------------------
Net Annual Fund Operating
Expenses 1.25%*
</TABLE>

* The Fund's total annual fund operating expenses and net annual fund operating
expenses are estimated based on expenses expected to be incurred in the cur-
rent fiscal year. The Adviser has contractually agreed to waive its invest-
ment advisory fee or other fees until March 31, 2001, in an amount equal to
the administrative servicing fee paid by the Fund. Accordingly, Net Annual
Fund Operating Expenses are expected to be 1.25%. For more information about
these fees, see "Investment Adviser."

The Example also assumes that each year your investment has a 5% return, Fund
operating expenses remain the same and you reinvest all dividends and distribu-
tions. Although your actual costs and returns might be different, your approxi-
mate costs of investing $10,000 in the Fund would be:

<TABLE>
<CAPTION>
1 Year 3 Years
-------------------
<S> <C> <C>
$127 $397
</TABLE>

21
<PAGE>

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

More Information About Risk

Equity Risk
(All Funds)--Equity securities include public and privately issued equity secu-
rities, common and preferred stocks, warrants, rights to subscribe to common
stock and convertible securities, as well as instruments that attempt to track
the price movement of equity indices. Investments in these securities in gen-
eral are subject to market risks that may cause their prices to fluctuate over
time. The value of securities convertible into equity securities, such as war-
rants or convertible debt, is also affected by prevailing interest rates, the
credit quality of the issuer and any call provision.

Small Cap Risk
(Blended Equity Fund, Large Cap Growth Fund, Small Cap Fund, Value and Restruc-
turing Fund, Value Equity Fund, Energy and Natural Resources Fund and Technol-
ogy Fund)--The smaller capitalization companies in which the Funds may invest
may be more vulnerable to adverse business or economic events than larger, more
established companies. In particular, these small companies may have limited
product lines, markets and financial resources, and may depend upon a rela-
tively small management group. Therefore, small cap stocks may be more volatile
than those of larger companies.

Mid Cap Risk
(Blended Equity Fund, Optimum Growth Fund, Value and Restructuring Fund, Value
Equity Fund, Energy and Natural Resources Fund and Technology Fund)--The medium
capitalization companies that the Funds may invest in may be more vulnerable to
adverse business or economic events than larger companies. In particular, these
companies may have limited product lines, markets and financial resources, and
may depend on a relatively small management group. Therefore, medium capital-
ization stocks may be more volatile than those of larger companies.

Mortgage-Backed Securities
(Real Estate Fund)--Mortgage-backed securities are fixed income securities rep-
resenting an interest in a pool of underlying mortgage loans. They are sensi-
tive to changes in interest rates, but may respond to these changes differently
from other fixed income securities due to the possibility of prepayment of the
underlying mortgage loans. As a result, it may not be possible to determine in
advance the actual maturity date or average life of a mortgage-backed security.
Rising interest rates tend to discourage refinancings, with the result that the
average life and volatility of the security will increase, exacerbating its de-
crease in market price. When interest rates fall, however, mortgage-backed se-
curities may not gain as much in market value because of the expectation of ad-
ditional mortgage prepayments that must be reinvested at lower interest rates.
Prepayment risk may make it difficult to calculate the average maturity of a
portfolio of mortgage- backed securities and, therefore, to assess the volatil-
ity risk of that portfolio.

Technology Risk
(Blended Equity Fund, Large Cap Growth Fund, Optimum Growth Fund, Small Cap
Fund, Value and Restructuring Fund, Value Equity Fund and Technology Fund)--The
Funds may invest in securities of issuers engaged in the technology sector of
the economy. These securities may underperform stocks of other issuers or the
market as a whole. To the extent that the Funds invest in issuers conducting
business in the technology market sector, the Funds are subject to legislative
or regulatory changes, adverse market conditions and/or increased competition
affecting the market sector. Competitive pressures may significantly impact the
financial condition of technology companies. For example, an increasing number
of companies and new product offerings can lead to price cuts and slower sell-
ing cycles, and many of these companies may be dependent on the success of a
principal product, may rely on sole source providers and third-party manufac-
turers, and may experience difficulties in managing growth. In addition, secu-
rities of technology companies may experience dramatic price movements that
have little or no basis in fundamental economic conditions. As a result, a
Fund's investment in technology companies may subject it to more volatile price
movements.

22
<PAGE>

-------------------------------------------------------------
arrangements of similar U.S. securities. Some foreign governments levy with-
holding taxes against dividend and interest income. Although in some countries
a portion of these taxes is recoverable, the non-recovered portion will reduce
the income received from the securities comprising the portfolio.

Currency Risk
(All Funds)--Investments in foreign securities denominated in foreign curren-
cies involve additional risks, including:

. A Fund may incur substantial costs in connection with conversions between
various currencies.

. Only a limited market currently exists for hedging transactions relating to
currencies in certain emerging markets.

The Adviser makes investment decisions for the Funds and continuously reviews,
supervises and administers each Fund's investment program.

23
<PAGE>

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

The Board of Directors of Excelsior Funds, Inc. and the Board of Trustees of
Excelsior Institutional Trust supervise the Adviser and establish policies that
the Adviser must follow in its management activities.

For the fiscal year ended March 31, 2000, U.S. Trust received advisory fees, as
a percentage of average daily net assets, of:

<TABLE>
<S> <C>
Blended Equity Fund 0.70%
Large Cap Growth Fund 0.69%
Optimum Growth Fund 0.52%
Small Cap Fund 0.48%
Value and Restructuring Fund 0.50%
Value Equity Fund 0.50%
Energy and Natural Resources Fund 0.51%
Real Estate Fund 0.79%
Technology Fund 1.00%*
</TABLE>
-----
* The Technology Fund commenced operations on March 31, 2000. The fees given
are the contractual rate of advisory fees.

Portfolio Managers
Leigh H. Weiss and Bruce Tavel have served as the Blended Equity Fund's portfo-
lio co-managers since 1997. Mr. Weiss, a Managing Director and Senior Portfolio
Manager, has been with U.S. Trust since 1993. Prior to joining U.S. Trust, Mr.
Weiss was a portfolio manager with Goldman, Sachs & Co. Mr. Tavel, a Managing
Director and head of U.S. Trust's Structured Investments Division, has been
with U.S. Trust since 1980. Mr. Weiss and Mr. Tavel are primarily responsible
for the day to day management of the Blended Equity Fund's portfolio. Research,
analyses, trade execution and other facilities provided by U.S. Trust and other
personnel also play a significant role in portfolio management and performance.

Timothy Pettee, Margaret Doyle and Todd Herget serve as the Small Cap Fund's
portfolio co-managers. Mr. Pettee, a Managing Director and Director of Equity
Research, has been with U.S. Trust since 1998. Prior to joining U.S. Trust, Mr.
Pettee was a Vice President and fund manager with Alliance Capital Management
in New York. Ms. Doyle, a Senior Vice President in U.S. Trust's equity research
division, has been with U.S. Trust since 1998. From 1996 to 1998, Ms. Doyle was
a Vice President and Investment Officer with J&W Seligman & Co. in New York.
From 1994 to 1996, Ms. Doyle was an Equity Research Analyst with Salomon Broth-
ers, Inc. in New York. Todd Herget, a Vice President in U.S. Trust's equity re-
search division has been with U.S. Trust since 1998. Mr. Herget is responsible
for the Fund's investments in the healthcare sector. Mr. Herget was previously
a cardiac research assistant with the Westchester County Medical Center. Mr.
Pettee, Ms. Doyle and Mr. Herget are primarily responsible for the day to day
management of the Small Cap Fund's portfolio. Research, analyses, trade execu-
tion and other facilities provided by U.S. Trust and other personnel also play
a significant role in portfolio management and performance.

All investment decisions for the Large Cap Growth Fund, Optimum Growth Fund,
Value Equity and the Technology Fund are made by a committee of investment pro-
fessionals and no persons are primarily responsible for making recommendations
to that committee. United States Trust Company of New York provides its invest-
ment advisory services to the Large Cap Growth Fund, Optimum Growth Fund, and
the Technology Fund primarily through its Campbell Cowperthwait division.

Michael E. Hoover has served as the Energy and Natural Resources Fund's portfo-
lio manager since 1995. Mr. Hoover, Senior Vice President and Senior Analyst,
has been with U.S. Trust since 1989. Mr. Hoover is primarily responsible for
the day to day management of the Energy and Natural Resources Fund's portfolio.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.

Joan Ellis has served as the Real Estate Fund's portfolio manager or co-manager
since its inception. Ms. Ellis, Senior Vice President in the Investment Re-
search Division, has been with U.S. Trust since 1984. Ms. Ellis is primarily
responsible for the day to day management of the Real Estate Fund's portfolio.
Research, analyses, trade execution and other facilities provided by U.S. Trust
and other personnel also play a significant role in portfolio management and
performance.

Purchasing, Selling and Exchanging Fund Shares
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Funds.

How to Purchase Fund Shares
You may purchase shares directly by:
. Mail
. Telephone
. Wire, or
. Automatic Investment Program

24
<PAGE>

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

To purchase shares directly from us, please call (800) 446-1012 (from overseas,
call (617) 557-8280), or complete and send in the enclosed application to Ex-
celsior Funds, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston,
MA 02208-2798. Unless you arrange to pay by wire or through the automatic in-
vestment program, write your check, payable in U.S. dollars, to "Excelsior
Funds" and include the name of the appropriate Fund(s) on the check. A Fund
cannot accept third-party checks, credit cards, credit card checks or cash. To
purchase shares by wire, please call us for instructions. Federal funds and
registration instructions should be wired through the Federal Reserve System
to:

The Chase Manhattan Bank
ABA #021000021
Excelsior Funds, Account Number 9102732915

For Further Credit To:
Excelsior Funds
Wire Control Number
Excelsior Funds Account Registration (including account number)

You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its proce-
dures, which may be different from the procedures for investing directly. Your
broker or institution may charge a fee for its services, in addition to the
fees charged by the Fund. You will also generally have to address your corre-
spondence or questions regarding a Fund to your institution.

How We Calculate NAV
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund.

In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or the Adviser thinks that they are un-
reliable, fair value prices may be determined in good faith using methods ap-
proved by the Board of Directors and the Board of Trustees, as the case may be.
Fixed income investments with remaining maturities of 60 days or less generally
are valued at their amortized cost which approximates their market value.

Some Funds may hold securities that are listed on foreign exchanges. These se-
curities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of a Fund's investments may change on days
when you cannot purchase or sell Fund shares.

Minimum Purchases
To purchase shares for the first time, you must invest at least $500 ($250 for
IRAs) in any Fund.

Your subsequent investments must be made in amounts of at least $50.

A Fund may accept investments of smaller amounts at its discretion.

25
<PAGE>

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

Automatic Investment Program
If you have a checking, money market or NOW account with a bank, you may pur-
chase shares automatically through regular deductions from your account in
amounts of at least $50 per transaction.

With a $50 minimum initial investment, you may begin regularly scheduled in-
vestments once per month, on either the first or fifteenth day, or twice per
month, on both days.

How to Sell Your Fund Shares
You may sell shares directly by:
. Mail
. Telephone, or
. Systematic Withdrawal Plan

Holders of Fund shares may sell (sometimes called "redeem") shares by following
the procedures established when they opened their account or accounts. If you
have questions, call (800) 446-1012 (from overseas, call (617) 557-8280).

You may sell your shares by sending a written request for redemption to:

Excelsior Funds
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798

Please be sure to indicate the number of shares to be sold, identify your ac-
count number and sign the request.

If you own your shares directly and previously indicated on your account appli-
cation or arranged in writing to do so, you may sell your shares on any Busi-
ness Day by contacting a Fund directly by telephone at (800) 446-1012 (from
overseas, call (617) 557-8280). The minimum amount for telephone redemptions is
$500. Shares will not be redeemed by the Fund unless all required documents
have been received by the Fund.

If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or institu-
tion may charge a fee for its services, in addition to the fees charged by the
Fund.

The sale price of each share will be the next NAV determined after the Fund re-
ceives your request in good order.

Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may use the systematic with-
drawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or
annual automatic withdrawals from any Fund. The proceeds of each withdrawal
will be mailed to you by check or, if you have a checking or savings account
with a bank, electronically transferred to your account.

Receiving Your Money
Normally, we will send your sale proceeds within five Business Days after we
receive your request in good order. Your proceeds can be wired to your bank ac-
count (if more than $500) or sent to you by check. If you recently purchased
your shares by check, redemption proceeds may not be available until your check
has cleared (which may take up to 15 days from your date of purchase).

26
<PAGE>

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

How to Exchange Your Shares
You may exchange your shares on any Business Day for shares of any portfolio of
Excelsior Funds, Inc. or Excelsior Tax-Exempt Funds, Inc., or for Shares of
certain portfolios of Excelsior Institutional Trust. In order to protect other
shareholders, we may limit your exchanges to no more than six per year. We may
also reject any exchange request if we determine that such exchange is not in
the best interests of a Fund or its shareholders. Shares can be exchanged di-
rectly by mail, or by telephone if you previously selected the telephone ex-
change option on the account application.

You may also exchange shares through your financial institution. Exchange re-
quests must be for an amount of at least $500.

If you recently purchased shares by check you may not be able to exchange your
shares until your check has cleared (which may take up to 15 days from your
date of purchase). This exchange privilege may be changed or canceled at any
time upon 60 days' notice.

Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund
shares. These intermediaries may authorize other organizations to accept pur-
chase, redemption and exchange requests for Fund shares. These requests are
normally executed at the NAV next determined after the intermediary receives
the request in good order. Authorized intermediaries are responsible for trans-
mitting requests and delivering funds on a timely basis.

Shareholder Servicing
The Funds are permitted to pay an administrative servicing fee to certain
shareholder organizations for providing services to their customers who hold
shares of the Funds. These services may include assisting in the processing of
purchase, redemption and exchange requests and providing periodic account
statements. The shareholder servicing fee may be up to 0.40% (0.25% in the case
of the Technology Fund) of the average daily net asset value of Fund shares
held by clients of a shareholder organization.

Distribution of Fund Shares
The Optimum Growth and Value Equity Funds have adopted a distribution plan that
allows shares of the Funds to pay distribution fees for the sale and distribu-
tion of their shares in an amount not to exceed the annual rate of 0.25% of the
average daily net asset value of each Fund's outstanding shares. Because these
fees are paid out of a Fund's assets continuously, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.

Dividends and Distributions
Each Fund distributes dividends from its income quarterly.

Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive
the distribution.

Dividends and distributions for shares held of record by U.S. Trust and its af-
filiates or correspondent banks will be paid in cash. Otherwise, dividends and
distributions will be paid in the form of additional Fund shares unless you
elect to receive payment in cash. To elect cash payment, you must notify the
Fund in writing prior to the date of the distribution. Your election will be
effective for dividends and distributions paid after the Fund receives your
written notice. To cancel your election, simply send the Fund written notice.

27
<PAGE>

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

Taxes
Each Fund will distribute substantially all of its taxable income including its
net capital gain (the excess of long-term capital gain over short-term capital
loss), if any. Distributions you receive from a Fund will generally be taxable
regardless of whether they are paid in cash or reinvested in additional shares.
Distributions attributable to the net capital gain of a Fund will be taxable to
you as long-term capital gain, regardless of how long you have held your
shares. Other Fund distributions will generally be taxable as ordinary income.

Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.

The one major exception to these tax principles is that distributions on, and
sales, exchanges and redemptions of, shares held in an IRA (or other tax-quali-
fied plan) will generally not be currently taxable.

More information about taxes is in the Statement of Additional Information.

28
<PAGE>

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

Financial Highlights
The tables that follow present performance information about shares of each
Fund. This information is intended to help you understand: each Fund's finan-
cial performance for the past five years, or, if shorter, the period of the
Fund's operations. Some of this information reflects financial information for
a single Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in a Fund, assuming you reinvested
all of your dividends and distributions. This information has been audited by
Ernst & Young LLP, independent auditors. Their report, along with each Fund's
financial statements, are incorporated by reference into our Statement of Addi-
tional Information. You can obtain the annual report, which contains more per-
formance information, at no charge by calling (800) 446-1012 (from overseas,
call (617) 557-8280).

BLENDED EQUITY FUND

<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 42.51 $ 36.12 $ 25.81 $ 24.43 $ 21.40
------- ------- ------- ------- -------
Income From Investment Operations
Net Investment Income............ 0.03 0.11 0.16 0.18 0.12
Net Gains on Securities (both
realized and unrealized)........ 9.54 6.90 12.59 2.50 5.21
------- ------- ------- ------- -------
Total From Investment
Operations...................... 9.57 7.01 12.75 2.68 5.33
------- ------- ------- ------- -------
Less Distributions
Dividends From Net Investment
Income.......................... (0.06) (0.13) (0.16) (0.14) (0.11)
Distributions From Net Realized
Gain on Investments and
Options......................... (1.34) (0.49) (2.28) (1.16) (2.19)
------- ------- ------- ------- -------
Total Distributions.............. (1.45) (0.62) (2.44) (1.30) (2.30)
------- ------- ------- ------- -------
Net Asset Value, End of Year...... $ 50.63 $ 42.51 $ 36.12 $ 25.81 $ 24.43
======= ======= ======= ======= =======
Total Return...................... 22.90% 19.65% 50.82% 11.09% 26.45%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)....................... $993.41 $720.27 $594.91 $306.99 $188.57
Ratio of Net Operating Expenses
to Average Net Assets........... 0.97% 0.95% 0.99% 1.01% 1.05%
Ratio of Gross Operating Expenses
to Average Net Assets/1/ ....... 1.02% 1.01% 1.06% 1.06% 1.12%
Ratio of Net Investment Income to
Average Net Assets.............. 0.08% 0.29% 0.55% 0.71% 0.55%
Portfolio Turnover Rate.......... 24.0% 20.0% 28.0% 39.0% 27.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

29
<PAGE>

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

LARGE CAP GROWTH FUND

<TABLE>
<CAPTION>
Year Ended
March 31,
---------------- Period Ended
2000 1999 March 31, 1998/1/
------- ------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 14.30 $ 8.51 $ 7.00
------- ------- -------
Income From Investment Operations
Net Investment Income (Loss).............. (0.06) (0.03) 0.00/2/
Net Gains or (Losses) on Securities (both
realized and unrealized)................. 4.74 5.82 1.51
------- ------- -------
Total From Investment Operations........... 4.68 5.79 1.51
------- ------- -------
Net Asset Value, End of Period............. $ 18.98 $ 14.30 $ 8.51
======= ======= =======
Total Return............................... 32.73% 68.04% 21.57%/3/
Ratios/Supplemental Data
Net Assets, End of Period (in millions)... $498.31 $251.55 $ 47.53
Ratio of Net Operating Expenses to Average
Net Assets............................... 1.01% 1.04% 1.05%/4/
Ratio of Gross Operating Expenses to
Average Net Assets/5/.................... 1.07% 1.08% 1.20%/4/
Ratio of Net Investment Income/(Loss) to
Average Net Assets....................... (0.48)% (0.53)% (0.16)%/4/
Portfolio Turnover Rate................... 20% 4% 12%/4/
</TABLE>
------
Notes:
1. Inception date of the Fund was October 1, 1997.
2. Amount represents less than $0.01 per share.
3. Not annualized.
4. Annualized.
5. Expense ratio before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

30
<PAGE>

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

OPTIMUM GROWTH FUND

<TABLE>
<CAPTION>
Year Ended March 31,
------------------------- Period Ended
2000 1999 1998 March 31, 1997/1/
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $ 27.40 $ 16.31 $ 10.18 $ 9.87
------- ------- ------- ------
Income From Investment Operations:
Net Investment Income............ (0.11) (0.06) (0.01) 0.02
Net Gains or (losses) on
Securities (both realized and
unrealized)..................... 7.16 11.15 6.15 0.31/2/
------- ------- ------- ------
Total From Investment Operations.. 7.05 11.09 6.14 0.33
------- ------- ------- ------
Less Distributions:
Dividends From Net Investment
Income.......................... 0.00 0.00 (0.01) (0.02)
Distributions From Net Realized
Gains on Investments and
Options......................... $ (3.88) 0.00 0.00 0.00
------- ------- ------- ------
Total Distributions............... (3.88) 0.00 (0.01) (0.02)
------- ------- ------- ------
Net Asset Value, End of Period.... $ 30.57 $ 27.40 $ 16.31 $10.18
======= ======= ======= ======
Total Return...................... 27.40% 68.00% 60.41% 3.31%/3/
Ratios/Supplemental Data
Net Assets at end of Period (in
millions)....................... $ 21.97 $ 12.41 $ 6.60 $ 3.36
Ratio of Net Operating Expenses
to Average Net Assets........... 1.05% 1.05% 1.05% 1.05%/5/
Ratio of Gross Operating Expenses
to Average Net Assets/4/........ 1.18% 1.26% 1.32% 1.47%/5/
Ratio of Net Investment Income
(Loss) to Average Net Assets.... (0.43)% (0.34)% (0.12)% 0.33%/5/
Portfolio Turnover............... 44% 22% 19% 20%/5/
</TABLE>
------
Notes:
1. Inception date of the Fund was July 3, 1996.
2. This amount does not accord with the aggregate net losses on investments
because of the timing of sales and repurchases of the shares in relation to
fluctuating market value of the investments in the Fund.
3. Not annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.
5. Annualized.

31
<PAGE>

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

SMALL CAP FUND

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 9.27 $ 11.95 $ 8.83 $ 10.78 $ 9.77
------- -------- ------- -------- -------
Income From Investment Operations
Net Investment Income (Loss).... 0.00 0.00 (0.01) (0.03) (0.02)
Net Gains or (Losses) on
Securities (both realized
and unrealized)................ 6.12 (2.56) 3.13 (1.43) 1.72
------- -------- ------- -------- -------
Total From Investment
Operations...................... 6.12 (2.56) 3.12 (1.46) 1.70
------- -------- ------- -------- -------
Less Distributions
Distributions From Net Realized
Gain on Investments
and Options.................... 0.00 (0.12) 0.00 (0.10) (0.69)
Distributions in Excess of Net
Realized Gain on Investments
and Options.................... 0.00 0.00 0.00 (0.39) 0.00
------- -------- ------- -------- -------
Total Distributions.............. 0.00 (0.12) 0.00 (0.49) (0.69)
------- -------- ------- -------- -------
Net Asset Value, End of Period... $ 15.39 $ 9.27 $ 11.95 $ 8.83 $ 10.78
======= ======== ======= ======== =======
Total Return..................... 65.91% (21.41)% 35.33% (14.33)% 18.29%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $107.94 $ 43.79 $ 68.55 $ 53.26 $ 78.06
Ratio of Net Operating Expenses
to Average Net Assets.......... 0.92% 0.94% 0.94% 0.94% 0.90%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/...................... 1.03% 1.05% 1.01% 1.02% 0.98%
Ratio of Net Investment
Income/(Loss) to Average
Net Assets..................... 0.01% (0.04)% (0.14)% (0.26)% (0.17)%
Portfolio Turnover Rate......... 134.0% 115.0% 73.0% 55.0% 38.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

32
<PAGE>

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

VALUE EQUITY FUND

<TABLE>
<CAPTION>
Year Ended March 31,
---------------------- Period Ended
2000 1999 1998 March 31, 1997/1/
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $15.35 $16.11 $11.33 $ 12.08
------ ------ ------ -------
Income From Investment Operations:
Net Investment Income............... 0.01 0.08 0.07 0.01
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 6.35 0.55 5.57 (0.76)
------ ------ ------ -------
Total From Investment Operations..... 6.36 0.63 5.64 (0.75)
------ ------ ------ -------
Less Distributions:
Dividends From Net Investment
Income............................. (0.05) (0.07) (0.06) 0.00
Distributions From Net Realized
Gains on Investments and Options... (0.32) (1.32) (0.80) 0.00
------ ------ ------ -------
Total Distributions.................. (0.37) (1.39) (0.86) 0.00
------ ------ ------ -------
Net Asset Value, End of Period....... $21.34 $15.35 $16.11 $ 11.33
====== ====== ====== =======
Total Return......................... 41.60% 4.59% 51.09% (6.21)%/2/
Ratios/Supplemental Data
Net Assets at end of Period (in
millions).......................... $ 336 $ 125 $ 78 $ 56
Ratio of Net Operating Expenses to
Average Net Assets................. 1.05% 1.05% 1.05% 1.05%/3/
Ratio of Gross Operating Expenses to
Average Net Assets/4/.............. 1.20% 1.32% 1.35% 1.43%/3/
Ratio of Net Investment Income
(Loss) to Average Net Assets....... 0.02% 0.53% 0.47% 0.54%/3/
Portfolio Turnover.................. 45% 55% 51% 64%/3/
</TABLE>
------
Notes:
1. Inception date of the Fund was January 15, 1997.
2. Not annualized.
3. Annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

33
<PAGE>

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

VALUE AND RESTRUCTURING FUND

<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 23.88 $ 23.79 $ 15.93 $ 14.03 $10.55
--------- ------- ------- ------- ------
Income From Investment Operations
Net Investment Income........... 0.07 0.13 0.10 0.13 0.10
Net Gains on Securities (both
realized and unrealized)....... 10.03 0.21 8.12 2.36 3.71
--------- ------- ------- ------- ------
Total From Investment
Operations...................... 10.10 0.34 8.22 2.49 3.81
--------- ------- ------- ------- ------
Less Distributions
Dividends From Net Investment
Income......................... (0.09) (0.11) (0.09) (0.12) (0.09)
Distributions From Net Realized
Gain on Investments and
Options........................ 0.00 (0.14) (0.27) (0.47) (0.24)
--------- ------- ------- ------- ------
Total Distributions.............. (0.09) (0.25) (0.36) (0.59) (0.33)
--------- ------- ------- ------- ------
Net Asset Value, End of Period... $ 33.89 $ 23.88 $ 23.79 $ 15.93 $14.03
========= ======= ======= ======= ======
Total Return..................... 42.41% 1.48% 52.10% 18.09% 36.48%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions)...................... $1,207.24 $594.62 $388.45 $124.01 $74.05
Ratio of Net Operating Expenses
to Average Net Assets.......... 0.90% 0.93% 0.89% 0.91% 0.91%
Ratio of Gross Operating
Expenses to Average Net
Assets/1/...................... 1.03% 1.07% 0.93% 0.95% 0.95%
Ratio of Net Investment Income
to Average Net Assets.......... 0.25% 0.59% 0.54% 0.90% 0.88%
Portfolio Turnover Rate......... 20.0% 43.0% 30.0% 62.0% 56.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

34
<PAGE>

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

ENERGY AND NATURAL RESOURCES FUND

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
2000 1999 1998 1997 1996
------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $11.02 $ 12.66 $11.12 $ 9.55 $ 7.92
Income From Investment Operations
Net Investment Income............... 0.04 0.10 0.09 0.09 0.07
Net Gains or (Losses) on Securities
(both realized and unrealized)..... 4.72 (1.65) 2.69 2.60 1.63
------ -------- ------ ------ ------
Total From Investment Operations..... 4.76 (1.55) 2.78 2.69 1.70
------ -------- ------ ------ ------
Less Distributions
Dividends From Net Investment
Income............................. (0.06) (0.09) (0.10) (0.09) (0.07)
Distributions From Net Realized Gain
on Investments and Options......... (0.51) 0.00 (1.07) (1.03) 0.00
Distributions in Excess of Net
Realized Gain on Investments and
Options............................ 0.00 0.00 (0.07) 0.00 0.00
------ -------- ------ ------ ------
Total Distributions.................. (0.57) (0.09) (1.24) (1.12) (0.07)
Net Asset Value, End of Period....... $15.21 $ 11.02 $12.66 $11.12 $ 9.55
====== ======== ====== ====== ======
Total Return......................... 44.61% (12.23)% 24.97% 28.28% 21.60%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions).......................... $71.13 $ 43.02 $46.17 $33.39 $23.29
Ratio of Net Operating Expenses to
Average Net Assets................. 0.97% 0.98% 0.99% 0.93% 0.96%
Ratio of Gross Operating Expenses to
Average Net Assets/1/.............. 1.08% 1.09% 1.07% 0.98% 1.09%
Ratio of Net Investment Income to
Average Net Assets................. 0.37% 0.97% 0.69% 0.84% 0.88%
Portfolio Turnover Rate............. 138.0% 96.0% 88.0% 87.0% 43.0%
</TABLE>
------
Notes:
1. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

35
<PAGE>

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

REAL ESTATE FUND

<TABLE>
<CAPTION>
Year Ended
March 31, Period ended
---------------- March 31,
2000 1999 1998/1/
------ -------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 5.50 $ 7.05 $ 7.00
------ -------- ------
Income From Investment Operations
Net Investment Income.......................... 0.34 0.33 0.15
Net Gains or (Losses) on Securities (both
realized and unrealized)...................... (0.31) (1.55) 0.01
------ -------- ------
Total From Investment Operations................ 0.03 (1.22) 0.16
------ -------- ------
Less Distributions
Dividends From Net Investment Income........... (0.32) (0.33) (0.11)
Total Distributions............................. (0.32) (0.33) (0.11)
------ -------- ------
Net Asset Value, End of Period.................. $ 5.21 $ 5.50 $ 7.05
====== ======== ======
Total Return.................................... 0.58% (17.55)% 2.26%/2/
Ratios/Supplemental Data
Net Assets, End of Period (in millions)........ $33.70 $ 32.84 $41.17
Ratio of Net Operating Expenses to Average Net
Assets........................................ 1.20% 1.20% 1.20%/3/
Ratio of Gross Operating Expenses to Average
Net Assets/4/................................. 1.41% 1.43% 1.40%/3/
Ratio of Net Investment Income to Average Net
Assets........................................ 6.17% 5.37% 5.02%/3/
Portfolio Turnover Rate........................ 27.0% 28.0% 30.0%/3/
</TABLE>
------
Notes:
1. Inception date of the Fund was October 1, 1997.
2. Not annualized.
3. Annualized.
4. Expense ratios before waiver of fees and reimbursement of expenses (if any)
by investment adviser and administrators.

36
<PAGE>

Excelsior Funds, Inc.
Excelsior Institutional Trust

Investment Adviser
United States Trust Company of New York
114 W. 47th Street
New York, New York 10036

U.S. Trust Company
225 High Ridge Road
East Building
Stamford, Connecticut 06905

Distributor
Edgewood Services, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-5829

More information about each Fund is available without charge through the fol-
lowing:

Statement of Additional Information (SAI)
The SAIs dated August 1, 2000 include detailed information about Excelsior
Funds, Inc. and Excelsior Institutional Trust. The SAIs are on file with the
SEC and are incorporated by reference into this prospectus. This means that the
SAIs, for legal purposes, are a part of this prospectus.

To Obtain an SAI, Annual or Semi-Annual Report, or More Information:
By Telephone: Call (800) 446-1012 (from overseas, call (617) 557-8280)

By Mail: Excelsior Funds, Inc., 73 Tremont Street, Boston, Massachusetts 02108-
3913

By Internet: http://www.excelsiorfunds.com

From the SEC: You can also obtain the SAIs or the Annual and Semi-Annual re-
ports, as well as other information about Excelsior Funds, Inc. and Excelsior
Institutional Trust, from the EDGAR Database on the SEC's website
("http://www.sec.gov"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information on the operation of the Pub-
lic Reference Room, call 202-942-8090). You may request documents by mail from
the SEC, upon payment of a duplicating fee, by writing to: Securities and Ex-
change Commission, Public Reference Section, Washington, DC 20549-0102. You may
also obtain this information, upon payment of a duplicating fee, by e-mailing
the SEC at the following address: [email protected]. Excelsior Funds, Inc.'s
and Excelsior Institutional Trust's Investment Company Act registration numbers
are 811-4088 and 811-8490, respectively.
<PAGE>

EXCELSIOR INSTITUTIONAL TRUST

Equity Fund
Value Equity Fund
Optimum Growth Fund
International Equity Fund
Income Fund
Total Return Bond Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 2000

This Statement of Additional Information pertains to the Shares
("Retail Shares") and Institutional Shares (together with Retail Shares,
"Shares") of the Value Equity and Optimum Growth Funds, and the Institutional
Shares of the Equity, Income, Total Return Bond and International Equity Funds
(each, a "Fund" and collectively, the "Funds") of Excelsior Institutional Trust.
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current prospectuses for the Funds dated August 1, 2000
(the "Prospectuses"). Copies of the Prospectuses may be obtained by writing
Excelsior Institutional Trust c/o Chase Global Funds Services Company, 73
Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012 (Retail
Shares) or (800) 881-9358 (Institutional Shares). Capitalized terms not
otherwise defined have the same meaning as in the Prospectuses.

The audited financial statements and related reports of Ernst & Young
LLP, independent auditors, contained in the annual reports to the Funds'
shareholders for the fiscal year ended March 31, 2000 are incorporated herein by
reference in the section entitled "Financial Statements." No other parts of the
annual reports are incorporated herein by reference. Copies of the annual
reports may be obtained upon request and without charge by calling (800)
446-1012 (Retail Shares) or (800) 881-9358 (Institutional Shares).
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
CLASSIFICATION AND HISTORY......................................................................... 1

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS........................................................ 1
Investment Philosophy and Strategies...................................................... 1
Additional Investment Policies............................................................ 1
Additional Information on Portfolio Instruments........................................... 4
Investment Limitations.................................................................... 27

PORTFOLIO TRANSACTIONS............................................................................. 30

PERFORMANCE INFORMATION............................................................................ 33

PORTFOLIO VALUATION AND DETERMINATION OF NET ASSET VALUE........................................... 38

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................... 40
Distributor............................................................................... 40
Purchase of Shares........................................................................ 40
Redemption Procedures..................................................................... 41
Other Redemption Information.............................................................. 42

INVESTOR PROGRAMS.................................................................................. 43
Systematic Withdrawal Plan................................................................ 43
Exchange Privilege........................................................................ 44
Retirement Plans.......................................................................... 44
Additional Information.................................................................... 45

RULE 12B-1 DISTRIBUTION PLAN....................................................................... 45

MANAGEMENT OF THE FUNDS............................................................................ 46
Trustees and Officers..................................................................... 46
Investment Advisory Services.............................................................. 53
Administrators............................................................................ 55
Shareholder Organizations................................................................. 57
Expenses.................................................................................. 58
Transfer Agent and Custodian.............................................................. 58

INDEPENDENT AUDITORS............................................................................... 59

COUNSEL............................................................................................ 59

TAXATION........................................................................................... 60

DESCRIPTION OF THE TRUST........................................................................... 62
</TABLE>

-i-
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
<S> <C>
CODE OF ETHICS..................................................................................... 64

MISCELLANEOUS..................................................................................... 64

FINANCIAL STATEMENTS.............................................................................. 65

APPENDIX A........................................................................................ A-1
</TABLE>

-ii-
<PAGE>

CLASSIFICATION AND HISTORY
--------------------------

Excelsior Institutional Trust (the "Trust") is an open-end,
management investment company. Each Fund is a separate series of the Trust and
is classified as diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust was organized as a business trust under the
laws of the State of Delaware on April 27, 1994. Prior to March 15, 1999, the
Equity Fund, Value Equity Fund, Optimum Growth Fund, Income Fund, Total Return
Bond Fund and International Equity Fund were known as the Institutional Equity
Fund, Institutional Value Equity Fund, Institutional Optimum Growth Fund,
Institutional Income Fund, Institutional Total Return Bond Fund and
Institutional International Equity Fund, respectively.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectuses. The investment objective of each Fund may be changed without
shareholder approval. Except as expressly noted below, each Fund's investment
policies also may be changed without shareholder approval.

Investment Philosophy and Strategies
------------------------------------

In managing investments for the Funds, the Adviser follows a
long-term investment philosophy which generally does not change with the short-
term variability of financial markets or fundamental conditions. Its approach
begins with the conviction that all worthwhile investments are grounded in
value. The Adviser believes that an investor can identify fundamental values
that eventually should be reflected in market prices, such that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.

The Adviser's investment philosophy is to identify investment
values available in the market at attractive prices. Investment value arises
from the ability to generate earnings or from the ownership of assets or
resources. Underlying earnings potential and asset values are frequently
demonstrable but not recognized in the market prices of the securities
representing their ownership.

Additional Investment Policies
------------------------------

Equity, Value Equity and Optimum Growth Funds
---------------------------------------------

Under normal market and economic conditions, the Equity, Value
Equity and Optimum Growth Funds will invest at least 65% of their respective
total assets in common stock, preferred stock and securities convertible into
common stock. Normally, not more than 35% of each Fund's total assets may be
invested in other securities and instruments including, e.g., investment-grade
debt securities, warrants, options, and futures instruments as described in more

1
<PAGE>

detail below. The Funds may hold cash or invest without limitation in U.S.
government securities, high quality money market instruments and repurchase
agreements collateralized by the foregoing obligations, if deemed appropriate by
the Adviser for temporary defensive purposes.

Portfolio holdings will include equity securities of companies
having capitalizations of varying amounts, and the Funds may invest in the
securities of high growth, small companies when the Adviser expects earnings and
the price of the securities to grow at an above-average rate. The equity
securities of small companies have historically been characterized by greater
volatility of returns, greater total returns and lower dividend yields than
equity securities of large companies. As a result, there may be a greater
fluctuation in the value of a Fund's shares, and a Fund may be required, in
order to satisfy redemption requests or for other reasons, to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a period of time.

The Equity, Value Equity and Optimum Growth Funds may invest
directly or indirectly in the securities of foreign issuers. The Funds currently
do not expect to invest more than 30% of their respective total assets at the
time of purchase in such securities.

Income and Total Return Bond Funds
----------------------------------

The Income and Total Return Bond Funds may invest in the
following types of securities: corporate debt obligations such as bonds,
debentures, obligations convertible into common stocks and money market
instruments; preferred stocks; and obligations issued or guaranteed by the U.S.
government and its agencies or instrumentalities. The Funds are also permitted
to enter into repurchase agreements, and may from time to time invest in debt
obligations issued by or on behalf of states, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest of which
is, in the opinion of bond counsel to the issuer, exempt from federal income tax
("Municipal Obligations"). The Adviser will consider investments in Municipal
Obligations for the Funds when the Adviser believes that the total return on
such securities is attractive relative to that of taxable securities.

Under normal market conditions, at least 65% of the Income and
Total Return Bond Funds' respective total assets will be invested in
investment-grade bonds that are rated within the three highest ratings of
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Services ("S&P") (or are unrated obligations considered to be of comparable
credit quality by the Adviser). "Investment-grade bonds" are bonds and other
debt instruments that are rated within the four highest ratings of Moody's or
S&P (or are unrated obligations considered to be of investment grade by the
Adviser) and U.S. government obligations and money market instruments of the
types described below. When, in the opinion of the Adviser, a defensive
investment posture is warranted, each of these Funds may invest temporarily and
without limitation in high quality, short-term money market instruments.

2
<PAGE>

The Income Fund may invest up to 35% of its total assets, and the
Total Return Bond Fund may invest up to 5% of its total assets, in bonds rated
below investment grade. Investments in obligations rated below the four highest
ratings of S&P and Moody's ("junk bonds") have different risks than investments
in securities that are rated investment grade. Risk of loss upon default by the
borrower is significantly greater because lower-rated securities are generally
unsecured and are often subordinated to other creditors of the issuer, and
because the issuers frequently have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recessions, individual
corporate developments and increasing interest rates, than are investment grade
issuers. As a result, the market price of such securities, and the net asset
value of a Fund's shares, may be particularly volatile. Additional risks
associated with lower-rated fixed-income securities are (a) the relative youth
and growth of the market for such securities, (b) the sensitivity of such
securities to interest rate and economic changes, (c) the lower degree of
protection of principal and interest payments, (d) the relatively low trading
market liquidity for such securities, (e) the impact that legislation may have
on the high yield bond market (and, in turn, on a Fund's net asset value and
investment practices), (f) the operation of mandatory sinking fund or
call/redemption provisions during periods of declining interest rates whereby a
Fund may be required to reinvest premature redemption proceeds in lower yielding
portfolio securities, and (g) the creditworthiness of the issuers of such
securities. During an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. An economic downturn could also disrupt the market for lower-rated
bonds generally and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. If the issuer of a
lower-rated debt obligation held by a Fund defaulted, the Fund could incur
additional expenses to seek recovery. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower-rated securities, especially in a thinly traded
market. Finally, a Fund's trading in fixed-income securities to achieve capital
appreciation entails risks that capital losses rather than gains will result.

The Income and Total Return Bond Funds may invest up to 25% of
their respective total assets in (a) preferred stocks and (b) U.S.
dollar-denominated debt obligations of (i) foreign issuers, including foreign
corporations and foreign governments, and (ii) U.S. companies issued outside the
United States. The Funds will not invest in common stocks, and any common stocks
received through conversion of convertible debt obligations will be sold in an
orderly manner as soon as possible.

International Equity Fund
-------------------------

Under normal market and economic conditions, the International
Equity Fund will invest at least 75% of its assets in foreign equity securities.
Foreign equity securities may include common stock, preferred stock, securities
convertible into common or preferred stock and warrants issued by companies
domiciled outside of the United States and shares of U.S. registered investment
companies that invest primarily in foreign securities. While there are no
prescribed limits on geographic distributions, the Fund normally will hold
securities of issuers

3
<PAGE>

collectively having their principal place of business in no fewer than three
foreign countries. For cash management purposes, the Fund may invest up to 25%
of its assets on a continuous basis in cash or short-term instruments such as
commercial paper, bank obligations, U.S. government and agency securities
maturing within one year, notes and other investment-grade debt securities of
various maturities, and repurchase agreements collateralized by these
securities. Under unusual economic and market conditions, the Fund may restrict
the securities markets in which its assets are invested and may invest without
limitation in any combination of high quality domestic or foreign money market
instruments.

Convertible debt securities purchased by the Fund will be rated
investment grade by Moody's or S&P if such a rating is available. To be deemed
investment grade, debt securities must carry a rating of at least "Baa" from
Moody's or "BBB" from S&P. If unrated, as is the case with most foreign
securities, convertible debt securities purchased by the Fund will be deemed to
be comparable in quality to securities rated investment grade by the Adviser
under the supervision of the Board of Trustees of the Trust. With respect to
securities rated "Baa" by Moody's or "BBB" by S&P (the lowest of the top four
investment rankings), or deemed to be comparable in quality to such securities,
interest and principal payments are regarded as adequate for the present;
however, these securities may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make interest and principal payments than is the case with higher
grade bonds. The Fund will sell in an orderly fashion as soon as possible any
debt securities it holds if they are downgraded below "Baa" by Moody's or "BBB"
by S&P. The Fund may purchase securities both on recognized stock exchanges and
in over-the-counter markets. Most of the Fund's portfolio transactions will be
effected in the primary trading market for the given security.

The countries in which the Fund may invest, include but are not
limited to: Japan, France, the United Kingdom, Germany, Italy, the Netherlands,
Switzerland, Singapore, Australia, Canada, Sweden, Ireland, Hong Kong, Thailand,
Spain, Portugal, Israel, Chile, Argentina and Hungary.

Additional Information on Portfolio Instruments
-----------------------------------------------

Gold Bullion
------------

The International Equity Fund may invest up to 5% of its total
assets in gold bullion by purchasing gold bars primarily of standard weight
(approximately 400 troy ounces) at the best available prices in the New York
bullion market. However, the Adviser will have discretion to purchase or sell
gold bullion in other markets, including foreign markets, if better prices can
be obtained. Gold bullion is valued by the Fund at the mean between the closing
bid and asked prices in the New York bullion market as of the close of the New
York Stock Exchange each business day. When there is no readily available market
quotation for gold bullion, the bullion will be valued by such method as
determined by the Trust's Board of Trustees to best reflect its fair value. For
purpose of determining net asset value, gold held by the Fund will be valued in
U.S. dollars. Investments in gold will not produce dividends or

4
<PAGE>

interest income, and the Fund can look only to price appreciation for a return
on such investments.

U.S. Government and Agency Securities
-------------------------------------

Securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities include U.S. Treasury securities, which differ
only in their interest rates, maturities and times of issuance. Treasury Bills
have initial maturities of one year or less; Treasury Notes have initial
maturities of one to ten years; and Treasury Bonds generally have initial
maturities of greater than ten years. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, such as Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the Treasury;
others, such as those issued by the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and others are supported
only by the credit of the agency or instrumentality. While the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law.

Securities Lending
------------------

To increase return on its portfolio securities, each Fund may
lend its portfolio securities to broker/dealers pursuant to agreements requiring
the loans to be continuously secured by collateral equal at all times in value
to at least the market value of the securities loaned. Collateral for such loans
may include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
When a Fund lends its securities, it continues to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable, high-
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to lent securities pass to the borrower, such loans may be called at
any time and will be called so that the securities may be voted by a Fund if a
material event affecting the investment is to occur.

There may be risks of delay in receiving additional collateral or
in recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.

Variable Rate and Floating Rate Securities
------------------------------------------

Each Fund may purchase floating and variable rate demand notes
and bonds, which are obligations ordinarily having stated maturities in excess
of 397 days, but which permit

5
<PAGE>

the holder to demand payment of principal at any time, or at specified intervals
not exceeding 397 days, in each case upon not more than 30 days' notice.
Variable rate demand notes include master demand notes which are obligations
that permit a Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund, as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations.

The interest rate on a floating rate demand obligation is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
Frequently, such obligations are collateralized by letters of credit or other
credit support arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, a Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and a Fund may invest in obligations which are not so rated only if the Adviser
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Adviser will
consider on an ongoing basis the creditworthiness of the issuers of the floating
and variable rate demand obligations held by the Funds. Each Fund will not
invest more than 15% of the value of its net assets in floating or variable rate
demand obligations as to which it cannot exercise the demand feature on not more
than seven days' notice if there is no secondary market available for these
obligations, and in other securities that are deemed illiquid. See "Investment
Restrictions" below.

Participation Interests
-----------------------

Each Fund may purchase from financial institutions participation
interests in securities in which such Fund may invest. A participation interest
gives a Fund an undivided interest in the security in the proportion that the
Fund's participation interest bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest, with remaining maturities of 13 months or less. If the participation
interest is unrated, or has been given a rating below that which is permissible
for purchase by the Fund, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. government securities, or, in the case
of unrated participation interests, the Adviser must have determined that the
instrument is of comparable quality to those instruments in which the Fund may
invest. For certain participation interests, a Fund will have the right to
demand payment, on not more than seven days' notice, for all or any part of the
Fund's participation interest in the security, plus accrued interest. As to
these instruments, the Fund intends to exercise its right to demand payment only
upon a default under the terms of the security, as needed to provide liquidity
to meet redemptions, or to

6
<PAGE>

maintain or improve the quality of its investment portfolio. Each Fund will not
invest more than 15% of its net assets in participation interests that do not
have this demand feature, and in other securities that are deemed illiquid.
Currently, no Fund intends to invest more than 5% of its net assets in
participation interests during the current year. See "Investment Restrictions"
below.

Illiquid Securities
-------------------

Each Fund may acquire investments that are illiquid or have
limited liquidity, such as private placements or investments that are not
registered under the Securities Act of 1933, as amended (the "1933 Act"), and
cannot be offered for public sale in the United States without first being
registered under the 1933 Act. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Fund. The price a Fund
pays for illiquid securities or receives upon resale may be lower than the price
paid or received for similar securities with a more liquid market.

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

In recent years, however, a large institutional market has
developed for certain securities that are not registered under the 1933 Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.

Each Fund may not invest in additional illiquid securities if, as
a result, more than 15% of the market value of its net assets would be invested
in illiquid securities. Each Fund may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. Rule 144A
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers.

7
<PAGE>

Rule 144A securities may be determined to be liquid in accordance
with guidelines established by the Adviser and approved by the Trustees of the
Trust. The Trustees will monitor the implementation of these guidelines on a
periodic basis. Because Rule 144A is relatively new, it is not possible to
predict how markets in Rule 144A securities will develop. If trading in Rule
144A securities were to decline, these securities could become illiquid after
being purchased, increasing the level of illiquidity of a Fund. As a result, a
Fund holding these securities might not be able to sell these securities when
the Adviser wishes to do so, or might have to sell them at less than fair value.

The Adviser will monitor the liquidity of Rule 144A securities
for each Fund under the supervision of the Trust's Board of Trustees. In
reaching liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer).

Unsecured Promissory Notes
--------------------------

Each Fund may also purchase unsecured promissory notes ("Notes")
which are not readily marketable and have not been registered under the 1933
Act, provided such investments are consistent with such Fund's investment
objectives and policies. Each Fund will invest no more than 15% of its net
assets in such Notes and in other securities that are not readily marketable
(which securities would include floating and variable rate demand obligations as
to which the Fund cannot exercise the demand feature described above and as to
which there is no secondary market). Currently, no Fund intends to invest any of
its assets in unsecured promissory notes during the coming year. See "Investment
Restrictions" below.

Repurchase Agreements
---------------------

Each Fund may agree to purchase portfolio securities subject to
the seller's agreement to repurchase them at a mutually agreed upon date and
price ("repurchase agreements"). The Funds will enter into repurchase agreements
only with financial institutions that are deemed to be creditworthy by the
Adviser. The Funds will not enter into repurchase agreements with the Adviser or
any of its affiliates. Repurchase agreements with remaining maturities in excess
of seven days will be considered illiquid securities and will be subject to the
limitations described above under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

8
<PAGE>

the agreement and held by a Fund at not less than the repurchase price. Default
or bankruptcy of the seller would, however, expose a Fund to possible delay in
connection with the disposition of the underlying securities or loss to the
extent that proceeds from a sale of the underlying securities were less than the
repurchase price under the agreement. Repurchase agreements are considered loans
by a Fund under the 1940 Act.

Borrowing and Reverse Repurchase Agreements
-------------------------------------------

Each Fund may borrow funds, in an amount up to one-third of the
value of its total assets, for temporary or emergency purposes, such as meeting
larger than anticipated redemption requests, and not for leverage. Each Fund may
also agree to sell portfolio securities to financial institutions such as banks
and broker-dealers and to repurchase them at a mutually agreed date and price (a
"reverse repurchase agreement"). The Securities and Exchange Commission (the
"SEC") views reverse repurchase agreements as a form of borrowing. At the time a
Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account liquid assets having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold by a Fund may decline below the
repurchase price of those securities.

Municipal Obligations
---------------------

The Income and Total Return Bond Funds may, when deemed
appropriate by the Adviser in light of the Funds' investment objectives, invest
in Municipal Obligations. Although yields on Municipal Obligations can generally
be expected under normal market conditions to be lower than yields on corporate
and U.S. government obligations, from time to time municipal securities have
outperformed, on a total return basis, comparable corporate and federal debt
obligations as a result of prevailing economic, regulatory or other
circumstances. Dividends paid by the Income and Total Return Bond Funds that are
derived from interest on municipal securities would be taxable to the Funds'
shareholders for federal income tax purposes.

Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses, and the extension of
loans to public institutions and facilities. Private activity bonds that are
issued by or on behalf of public authorities to finance various privately
operated facilities are included within the term "Municipal Obligations" only if
the interest paid thereon is exempt from regular federal income tax and not
treated as a specific tax preference item under the federal alternative minimum
tax.

The two principal classifications of Municipal Obligations which
may be held by the Income and Total Return Bond Funds are "general obligation"
securities and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, credit, and taxing power for the
payment of principal and interest. Revenue securities are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as user fees of the facility being financed.

9
<PAGE>

The Income and Total Return Bond Funds' portfolios may also
include "moral obligation" securities, which are usually issued by public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund --
the restoration of which is a moral commitment, but not a legal obligation of
the state or municipality which created the issuer. There is no limitation on
the amount of moral obligation securities that may be held by the Funds.

There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general market conditions, the financial condition of the
issuer, conditions of the municipal bond market, the size of a particular
offering, the maturity of the obligation, and the rating of the issue. The
ratings of nationally recognized statistical rating organizations ("NRSROs")
such as Moody's and S&P described in Appendix A hereto represent their opinion
as to the quality of Municipal Obligations. It should be emphasized that these
ratings are general and are not absolute standards of quality, and Municipal
Obligations with the same maturity, interest rate, and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a Fund,
an issue of Municipal Obligations may cease to be rated, or its rating may be
reduced below the minimum rating required for purchase by that Fund. The Adviser
will consider such an event in determining whether a Fund should continue to
hold the obligation.

The payment of principal and interest on most Municipal
Obligations purchased by the Funds will depend upon the ability of the issuers
to meet their obligations. Each state, the District of Columbia, each of their
political subdivisions, agencies, instrumentalities and authorities, and each
multistate agency of which a state is a member, is a separate "issuer" as that
term is used in this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer." An issuer's obligations under its Municipal Obligations are subject
to the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.

Private activity bonds are issued to obtain funds to provide,
among other things, privately operated housing facilities, pollution control
facilities, convention or trade show facilities, mass transit, airport, port or
parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities.

10
<PAGE>

Private activity bonds held by the Funds are in most cases revenue securities
and are not payable from the unrestricted revenues of the issuer. The principal
and interest on these obligations may be payable from the general revenues of
the users of such facilities. Consequently, the credit quality of these
obligations is usually directly related to the credit standing of the corporate
user of the facility involved.

Among other instruments, the Funds may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. In addition, the Funds may invest in
long-term tax-exempt instruments, such as municipal bonds and private activity
bonds, to the extent consistent with the maturity restrictions applicable to it.

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

Stand-By Commitments
--------------------

The Income and Total Return Bond Funds may acquire "stand-by
commitments" with respect to Municipal Obligations held by them. Under a
stand-by commitment, a dealer or bank agrees to purchase from a Fund, at the
Fund's option, specified Municipal Obligations at a specified price. The amount
payable to a Fund upon its exercise of a stand-by commitment is normally (i) the
Fund's acquisition cost of the Municipal Obligations (excluding any accrued
interest which the Fund paid on their acquisition), less any amortized market
premium or plus any amortized market or original issue discount during the
period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period. Stand-by
commitments are exercisable by a Fund at any time before the maturity of the
underlying Municipal Obligations, and may be sold, transferred or assigned by
the Fund only with the underlying instruments.

The Income and Total Return Bond Funds expect that stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, either Fund may pay
for a stand-by commitment either separately in cash or by paying a higher price
for securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). Where a Fund has
paid any consideration directly or indirectly for a stand-by commitment, its
cost will be reflected as unrealized depreciation for the period during which
the commitment was held by the Fund.

The Income and Total Return Bond Funds intend to enter into
stand-by commitments only with banks and broker/dealers which, in the Adviser's
opinion, present minimal credit risks. In evaluating the creditworthiness of the
issuer of a stand-by commitment, the Adviser will review periodically the
issuer's assets, liabilities, contingent claims and other

11
<PAGE>

relevant financial information. The Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and do not intend to exercise their
rights thereunder for trading purposes. Stand-by commitments acquired by a Fund
will be valued at zero in determining the Fund's net asset value.

Foreign Securities
------------------

Investing in securities issued by companies whose principal
business activities are outside the United States may involve significant risks
not present in domestic investments. For example, there is generally less
publicly available information about foreign companies, particularly those not
subject to the disclosure and reporting requirements of the U.S. securities
laws. Foreign issuers are generally not bound by uniform accounting, auditing
and financial reporting requirements comparable to those applicable to domestic
issuers. Investments in foreign securities also involve the risk of possible
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, brokerage or other taxation, limitation on the removal of
funds or other assets of a Fund, political or financial instability or
diplomatic and other developments which would affect such investments. Further,
economies of particular countries or areas of the world may differ from the
economy of the United States.

It is anticipated that in most cases the best available market
for foreign securities would be on exchanges or in over-the-counter markets
located outside the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the United
States, and securities of some foreign issuers (particularly those located in
developing countries) may be less liquid and more volatile than securities of
comparable United States companies. Foreign security trading practices,
including those involving securities settlement where a Fund's assets may be
released prior to receipt of payment, may expose a Fund to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer. In
general, there is less overall governmental supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States.

The costs attributable to investing abroad are usually higher
than those attributable to investing in domestic securities for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions in
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.

Each Fund may invest in foreign securities that impose
restrictions on transfer within the United States or to United States persons.
Although securities subject to such transfer restrictions may be marketable
abroad, they may be less liquid than foreign securities of the same class that
are not subject to such restrictions.

Dividends and interest paid by foreign issuers may be subject
to withholding and other foreign taxes. To the extent that such taxes are not
offset by credits or deductions allowed to investors under the federal income
tax laws, they may reduce the net return to investors.

12
<PAGE>

Each of the Equity, Value Equity, Optimum Growth and
International Equity Funds may invest indirectly in the securities of foreign
issuers through sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar instruments. ADRs typically are issued by an American bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic
underlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR and
GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored ADRs, EDRs and
GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile
than if such instruments were sponsored by the issuer.

The International Equity Fund may also invest indirectly in
foreign securities through share entitlement certificates. Share entitlement
certificates are transferable securities similar to depository receipts which
are structured like global debt issues to facilitate trading on an international
basis. The holder of a share entitlement certificate holds a fully
collateralized obligation of the issuer the value of which is linked directly to
that of the underlying foreign security.

Forward Foreign Currency Exchange Contracts
-------------------------------------------

In accordance with their respective investment objectives and
policies, the Funds may buy and sell securities (and receive interest, dividends
and sale proceeds) in currencies other than the U.S. dollar. Therefore, the
Funds may from time to time enter into foreign currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Funds either enter into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or use forward contracts to purchase or sell
foreign currencies. The cost of a Fund's spot currency exchange transactions
will generally be the difference between the bid and offer spot rate of the
currency being purchased or sold.

A forward foreign currency exchange contract is an obligation
by a Fund to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. A Fund maintains with its custodian a segregated
account of liquid assets in an amount at least equal to its obligations under
each forward foreign currency exchange contract. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of the Fund's securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.

13
<PAGE>

Each Fund may enter into forward foreign currency exchange
contracts for hedging purposes in an attempt to protect against changes in
foreign currency exchange rates between the trade and settlement dates of
specific securities transactions or changes in foreign currency exchange rates
that would adversely affect a portfolio position or an anticipated investment
position. Since consideration of the prospect for currency parities will be
incorporated into the Adviser's long-term investment decisions, the Funds will
not routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Adviser believes that it is important to
have the flexibility to enter into foreign currency hedging transactions when it
determines that the transactions would be in a Fund's best interest. Although
these transactions tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential
gain that might be realized should the value of the hedged currency increase.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.

At or before the maturity of a forward foreign currency
exchange contract when a Fund has agreed to deliver a foreign currency, the Fund
may sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a currency, and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent of the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract.

While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event, a Fund's ability to
utilize forward contracts may be restricted. Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject the Fund to certain risks.

14
<PAGE>

The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the foreign
currency-denominated asset that is the subject of the hedge generally will not
be precise. In addition, a Fund may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit a Fund's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Fund's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Fund's cross-hedges and the movements in the exchange rates of the
foreign currencies in which the Fund's assets that are the subject of such
cross-hedges are denominated.

Guaranteed Investment Contracts
-------------------------------

Each Fund may invest in guaranteed investment contracts
("GICs") issued by insurance companies. Pursuant to such contracts, a Fund makes
cash contributions to a deposit fund of the insurance company's general account.
The insurance company then credits to the fund guaranteed interest. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Because a Fund may not receive the principal
amount of a GIC from the insurance company on seven days' notice or less, the
GIC is considered an illiquid investment and, together with other instruments in
a Fund which are deemed illiquid, will not exceed 15% of the Fund's net assets.
The term of a GIC will be 13 months or less. In determining average weighted
portfolio maturity, a GIC will be deemed to have a maturity equal to the longer
of the period of time remaining until the next readjustment of the guaranteed
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand. Currently, each Fund intends to invest
5% or less of its respective net assets in GICs during the current year.

When-Issued and Forward Transactions
------------------------------------

Each Fund may purchase eligible securities on a "when-issued"
basis and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to

15
<PAGE>

satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.

It is expected that "forward commitments" and "when-issued"
purchases will not exceed 25% of the value of a Fund's total assets absent
unusual market conditions, and that the length of such commitments will not
exceed 45 days. The Funds do not intend to engage in "when-issued" purchases and
"forward commitments" for speculative purposes, but only in furtherance of their
investment objectives.

A Fund will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after it is entered into, and may sell securities
it has committed to purchase before those securities are delivered to the Fund
on the settlement date. In these cases, the Fund may realize a taxable capital
gain or loss.

When a Fund engages in "when-issued" or "forward commitment"
transactions, it relies on the other party to consummate the trade. Failure of
such other party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.

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

Zero Coupon Obligations
-----------------------

A Fund may acquire zero coupon obligations when consistent with its
investment objective and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since interest income is accrued throughout the term of the zero
coupon obligation but is not actually received until maturity, a Fund, which is
required for tax purposes to distribute to its shareholders a certain percentage
of its income, may have to sell other securities to distribute the income prior
to maturity of the zero coupon obligation.

Asset-Backed Securities
-----------------------

If permitted pursuant to its investment objectives and
policies, a Fund may invest in asset-backed securities including, but not
limited to, interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables, equipment leases, manufactured
housing (mobile home) leases, or home equity loans. These securities may be in

16
<PAGE>

the form of pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect government
guarantee.

The credit characteristics of asset-backed securities differ
in a number of respects from those of traditional debt securities. The credit
quality of most asset-backed securities depends primarily upon the credit
quality of the assets underlying such securities, how well the entity issuing
the securities is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit enhancement to
such securities.

Credit card receivables are generally unsecured and 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
asset-backed securities backed by motor vehicle installment purchase obligations
permit the servicer of such receivable to retain possession of the underlying
obligations. If the servicer sells 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 asset-backed securities. Further, if a vehicle is
registered in one state and is then re-registered because the owner and obligor
moves to another state, such re-registration could defeat the original security
interest in the vehicle in certain cases. 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 asset-backed securities backed
by 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.

Mortgage Pass-Throughs and Collateralized Mortgage Obligations
--------------------------------------------------------------

The Income and Total Return Bond Funds may purchase mortgage
and mortgage-related securities such as pass-throughs and collateralized
mortgage obligations that meet each Fund's selection criteria and are investment
grade or of comparable quality (collectively, "Mortgage Securities"). Mortgage
pass-throughs are securities that pass through to investors an undivided
interest in a pool of underlying mortgages. These are issued or guaranteed by
U.S. government agencies such as the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). Other mortgage pass-throughs consist of
whole loans originated and issued by private limited purpose corporations or
conduits. Collateralized mortgage obligation bonds are obligations of special
purpose corporations that are collateralized or supported by mortgages or
mortgage securities such as pass-throughs.

Mortgage Securities may be subject to a greater degree of
market volatility as a result of unanticipated prepayments of principal. During
periods of declining interest rates, the principal invested in mortgage-backed
securities with high interest rates may be repaid earlier than scheduled, and
the Funds will be forced to reinvest the unanticipated payments at generally
lower interest rates. When interest rates fall and principal prepayments are
reinvested at lower interest rates, the income that the Funds derive from
mortgage-backed securities is reduced. In

17
<PAGE>

addition, like other fixed income securities, Mortgage Securities generally
decline in price when interest rates rise.

Futures Contracts and Related Options
-------------------------------------

Each Fund may invest in futures contracts and options thereon.
They may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.

Futures contracts will not be entered into for speculative
purposes, but to hedge risks associated with a Fund's securities investments.
The Funds will engage in futures transactions only to the extent permitted by
the Commodity Futures Trading Commission ("CFTC") and the SEC. When investing in
futures contracts, the Funds must satisfy certain asset segregation requirements
to ensure that the use of futures is unleveraged. When a Fund takes a long
position in a futures contract, it must maintain a segregated account containing
liquid assets equal to the purchase price of the contract, less any margin or
deposit. When a Fund takes a short position in a futures contract, the Fund must
maintain a segregated account containing liquid assets in an amount equal to the
market value of the securities underlying such contract (less any margin or
deposit), which amount must be at least equal to the market price at which the
short position was established. Asset segregation requirements are not
applicable when a Fund "covers" an options or futures position generally by
entering into an offsetting position. Each Fund will limit its hedging
transactions in futures contracts and related options so that, immediately after
any such transaction, the aggregate initial margin that is required to be posted
by the Fund under the rules of the exchange on which the futures contract (or
futures option) is traded, plus any premiums paid by the Fund on its open
futures options positions, does not exceed 5% of the Fund's total assets, after
taking into account any unrealized profits and unrealized losses on the Fund's
open contracts (and excluding the amount that a futures option is "in-the-money"
at the time of purchase). An option to buy a futures contract is "in-the-money"
if the then-current purchase price of the underlying futures contract exceeds
the exercise or strike price; an option to sell a futures contract is
"in-the-money" if the exercise or strike price exceeds the then-current purchase
price of the contract that is the subject of the option. In addition, the use of
futures contracts is further restricted to the extent that no more than 10% of a
Fund's total assets may be hedged.

18
<PAGE>

such situations, if the Fund has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge.

Transactions in futures as a hedging device may subject a Fund
to a number of risks. Successful use of futures by a Fund is subject to the
ability of the Adviser to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. In addition,
in some situations, if a Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market.

As noted above, the risk of loss in trading futures contracts
in some strategies can be substantial, due both to the low margin deposits
required, and the extremely high degree of leverage involved in futures pricing.
As a result, a relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit,
before any deduction for the transaction costs, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract.

Utilization of futures transactions involves the risk of loss
by a Fund of margin deposits in the event of bankruptcy of a broker with whom
such Fund has an open position in a futures contract or related option.

19
<PAGE>

because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.

The trading of futures contracts is also subject to the risk
of trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

Options on Futures Contracts
----------------------------

Each Fund may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.

Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of the
instruments being hedged, an option may or may not be less risky than ownership
of the futures contract or such instruments. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transaction costs). Although
permitted by their fundamental investment policies, the Funds do not currently
intend to write futures options, and will not do so in the future absent any
necessary regulatory approvals.

Options
-------

Each Fund may purchase put and call options listed on a
national securities exchange and issued by the Options Clearing Corporation.
Such purchases would be in an amount not exceeding 5% of each such Fund's net
assets. Such options may relate to particular securities or to various stock and
bond indices. Purchase of options is a highly specialized activity which entails
greater than ordinary investment risks, including a substantial risk of a
complete loss of the amounts paid as premiums to the writer of the options.
Regardless of how

20
<PAGE>

much the market price of the underlying security increases or decreases, the
option buyer's risk is limited to the amount of the original investment for the
purchase of the option. However, options may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities. A listed call option gives the purchaser of the option
the right to buy from a clearing corporation, and the writer has the obligation
to sell to the clearing corporation, the underlying security at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by the Funds will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.

Each Fund may engage in writing covered call options (options on
securities owned by the particular Fund) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation. The
aggregate value of the securities subject to options written by each Fund may
not exceed 25% of the value of its net assets. By writing a covered call option,
a Fund forgoes the opportunity to profit from an increase in the market price of
the underlying security above the exercise price except insofar as the premium
represents such a profit, and it will not be able to sell the underlying
security until the option expires or is exercised or the Fund effects a closing
purchase transaction by purchasing an option of the same series.

When a Fund writes a covered call option, it may terminate its
obligation to sell the underlying security prior to the expiration date of the
option by executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only on
an exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series, which
will permit the Fund to make a closing purchase transaction in order to close
out its position.

21
<PAGE>

When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated expiration
date, or if the Fund involved enters into a closing purchase transaction, the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold), and the deferred
credit related to such option will be eliminated. If an option is exercised, the
Fund involved may deliver the underlying security from its portfolio or purchase
the underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the Fund
involved will realize a gain or loss. Premiums from expired call options written
by the Funds and net gains from closing purchase transactions are treated as
short-term capital gains for Federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses. The use of covered call
options is not a primary investment technique of the Funds and such options will
normally be written on underlying securities as to which the Adviser does not
anticipate significant short-term capital appreciation.

Short Sales "Against the Box"
-----------------------------

In a short sale, a Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. A Fund
may engage in short sales only if at the time of the short sale it owns or has
the right to obtain, at no additional cost, an equal amount of the security
being sold short. This investment technique is known as a short sale "against
the box."

In a short sale, the seller does not immediately deliver the
securities sold and is said to have a short position in those securities until
delivery occurs. If a Fund engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Fund maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Fund's long position.

A Fund will not engage in short sales against the box for investment
purposes. A Fund may, however, make a short sale as a hedge, when it believes
that the price of a security may decline, causing a decline in the value of a
security (or a security convertible or exchangeable for such security), or when
a Fund wants to sell the security at an attractive current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes or
for purposes of satisfying certain tests applicable to regulated investment
companies under the Internal Revenue Code of 1986, as amended (the "Code"). In
such case, any future losses in a Fund's long position should be reduced by a
gain in the short position. Conversely, any gain in the long position should be
reduced by a loss in the short position. The extent to which such gains or
losses are reduced depends upon the amount of the security sold short relative
to the amount a Fund owns. There are certain additional transaction costs
associated with short sales

22
<PAGE>

against the box, but a Fund will endeavor to offset these costs with the income
from the investment of the cash proceeds of short sales.

As a non-fundamental operating policy, not more than 40% of a Fund's
total assets would be involved in short sales against the box.

Investment Company Securities
-----------------------------

Each Fund may invest in securities issued by other investment
companies which invest in high quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by each Fund within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.

The Funds may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.

SPDRs are not individually redeemable, except upon termination of the
UIT. To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.

The price of SPDRs is derived from and based upon the securities held
by the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.

Short-Term Instruments
----------------------

23
<PAGE>

Each Fund may invest in short-term income securities in accordance
with its investment objective and policies. The Funds may also make money market
investments pending other investments or settlement, or to maintain liquidity to
satisfy redemption requests. In adverse market conditions and for temporary
defensive purposes only, each Fund may temporarily invest its assets without
limitation in short-term investments. Short-term investments include:
obligations of the U.S. government and its agencies or instrumentalities;
commercial paper, variable amount master demand notes and other debt securities,
including high quality U.S. dollar-denominated short-term bonds and notes issued
by domestic and foreign corporations; variable and floating rate securities;
bank obligations; repurchase agreements collateralized by these securities; and
shares of other investment companies that primarily invest in any of the above-
referenced securities.

The Funds may invest in commercial paper issued by major corporations
in reliance on the exemption from registration afforded by Section 3(a)(3) of
the 1933 Act. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts. Each Fund may purchase three types of
commercial paper, as classified by exemption from registration under the 1933
Act. The three types include open market, privately placed and letter of credit
commercial paper. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers or directly through the
issuers. Individual investor participation in the commercial paper market is
very limited. "Open market" commercial paper refers to the commercial paper of
any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current transactions,
limits maturities to 270 days and requires that the paper contain no provision
for automatic rollovers. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2) of the 1933 Act, which
exempts transactions by an issuer not involving any public offering. The
commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity restriction and
may be considered illiquid. See "Illiquid Securities" below. "Letter of credit"
commercial paper is exempt from registration under Section 3(a)(2) of the 1933
Act. It is backed by an irrevocable or unconditional commitment by a bank to
provide funds for repayment of the notes. Unlike "open market" and "privately
placed" commercial paper, "letter of credit" paper has no limitations on
purchases.

Each Fund may invest in U.S. dollar-denominated certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations
issued by domestic banks and domestic or foreign branches or subsidiaries of
foreign banks. Certificates of deposit are certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Such instruments include Yankee Certificates of Deposit ("Yankee CDs"),
which are certificates of deposit denominated in U.S. dollars and issued in the
United States by the domestic branch of a foreign bank. Time deposits are non-
negotiable deposits maintained in a

24
<PAGE>

banking institution for a specified period of time at a stated interest rate.
Time deposits which may be held by the Funds are not insured by the Federal
Deposit Insurance Corporation or any other agency of the U.S. government. A Fund
will not invest more than 15% of the value of its net assets in time deposits
maturing in longer than seven days and other instruments which are deemed
illiquid or not readily marketable. Bankers' acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the face amount of the instrument upon maturity.

Domestic commercial banks organized under federal law are supervised
and examined by the Comptroller of the Currency and are required to be members
of the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.

Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("Cds") and time deposits ("Tds"), may be general obligations of the parent
banks in addition to the issuing branch, or may be limited by the terms of a
specific obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
Foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.

Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.

In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an

25
<PAGE>

amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state.

The Funds will limit their short-term investments to those U.S.
dollar-denominated instruments which are determined by or on behalf of the Board
of Trustees of the Trust to present minimal credit risks and which are of "high
quality" as determined by an NRSRO (e.g., rated P-1 by Moody's or A-1 by S&P)
or, in the case of instruments which are not rated, are deemed to be of
comparable quality by the Adviser under the supervision of the Board of Trustees
of the Trust. The Funds may invest in obligations of banks which at the date of
investment have capital, surplus and undivided profits (as of the date of their
most recently published financial statements) in excess of $100 million.
Investments in high quality short-term instruments may, in many circumstances,
result in a lower yield than would be available from investments in instruments
with a lower quality or longer term.

Derivative Contracts and Securities
-----------------------------------

The term "derivative" has traditionally been applied to certain
contracts (including futures, forward, option and swap contracts) that derive
their value from changes in the value of an underlying security, currency,
commodity or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities derived from the cash flows from
underlying securities, mortgages or other obligations.

Derivative contracts and securities can be used to reduce or increase
the volatility of a Fund's total performance. To the extent that a Fund invests
in securities that could be characterized as derivatives, such as mortgage pass-
throughs and collateralized mortgage obligations, it will only do so in a manner
consistent with its investment objective, policies and limitations.

Certain Other Obligations
-------------------------

In order to allow for investments in new instruments that may be
created in the future, a Fund may invest in obligations other than those listed
herein, provided such investments are consistent with such Fund's investment
objective, policies and restrictions.

Portfolio Turnover Rate
-----------------------

Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the investment objective of the particular Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must be
borne directly by a Fund and ultimately by its shareholders. High portfolio
turnover may result in the realization of substantial net capital gains. To the
extent net short-term capital gains are realized, any

26
<PAGE>

distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxation" below.

The portfolio turnover of the International Equity Fund decreased from
107% in 1999 to 43% in 2000. The portfolio turnover was higher in 1999 because
the Fund changed its investment adviser in 1999, and the new adviser
restructured the Fund's portfolio during that year.

The Total Return Bond Fund's portfolio turnover decreased from 234% in
1999 to 115% in 2000 because fewer investment opportunities were available in
2000 than in 1999.

Rating Services
---------------

Ratings represent the opinions of rating services as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are an initial criterion for selection of
portfolio investments, the Adviser also makes its own evaluations of these
securities, subject to review by the Board of Trustees of the Trust. After
purchase by a Fund, an obligation may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event would
require a Fund to dispose of the obligation, but the Adviser will consider such
an event in its determination of whether the Fund should continue to hold the
obligation. A description of the ratings used herein is set forth in the
Appendix to this Statement of Additional Information.

Investment Limitations
----------------------

The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of the Trust or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Trust or such Fund, or (b) 67% or more of the shares of the Trust
or such Fund present at a meeting if more than 50% of the outstanding shares of
the Trust or such Fund are represented at the meeting in person or by proxy.
Investment limitations which are "operating policies" with respect to a Fund may
be changed by the Trust's Board of Trustees without shareholder approval.

As a matter of fundamental policy, each Fund may not:

(1) borrow money or mortgage or hypothecate assets of the Fund, except
that in an amount not to exceed 1/3 of the current value of the Fund's assets
(including such borrowing) less liabilities (not including such borrowing), it
may borrow money, enter into reverse repurchase agreements, and purchase when-
issued securities, and except that it may pledge,

27
<PAGE>

mortgage or hypothecate its assets to secure such borrowings, reverse repurchase
agreements, or when-issued securities, provided that collateral arrangements
with respect to options and futures, including deposits of initial margin and
variation margin, are not considered a pledge of assets for purposes of this
restriction, and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute. The Equity, Income, Total Return Bond and
International Equity Funds will not purchase securities while borrowings exceed
5% of their respective total assets;

(2) underwrite securities issued by other persons except insofar as the
Trust or a Fund may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;

(3) make loans to other persons except (a) through the lending of the
Fund's portfolio securities and provided that any such loans not exceed 30% of
the Fund's total assets (taken at market value), (b) through the use of
repurchase agreements or the purchase of short-term obligations, or (c) by
purchasing debt securities of types distributed publicly or privately;

(4) purchase or sell real estate (including limited partnership interests
in partnerships substantially all of whose assets consist of real estate but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (the Trust may hold and
sell, for a Fund's portfolio, real estate acquired as a result of the Fund's
ownership of securities);

(5) invest 25% or more of its assets in any one industry (excluding U.S.
government securities); or

(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.

With respect to the Equity, Income, Total Return Bond and
International Equity Funds, none of the above-referenced fundamental investment
restrictions shall prevent a Fund from investing all of its investable assets in
an open-end management investment company with substantially the same investment
objective and policies as the Fund.

Each Fund will not as a matter of operating policy:

(7) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;

(8) invest for the purpose of exercising control or management;

28
<PAGE>

(9) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Fund if such purchase at the time thereof
would cause (a) more than 10% of the Fund's total assets (taken at the greater
of cost or market value) to be invested in the securities of such issuers; (b)
more than 5% of the Fund's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c) more than 3% of the
outstanding voting securities of any such issuer to be held for the Fund;

(10) purchase securities of any issuer if such purchase at the time thereof
would cause the Fund to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed a
single class and all preferred stock of an issuer shall be deemed a single
class, except that futures or option contracts shall not be subject to this
restriction;

(11) purchase or retain in the Fund's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Trust, or is an officer or partner of
the investment adviser of the Fund, if after the purchase of the securities of
such issuer for the Fund one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at market value, of
such issuer, and such persons owning more than 1/2 of 1% of such shares or
securities together own beneficially more than 5% of such shares or securities,
or both, all taken at market value;

(12) invest more than 5% of the Fund's net assets in warrants (valued at
the lower of cost or market);

(13) make short sales of securities or maintain a short position (excluding
short sales if the Fund owns an equal amount of such securities or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of equivalent kind and amount) if such short sales
represent more than 25% of the Fund's net assets (taken at market value);
provided, however, that the value of the Fund's short sales of securities
(excluding U.S. government securities) of any one issuer may not be greater than
2% of the value (taken at market value) of the Fund's net assets or more than 2%
of the securities of any class of any issuer; or

(14) enter into repurchase agreements providing for settlement in more than
seven days after notice, or purchase securities which are not readily
marketable, if, in the aggregate, more than 15% of its net assets would be so
invested.

Policies (7) through (14) may be changed by the Board of Trustees of
the Trust without shareholder approval.

29
<PAGE>

As diversified portfolios, 75% of the assets of each Fund are
represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following fundamental
limitations: (a) the Fund may not invest more than 5% of its total assets in the
securities of any one issuer, and (b) the Fund may not own more than 10% of the
outstanding voting securities of any one issuer. In addition, each Fund may not
invest 25% or more of its assets in the securities of issuers in any one
industry. These are fundamental investment policies of each Fund which may not
be changed without shareholder approval. For purposes of these policies and
limitations, each Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a domestic bank or savings association
having capital, surplus and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."

If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's securities will not constitute a violation of such limitation.

PORTFOLIO TRANSACTIONS
----------------------

Subject to the general control of the Trust's Board of Trustees, the
Adviser is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of all portfolio securities of the Funds.

Except as may be required to ensure satisfaction of certain tests
applicable to regulated investment companies under the Code, portfolio changes
are made without regard to the length of time a security has been held, or
whether a sale would result in the recognition of a profit or loss. Each Fund
may engage in short-term trading to achieve its investment objective(s).
Portfolio turnover may vary greatly from year to year as well as within a
particular year. It is expected that the Income Fund's and Total Return Bond
Fund's turnover rates may remain higher than those of many other investment
companies with similar investment objectives and policies; however, since
brokerage commissions are not normally paid on instruments purchased by these
Funds, portfolio turnover is not expected to have a material effect on the net
asset value of either Fund. Each Fund's portfolio turnover rate may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable a Fund to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
Portfolio trading is engaged in for a Fund if the Adviser believes that a
transaction net of costs (including custodian charges) will help achieve the
Fund's investment objective.

A Fund's purchase and sales of securities may be principal
transactions, that is, securities may be purchased directly from the issuer or
from an underwriter or market maker for the securities. There usually are no
brokerage commissions paid for such purchases and, therefore, the Funds do not
anticipate paying brokerage commissions in such transactions.

30
<PAGE>

Purchases and sales of the Income Fund's and Total Return Bond Fund's portfolio
securities will usually be principal transactions without brokerage commissions.
Any transactions for which a Fund pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and the asked price.

Allocations of transactions, including their frequency, to
various dealers is determined by the Adviser in its best judgment and in a
manner deemed to be in the best interest of the investors in the applicable Fund
rather than by any formula. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. In executing
portfolio transactions for the Funds, the Adviser may use affiliated brokers in
accordance with the requirements of the 1940 Act. The Adviser may also take into
account the sale of Fund shares in allocating brokerage transactions.

The Advisory Agreements provide that, in executing portfolio
transactions and selecting brokers or dealers, the Adviser will seek to obtain
the best net price and the most favorable execution. The Adviser shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis.

In addition, the Advisory Agreements authorize the Adviser, to
the extent permitted by law and subject to the review of the Trust's Board of
Trustees, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion. Such
brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy. Such services might also include reports on global, regional, and
country-by-country prospects for economic growth, anticipated levels of
inflation, prevailing and expected interest rates, and the outlook for currency
relationships.

Supplementary research information so received is in addition
to and not in lieu of services required to be performed by the Adviser and does
not reduce the investment advisory fees payable by the Funds. Such information
may be useful to the Adviser in serving the Funds and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to the Adviser in carrying out its obligations to
the Funds.

During the fiscal year ended March 31, 2000, the Adviser
directed Fund brokerage transactions to brokers because of research services
provided. The amounts of such transactions and their related commissions were as
follows:

31
<PAGE>

Fund Amount of Transactions Related Commission
---- ---------------------- ------------------

Equity Fund $ 87,633 $ 4,067
Optimum Growth Fund $ 48,906 $ 4,083
International Equity Fund $294,694 $12,995

Investment decisions for a Fund will be made independently
from those for any other account or investment company that is or may in the
future become managed by the Adviser or any of its affiliates. If, however, a
Fund and other investment companies or accounts managed by the Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by a Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for a Fund and for other
investment companies managed by the Adviser occur contemporaneously, the
purchase or sale orders may be aggregated in order to obtain any price
advantages available to large denomination purchases or sales. Furthermore, in
certain circumstances affiliates of the Adviser whose investment portfolios are
managed internally, rather than by the Adviser, might seek to purchase or sell
the same type of investments at the same time as a Fund. Such an event might
also adversely affect that Fund.

For the fiscal years ended March 31, 2000, 1999 and 1998, the
Funds paid brokerage commissions as follows:

<TABLE>
<CAPTION>
% of Total
Total Amount of
Brokerage % of Transaction on
Total Commissions Total which
Brokerage Paid to Commission Commissions
Commissions Affiliated Paid to UST Were Paid to UST
Paid Persons Securities Corp./1/ Securities Corp./1/
---- ------- ----------------- -----------------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 2000
--------------------------------

Equity Fund $ 87,633 $ 0 0 0
Value Equity Fund $ 67,587 $ 0 0 0
Optimum Growth Fund $ 48,906 $ 0 0 0
International Equity Fund $294,694 $ 0 0 0
Income Fund $ 0 $ 0 0 0
Total Return Bond Fund $ 0 $ 0 0 0

Fiscal year ended March 31, 1999:
--------------------------------

Equity Fund $114,325 $ 0 0 0
Value Equity Fund $ 48,291 $ 0 0 0
Optimum Growth Fund $ 20,032 $ 0 0 0
International Equity Fund $248,086 $ 0 0 0

Fiscal year ended March 31, 1998
--------------------------------

Equity Fund $118,960 $9,474 7.96% 8.44%
Value Equity Fund $ 43,969 $1,377 3.13% 3.93%
Optimum Growth Fund $ 15,289 $ 0 0 0
International Equity Fund $108,548 $ 0 0 0
</TABLE>

32
<PAGE>

/1/ UST Securities Corp. is an affiliate of the Adviser.

The Trust is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents held by the Funds as of the close of the most recent fiscal year.
As of March 31, 2000, the following Funds held the following securities of the
Trust's regular brokers or dealers or their parents: the Income Fund held an
asset-backed security issued by Merrill Lynch Mortgage Investors, Inc. with a
principal amount of $2,053,056; and the Total Return Bond Fund held a corporate
bond issued by Goldman Sachs Group, Inc. with a principal amount of $4,060,000;
and a corporate bond issued by Bank of America with a principal amount of
$10,380,000.

PERFORMANCE INFORMATION
-----------------------

Standard Performance Information
--------------------------------

From time to time, performance quotations of the Funds'
Institutional Shares or Retail Shares may be included in advertisements, sales
literature or shareholder reports. These performance figures are calculated in
the following manner:

Yield. The Trust may provide annualized "yield" quotations for
Institutional Shares of the Income and Total Return Bond Funds. The "yield" of a
Fund refers to the income generated by an investment in such Fund over a thirty
day or one month period. The dates of any such period are identified in all
advertisements or communications containing yield quotations. Income is then
annualized; that is, the amount of income generated by an investment in
Institutional Shares of a Fund over a period is assumed to be generated (or
remain constant) over one year and is shown as a percentage of the net asset
value on the last day of that year-long period. The Funds may also advertise the
"effective yields," which are calculated similarly but, when annualized, income
is assumed to be reinvested, thereby making the effective yields slightly higher
because of the compounding effect of the assumed reinvestment. The Income and
Total Return Bond Funds may quote the standardized effective 30-day (or one
month) yield for their respective Institutional Shares, calculated in accordance
with the method prescribed by the SEC for mutual funds. Such yield will be
calculated for each Fund's Institutional Shares according to the following
formula:

33
<PAGE>

Yield = 2 (ab/cd + 1)/6/

Where: a = dividends and interest earned during the period.

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

c = average daily number of shares outstanding that
were entitled to receive dividends.

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

For the purpose of determining interest earned during the
period (variable "a" in the formula), each Fund computes the yield to maturity
of any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. Each Fund
calculates interest gained on tax-exempt obligations issued without original
issue discount and having a current market discount by using the coupon rate of
interest instead of the yield to maturity. In the case of tax-exempt obligations
with original issue discount, where the discount based on the current market
value exceeds the then-remaining portion of original issue discount, the yield
to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.

Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and that Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the maximum
offering price per share (variable "d" in the formula).

For the 30-day period ended March 31, 2000, the standardized
effective yield for Institutional Shares of the Income and Total Return Bond
Funds was as follows: Income Fund, 6.56%; and Total Return Bond Fund, 6.50%.

Total Return. The Trust may provide period and annualized
"total rates of return" and non-standardized total return data for Institutional
Shares or Retail Shares of a Fund. The "total rate of return" refers to the
change in the value of an investment in Institutional Shares or Retail Shares of
a Fund over a stated period which reflects any change in net asset value per
share and includes the value of any such Shares purchased with any dividends or
capital gains declared during such period. Period total rates of return may be
annualized. An annualized total rate of return is a compounded total rate of
return which assumes that the period total rate of

34
<PAGE>

return is generated over a one-year period, and that all dividends and capital
gains distributions are reinvested in Shares of the same class. The "average
annual total return" for Institutional Shares and Retail Shares of a Fund may be
quoted, and such return is computed by determining the average annual compounded
rate of return during specified periods that equates the initial amount invested
to the ending redeemable value of such investment according to the following
formula:

T = [(ERV/P)/1/n/ - 1]

Where: T = average annual total return.

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5- or
10-year (or other) periods at the end of the
applicable period (or a fractional portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in
years.

A Fund may also advertise the "aggregate total return" for its
Institutional Shares and Retail Shares which is computed by determining the
aggregate compounded rates of return during specified periods that likewise
equate the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:

Aggregate Total Return = [(ERV/P)] - /1/

The above calculations are made assuming that (1) all
dividends and capital gains distributions are reinvested on the reinvestment
dates at the price per share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.

Based on the foregoing calculations, the average annual total
returns for the Funds were as follows:

<TABLE>
<CAPTION>
Commencement of
One Year Period Five Year Period Operations* until
Ended March 31, 2000 Ended March 31, 2000 March 31, 2000
-------------------- -------------------- -----------------
<S> <C> <C> <C>
Equity Fund
Institutional Shares 25.75% 25.52% 25.59%
Value Equity Fund
Institutional Shares 41.92% N/A 27.92%
</TABLE>

35
<PAGE>

<TABLE>
<S> <C> <C> <C>
Retail Shares 41.60% N/A 27.65%
Optimum Growth Fund
Institutional Shares 27.66% N/A 39.09%
Retail Shares 27.40% N/A 38.67%

International Equity Fund
Institutional Shares 64.29% 16.89% 17.10%

Income Fund
Institutional Shares 1.16% 6.33% 6.68%
Total Return Bond Fund
Institutional Shares 1.47% 7.03% 7.40%
</TABLE>

* Institutional Shares of the Equity and Income Funds commenced
operations on January 16, 1995; Institutional Shares of the Total
Return Bond Fund commenced operations on January 19, 1995;
Institutional Shares of the Optimum Growth Fund commenced operations on
June 1, 1996; Retail Shares of the Optimum Growth Fund commenced
operations on July 3, 1996; Institutional Shares of the Value Equity
Fund commenced operations on June 1, 1996; Retail Shares of the Value
Equity Fund commenced operations on January 15, 1997; and Institutional
Shares of the International Equity Fund commenced operations on January
24, 1995.

Based on the foregoing calculations, the aggregate annual
total returns for the Funds were as follows:

36
<PAGE>

<TABLE>
<CAPTION>
Five-Year Period Ended Commencement of
3/31/00* Operations* until 3/31/00
---------------------- -------------------------
<S> <C> <C>
Equity Fund
Institutional Shares 211.52% 227.31%

Value Equity Fund
Institutional Shares N/A 156.95%
Retail Shares N/A N/A

Optimum Growth Fund
Institutional Shares N/A 156.95%
Retail Shares N/A N/A

International Equity Fund
Institutional Shares 118.24% 126.66%

Income Fund
Institutional Shares 35.95% 40.04%

Total Return Bond Fund
Institutional Shares 40.45% 44.94%
</TABLE>

Performance Results. Any yield or total return quotation
provided for Institutional Shares and Retail Shares of a Fund should not be
considered as representative of the performance of that Fund in the future since
the net asset value of shares of that Fund will vary based not only on the type,
quality and maturities of the securities held by it, but also on changes in the
current value of such securities and on changes in the expenses of the Fund.
These factors and possible differences in the methods used to calculate yields
and total return should be considered when comparing the yield and total return
of Institutional Shares and Retail Shares of a Fund to yields and total rates of
return published for other investment companies or other investment vehicles.
Total return reflects the performance of both principal and income. Retail
Shares in a Fund have different expenses than Institutional Shares which may
affect performance. Any fees charged by shareholder organizations to customers
that have invested in Shares and any charges to institutional investors for
asset management and related services will not be included in calculations of
performance.

Distribution Rate. Each Fund may also quote its distribution
rate. Distribution rate is calculated by annualizing the per share distribution
for the most recent calendar month

37
<PAGE>

and dividing such annualized distribution by the net asset value per share on
the last day of such month. The distribution rate of a fund will not be used in
advertising unless accompanied by standard performance measures.

Comparison of Fund Performance
------------------------------

Comparisons of non-standardized performance measures of
various investments are valid only if performance is calculated in the same
manner for each measure in the comparison. Since there are different methods of
calculating performance, investors should consider the effect of the methods
used to calculate performance when comparing the performance of Institutional
Shares and Retail Shares of a Fund with performance quoted with respect to other
investment companies or types of investments.

In connection with communicating its performance to current or
prospective shareholders, each Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. Some Funds may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Rankings and other evaluations of a Fund's performance made by independent
sources may also be used in advertisements concerning such Fund. Sources for a
Fund's performance information may include, but are not limited to, the
following: Barron's, Business Week, Consumer Digest, Donoghue's Money Fund
Report, Financial Times, Forbes, Fortune, New York Times and Wall Street
Journal.

PORTFOLIO VALUATION AND DETERMINATION OF NET ASSET VALUE
--------------------------------------------------------

The Trust determines the net asset value of the Institutional
Shares and Retail Shares of a Fund each day both the New York Stock Exchange
(the "NYSE") and the Adviser are open for business (a "Business Day"). As a
result, each Fund will normally determine its net asset value every weekday
except for the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas.

Daily determinations of net asset value for each Fund are made
at the close of regular trading hours on the NYSE, currently 4:00 p.m. (Eastern
time), and are calculated separately for each class of Shares by dividing the
total assets of a Fund that are allocated to a particular class of Shares less
all of its liabilities charged to that class, by the total number of Shares of
the class that are outstanding at the time the determination is made. As
discussed below, purchases, exchanges and redemptions will be effected at the
net asset value per share next computed after a request is received in good
order.

Assets in the Funds which are traded on a recognized domestic
stock exchange or are quoted on a national securities market are valued at the
last sale price on the securities

38
<PAGE>

exchange on which such securities are primarily traded or at the last sale price
on such national securities market. Securities in the Funds which are traded
only on over-the-counter markets are valued on the basis of closing over-the-
counter bid prices, and securities in such Funds for which there were no
transactions are valued at the average of the most recent bid and asked prices.
Restricted securities and securities or other assets for which market quotations
are not readily available are valued at fair value, pursuant to guidelines
adopted by the Board of Trustees of the Trust. Absent unusual circumstances,
debt securities maturing in 60 days or less are valued at amortized cost.

Securities of the Funds which are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except that when an event
subsequent to the time when value was so established is likely to have changed
such value, then the fair value of those securities will be determined after
consideration of such events and other material factors, all under the direction
and guidance of the Board of Trustees of the Trust. A security which is listed
or traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Absent unusual
circumstances, investments in foreign debt securities having a maturity of 60
days or less are valued based upon the amortized cost method. All other foreign
securities are valued at the last current bid quotation if market quotations are
available, or at fair value as determined in accordance with policies
established by the Board of Trustees of the Trust. For valuation purposes,
quotations of foreign securities in foreign currency are converted to U.S.
dollars equivalent at the prevailing market rate on the day of conversion. Some
of the securities acquired by the Funds may be traded on foreign exchanges or
over-the-counter markets on days which are not Business Days. In such cases, the
net asset value of the Shares may be significantly affected on days when
investors can neither purchase nor redeem a Fund's Shares. The administrators
have undertaken to price the securities held by the Funds, and may use one or
more independent pricing services in connection with this service. The methods
used by the pricing services and the valuations so established will be reviewed
by the Adviser and the administrators under the general supervision of the Board
of Trustees of the Trust.

A determination of value used in calculating net asset value
must be a fair value determination made in good faith utilizing procedures
approved by the Trust's Board of Trustees. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which a Fund could expect to receive upon
its current sale. Some, but not necessarily all, of the general factors which
may be considered in determining fair value include: (i) the fundamental
analytical data relating to the investment; (ii) the nature and duration of
restrictions on disposition of the securities; and (iii) an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Without limiting or including all of the specific factors which may be
considered in determining fair value, some of the specific factors include: type
of security, financial statements of the issuer, cost at date of purchase, size
of holding, discount from market value, value of unrestricted securities of the
same class at the time of purchase, special reports prepared by analysts,
information as to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities, price
and extent of public trading in similar securities of the issuer or comparable
companies, and other relevant matters.

39
<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------

Distributor
-----------

Shares are continuously offered for sale by Edgewood Services,
Inc. (the "Distributor"), a registered broker-dealer and the Trust's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA
15237-5829. The Distributor has agreed to devote its best efforts to effect the
sale of Shares, but is not obligated to sell any certain number of Shares.

At various times the Distributor may implement programs under
which a dealer's sales force may be eligible to win nominal awards for certain
sales efforts or under which the Distributor will make payments to any dealer
that sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of Shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its
own assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
Shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

Purchase of Shares
------------------

Shares of the Funds are offered for sale at their net asset
value per Share next computed after a purchase request is received in good order
by the Trust's transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several procedures for purchasing
Shares in order to accommodate different types of investors.

Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors or to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase Shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the

40
<PAGE>

Shareholder Organization and its Customer in Shares selected by the Customer.
Investors purchasing Shares may include officers, directors, or employees of the
particular Shareholder Organization.

Institutional Shares may be purchased directly only by financial
institutions ("Institutional Investors"). Retail Shares may be purchased
directly by individuals ("Direct Investors") or by Institutional Investors
(collectively with Direct Investors, "Investors"). Retail Shares may also be
purchased by Customers of the Adviser, its affiliates and correspondent banks,
and other Shareholder Organizations that have entered into agreements with the
Trust.

A Shareholder Organization may elect to hold of record Shares for its
Customers and to record beneficial ownership of Shares on the account statements
provided by it to its Customers. If it does so, it is the Shareholder
Organization's responsibility to transmit to the Distributor all purchase
requests for its Customers and to transmit, on a timely basis, payment for such
requests to Chase Global Funds Services Company ("CGFSC"), the Funds' transfer
agent, in accordance with the procedures agreed to by the Shareholder
Organization and the Distributor. Confirmations of all such Customer purchases
(and redemptions) will be sent by CGFSC to the particular Shareholder
Organization. As an alternative, a Shareholder Organization may elect to
establish its Customers' accounts of record with CGFSC. In this event, even if
the Shareholder Organization continues to place its Customers' purchase (and
redemption) requests with the Funds, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Funds bear the expense of fees payable to Shareholder
Organizations for such services. See "Shareholder Organizations."

Redemption Procedures
---------------------

Customers of Shareholder Organizations holding Shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Trust, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming Shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. In addition, certain redemptions of
Shares of the International Equity Fund are subject to a 2.00% redemption fee.
See the Funds' prospectus for further details. Investors may redeem all or part
of their Shares in accordance with any of the procedures described below (these
procedures also apply to Customers of Shareholder Organizations for whom
individual accounts have been established with CGFSC).

41
<PAGE>

As discussed in the Prospectus, a redemption request for an amount in
excess of $50,000 per account, or for any amount if the proceeds are to be sent
elsewhere than the address of record, must be accompanied by signature
guarantees from any eligible guarantor institution approved by CGFSC in
accordance with its Standards, Procedures and Guidelines for the Acceptance of
Signature Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor
institutions generally include banks, broker/dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations. All eligible guarantor institutions must participate in
the Securities Transfer Agents Medallion Program ("STAMP") in order to be
approved by CGFSC pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
CGFSC at (800) 446-1012 or at the address given above.

CGFSC may require additional supporting documents for redemptions. A
redemption request will not be deemed to be properly received until CGFSC
receives all required documents in good order. Payment for Retail Shares
redeemed will ordinarily be made by mail within five Business Days after receipt
by CGFSC of the redemption request in good order. Payment for Institutional
Shares redeemed will normally be sent the next Business Day after receipt by
CGFSC of the redemption request in good order. Questions with respect to the
proper form for redemption requests should be directed to CGFSC at (800) 446-
1012 (from overseas, call (617) 557-8280).

Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem Shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Investor's account at any commercial bank in the United States. Institutional
Investors may also redeem Shares by instructing CGFSC by telephone at (800) 446-
1012 or by terminal access.

During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Investor is unable to contact
CGFSC by telephone, the Investor may also deliver the redemption request to
CGFSC in writing at the address noted above.

Other Redemption Information
----------------------------

Except as described in "Investor Programs" below, Investors may be
required to redeem Shares in a Fund after 60 days' written notice if due to
Investor redemptions the balance in the particular account with respect to the
Fund remains below $500. If a Customer has agreed with a particular Shareholder
Organization to maintain a minimum balance in his or her account at the
institution with respect to Shares of a Fund, and the balance in such account
falls below that minimum, the Customer may be obliged by the Shareholder
Organization to redeem all or part of his or her Shares to the extent necessary
to maintain the required minimum balance.

The Trust may suspend the right of redemption or postpone the date of
payment for Shares for more than 7 days during any period when (a) trading on
the NYSE is restricted by applicable rules and regulations of the SEC; (b) the
NYSE is closed for other than customary

42
<PAGE>

weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC.

In the event that Shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such Shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.

The Trust reserves the right to honor any request for redemption or
repurchase of a Fund's Shares by making payment in whole or in part in
securities chosen by the Trust and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash.

Under certain circumstances, the Trust may, in its discretion, accept
securities as payment for Shares. Securities acquired in this manner will be
limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of any Fund acquiring such
securities.

INVESTOR PROGRAMS
-----------------

Systematic Withdrawal Plan
--------------------------

An Investor who owns Retail Shares with a value of $10,000 or more may
begin a Systematic Withdrawal Plan. The withdrawal can be on a monthly,
quarterly, semiannual or annual basis. There are four options for such
systematic withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value of the
account); or

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for Retail Shares with CGFSC. Under
this Plan, dividends and distributions are automatically reinvested in
additional Retail Shares of a Fund. Amounts paid to investors under this Plan
should not be considered as income. Withdrawal payments represent proceeds from
the sale of Retail Shares, and there will be a reduction of the shareholder's
equity in the Fund involved if the amount of the withdrawal payments exceeds the
dividends and distributions paid on the Retail Shares and the appreciation of
the Investor's investment in the Fund. This in turn may result in a complete
depletion of the shareholder's investment. An

43
<PAGE>

Investor may not participate in a program of systematic investing in a Fund
while at the same time participating in the Systematic Withdrawal Plan with
respect to an account in the same Fund. Customers of Shareholder Organizations
may obtain information on the availability of, and the procedures and fees
relating to, the Systematic Withdrawal Plan directly from their Shareholder
Organizations.

Exchange Privilege
------------------

Investors and Customers of Shareholder Organizations may exchange
Retail Shares having a value of at least $500 for Retail Shares of any other
portfolio of the Trust or for Shares of any portfolio of Excelsior Funds, Inc.
or Excelsior Tax-Exempt Funds, Inc. Institutional Shares may be exchanged for
Institutional Shares of any portfolio of Excelsior Institutional Trust or
Excelsior Funds, Inc. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.

Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Trust. However, certain exchanges are subject to a 2% redemption fee. See
"Redemption Procedures." In order to prevent abuse of this privilege to the
disadvantage of other shareholders, the Trust reserves the right to limit the
number of exchange requests of Investors to no more than six per year. Customers
of Shareholder Organizations may obtain information on the availability of, and
the procedures and fees relating to, such program directly from their
Shareholder Organizations.

Retirement Plans
----------------

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

. Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and

. Keogh Plans for self-employed individuals.

44
<PAGE>

Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase Shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

Additional Information
----------------------

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

RULE 12B-1 DISTRIBUTION PLAN
----------------------------

Pursuant to Rule 12b-1 of the 1940 Act, the Trust has adopted a
Distribution Plan (the "Distribution Plan") which permits the Retail Shares of
the Value Equity and Optimum Growth Funds to bear certain expenses in connection
with the distribution of such Shares. As required by Rule 12b-1, the Funds'
Distribution Plan and related distribution agreement have been approved, and are
subject to annual approval by, a majority of the Trust's Board of Trustees, and
by a majority of the trustees who are not interested persons of the Trust and
have no direct or indirect interest in the operation of the Distribution Plan or
any agreement relating to the Distribution Plan, by vote cast in person at a
meeting called for the purpose of voting on the Distribution Plan and related
agreement. Rule 12b-1 also requires that persons authorized to direct the
disposition of monies payable by a Fund (in the Funds' case, the Distributor)
provide for the trustees' review of quarterly reports on the amounts expended
and the purposes for the expenditures.

Under the Distribution Plan, the Retail Shares of the Value Equity and
Optimum Growth Funds may compensate the Distributor monthly for its services
which are intended to result in the sale of Retail Shares. The compensation may
not exceed the annual rate of 0.25% of the average daily net asset value of each
Fund's outstanding Retail Shares. The Distributor may also use the distribution
fees to defray direct and indirect marketing expenses such as: (i) the expense
of preparing, printing and distributing promotional materials and prospectuses
(other than prospectuses used for regulatory purposes or for distribution to
existing shareholders); (ii) the expense of other advertising via radio,
television or other print or electronic media; and (iii) the expense of payments
to financial institutions ("Distribution Organizations") for distribution
assistance (including sales incentives). Payments under the Distribution Plan
are not tied directly to out-of-pocket expenses and therefore may be used by the
Distributor as it chooses (for example, to defray its overhead expenses).

45
<PAGE>

Any material amendment to the Trust's arrangements with Distribution
Organizations must be approved by a majority of the Trust's Board of Trustees
(including a majority of the disinterested trustees). Any change in the
Distribution Plan that would materially increase the distribution expenses of
Retail Shares requires approval by holders of those Shares, but otherwise, the
Distribution Plan may be amended by the trustees, including a majority of the
disinterested trustees. So long as the Distribution Plan is in effect, the
selection and nomination of the members of the Trust's Board of Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust will be
committed to the discretion of such non-interested trustees.

The Distribution Plan will continue in effect for successive one year
periods, provided that such continuance is specifically approved by the vote of
a majority of the trustees who are not parties to the Distribution Plan or
interested persons of any such party and who have no direct or indirect
financial interest in the Distribution Plan or any related agreement and the
vote of a majority of the entire Board of Trustees. The Distribution Plan and
related agreement may be terminated as to a particular Fund by a vote of a
majority of the Trust's disinterested trustees or by vote of the holders of a
majority of the Retail Shares of the Fund.

For the fiscal year ended March 31, 2000, the Retail Shares of the
Value Equity and Optimum Growth Funds bore distribution fees under the
Distribution Plan of $343 and $45,308, respectively, to compensate the
Distributor for distribution-related services.

MANAGEMENT OF THE FUNDS
-----------------------

Trustees and Officers
---------------------

The business and affairs of the Funds are managed under the direction
of the Trust's Board of Trustees. The trustees and executive officers of the
Trust, their addresses, ages, principal occupations during the past five years,
and other affiliations are as follows:

46
<PAGE>

<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
---------------- ----- -------------------
<S> <C> <C>
Frederick S. Wonham* Chairman of the Board, Retired; Chairman of the Boards (since 1997), and President,
238 June Road President and Treasurer Treasurer and Director (since 1995) of Excelsior Funds, Inc. and
Stamford, CT 06903 Excelsior Tax-Exempt Funds, Inc.; Chairman of the Boards (since
Age: 69 1997), President, Treasurer and Trustee (since 1995) of Excelsior
Funds and Excelsior Institutional Trust; Vice Chairman of U.S.
Trust Corporation and U.S. Trust New York (from February 1990
until September 1995); and Chairman, U.S. Trust Company (from
March 1993 to May 1997).

Alfred C. Tannachion* Trustee Retired; Director of Excelsior Funds, Inc. and Excelsior Tax-
6549 Pine Meadows Drive Exempt Funds, Inc. (since 1985); Chairman of the Board of
Spring Hill, FL 34606 Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Age 74 (1991-1997) and the Trust (1996-1997); President and Treasurer of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. (1994-
1997) and the Trust (1996-1997); Chairman of the Board, President
and Treasurer of UST Master Variable Series, Inc. (1994-1997);
and Trustee of the Trust (since 1995).
</TABLE>

_____________________
* This trustee is considered to be an "interested person" of the Trust as
defined in the 1940 Act.

47
<PAGE>

<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
---------------- ----- -------------------
<S> <C> <C>
Rodman L. Drake Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Continuation Investments (since 1996); Trustee of Excelsior Institutional Trust and Excelsior
Group, Inc. Funds (since 1994); Director, Parsons Brinkerhoff, Inc. (engineering
1251 Avenue of the Americas, firm) (since 1995); President, Continuation Investments Group, Inc.
9/th/ Floor (since 1997); President, Mandrake Group (investment and consulting firm)
New York, NY 10020 (1994-1997); Chairman, MetroCashcard International, Inc. (since 1999);
Age: 57 Director, Hotelivision, Inc. (since 1999); Director, Alliance Group
Services, Inc. (since 1998); Director, Hyperion Total Return Fund, Inc.
and three other funds for which Hyperion Capital Management, Inc. serves
as investment adviser (since 1991); Co-Chairman, KMR Power Corporation
(power plants) (from 1993 to 1996); Director, The Latin America Smaller
Companies Fund, Inc. (from 1993 to 1998); Member of Advisory Board,
Argentina Private Equity Fund L.P. (from 1992 to 1996) and Garantia L.P
(Brazil) (from 1993 to 1996); and Director, Mueller Industries, Inc. (from
1992 to 1994).

Joseph H. Dugan Trustee Retired; Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
913 Franklin Lake Road Inc. (since 1984); Director of UST Master Variable Series, Inc. (from
Franklin Lakes, NJ 07417 1994 to June 1997); and Trustee of the Trust (since 1995).
Age: 75
</TABLE>

48
<PAGE>

Morrill Melton Hall, Jr. Director Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Comprehensive Health Services, Inc. (since July 30, 2000); Trustee of the Trust (since July 30, 2000); Chief
8229 Boone Blvd., Suite 700 Executive Officer, Comprehensive Health Services, Inc. (health care
Vienna, VA 22182 management and administration).
Age: 55

Jonathan Piel Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
558 E. 87th Street (since 1996); Trustee of the Trust and Excelsior Funds (since 1994); Vice
New York, NY 10128 President and Editor, Scientific American, Inc. (from 1986 to 1994);
Age: 61 Director, Group for The South Fork, Bridgehampton, New York (since 1993);
and Member, Advisory Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology (since 1984).
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other Affiliations
Name and Address Trust During Past 5 Years
<S> <C> <C>
Robert A. Robinson Trustee Director of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc.
Church Pension Group (since 1987); Director of UST Master Variable Series, Inc. (from 1994 to
445 Fifth Avenue June 1997); Trustee of the Trust (since 1995); President Emeritus, The
New York, NY 10016 Church Pension Fund and its affiliated companies (since 1966); Trustee,
Age: 74 H.B. and F.H. Bugher Foundation and Director of its wholly owned
subsidiaries --Rosiclear Lead and Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director, Morehouse Publishing Co. (1974-1998);
Trustee, HSBC Funds Trust and HSBC Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57

Michael P. Malloy Assistant Partner of the law firm of Drinker Biddle & Reath LLP.
One Logan Square Secretary
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41

Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global Funds Services Company
Chase Global Funds Secretary (November 1996 to present); and Officer and Manager of Financial
Services Company Reporting, Investors Bank & Trust Company (January 1991 to November 1996).
73 Tremont Street
Boston, MA 02108-3913
Age: 39
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
Position
with the Principal Occupation and Other
Name and Address Trust Affiliations During Past 5 Years
---------------- ----- --------------------------------
<S> <C> <C>
Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 33 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds
Services Company (from November 1996
to July 1998); Supervisor, Chase Global
Funds Services Company (from September
1995 to November 1996); Fund Administrator,
Chase Global Funds Services Company (from
February 1993 to September 1995).
</TABLE>

Each trustee receives an annual fee of $4,000 from Excelsior
Institutional Trust, and an annual fee of $9,000 from each of Excelsior Funds,
Inc. and Excelsior Tax-Exempt Funds, Inc. plus a meeting fee of $250 from
Excelsior Institutional Trust and $1,500 from each of Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. for each meeting attended and is reimbursed for
expenses incurred in connection with service as a trustee. The Chairman of the
Board is entitled to receive an additional $5,000 per annum from each of the
foregoing Companies for services in such capacity. Prior to December 1999, each
of Messrs. Drake, Piel and Wonham received $4,000 from Excelsior Funds plus a
per-Company meeting fee of $250 and each of these persons was reimbursed for
expenses received in attending meetings of Excelsior Funds. The Chairman of the
Board of Excelsior Funds received $5,000 per annum for services in such
capacity. The trustees may hold various other directorships unrelated to the
Funds. Drinker Biddle & Reath LLP, of which Messrs. McConnel and Malloy are
partners, receives legal fees as counsel to the Trust. The employees of CGFSC do
not receive any compensation from the Trust for acting as officers of the Trust.
No person who is currently an officer, director or employee of the Adviser
serves as an officer, director or employee of the Trust. As of July 7, 2000, the
trustees and officers of the Trust as a group owned beneficially less than 1% of
the outstanding shares of each Fund, and less than 1% of the outstanding shares
of all Funds in the aggregate.

51
<PAGE>

The following chart provides certain information about fees received
by the trustees in the most recently completed fiscal year.

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS PART ESTIMATED ANNUAL FROM THE TRUST AND
COMPENSATION OF TRUST BENEFITS UPON FUND COMPLEX* PAID
FROM THE TRUST EXPENSES RETIREMENT TO TRUSTEES
-------------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Frederick S. Wonham $6,500 None None $52,000(4)**
Rodman L. Drake $5,250 None None $38,750(4)**
Jonathan Piel $5,500 None None $42,000(4)**
Alfred Tannachion $5,250 None None $38,250(3)**
Donald L. Campbell*** $4,000 None None $22,000(3)**
Joseph C. Dugan $5,250 None None $38,250(3)**
Wolfe J. Frankl $5,000 None None $35,000(3)**
Robert A. Robinson $5,500 None None $39,500(3)**
</TABLE>

__________________

* The "Fund Complex" consists of the Trust, Excelsior Funds, Inc., Excelsior
Tax-Exempt Funds, Inc., and, until December 15, 1999, Excelsior Funds.

** Number of investment companies in the Fund Complex for which trustee
served as director or trustee.

*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.

The Trust Instrument of the Trust provides that the Trust will
indemnify its trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust unless it is finally adjudicated that they engaged in
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or unless it is finally adjudicated that they
did not act in good faith in the reasonable belief that their actions were in
the best interests of the Trust. In the case of settlement, such indemnification
will not be provided unless it has been determined by a court or other body
approving the settlement or other disposition, or by a reasonable determination,
based upon a review of readily available facts, by vote of a majority of
disinterested trustees, or in a written opinion of independent counsel, that
such officers or trustees have not engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of their duties.

52
<PAGE>

Investment Advisory Services
----------------------------

United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds, subject to the general
supervision and guidance of the Board of Trustees of the Trust. In the Advisory
Agreements, the Adviser has agreed to provide the services described in the
Prospectuses.

Each Advisory Agreement will continue in effect with respect to each
Fund as long as such continuance is specifically approved at least annually by
the Board of Trustees of the Trust or by a majority vote of the shareholders in
the applicable Fund and, in either case, by a majority of the Trustees of the
Trust who are not parties to the Advisory Agreement or interested persons of any
such party, at a meeting called for the purpose of voting on the Advisory
Agreement. Each investment adviser and administrator has agreed to waive certain
fees.

Each Advisory Agreement provides that the Adviser may render services
to others, and each Advisory Agreement is terminable by the Trust without
penalty on not more than 60 days' nor less than 30 days' written notice when
authorized either by majority vote of the Fund or by a vote of a majority of the
Board of Trustees of the Trust, or by the Adviser on not more than 60 days' nor
less than 30 days' written notice, and will automatically terminate in the event
of its assignment. Each Advisory Agreement provides that neither the Adviser nor
its personnel shall be liable for any error of judgment or mistake of law or for
any loss arising out of any investment, or for any act or omission in the
execution of security transactions for a Fund, except that U.S. Trust New York
and U.S. Trust Company shall be jointly, but not severally, liable for willful
misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties under the Advisory Agreement.

U.S. Trust Corporation is a wholly-owned subsidiary of The Charles
Schwab Corporation ("Schwab"). Charles R. Schwab is the founder, Chairman and
Co-Chief Executive Officer and a Director and significant shareholder of Schwab.
As a result of his positions and share ownership, Mr. Schwab may be deemed to be
a controlling person of Schwab and its subsidiaries. Through its principal
subsidiary Charles Schwab & Co., Inc., Schwab is the nation's fourth largest
financial services firm and the nation's largest electronic brokerage firm, in
each case measured by customer assets. At December 31, 1999, Schwab served 6.6
million active accounts with $725 billion in customer assets through 340 branch
offices, four regional customer telephone service centers and automated
telephonic and online channels. Approximately 30% of Schwab's customer assets
and approximately 13% of its customer accounts are managed by the 5,800
independent, fee-based investment advisors served by Schwab's institutional
investor segment.

For the services provided and expenses assumed pursuant to the
Advisory Agreements, the Adviser is entitled to be paid a fee computed daily and
paid monthly, at the annual rate of 0.65% of the average daily net assets of
each of the Equity, Value Equity,

53
<PAGE>

Optimum Growth, Income and Total Return Bond Funds, and 1.00% of the average
daily net assets of the International Equity Fund.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Equity, Income, Total Return Bond, Value Equity and Optimum
Growth Funds pursuant to an advisory agreement substantially similar to the
Advisory Agreement currently in effect for such Funds.

For the fiscal years ended March 31, 2000, 1999 and 1998, the Trust
paid the Adviser fees for advisory services as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Equity Fund $867,099 $684,933 $573,251
Value Equity Fund $236,844 $135,038 $104,281
Optimum Growth Fund $534,005 $304,737 $162,368
Income Fund $197,690 $150,590 $129,938
Total Return Bond Fund $710,288 $530,461 $375,215
International Equity Fund* $483,293 $214,663 $ 0
</TABLE>

* U.S. Trust became the Adviser to the International Equity Fund on December
29, 1998.

For the fiscal years ended March 31, 2000, 1999 and 1998, the Adviser
voluntarily agreed to waive a portion of its advisory fee for certain funds.
During the periods stated, these waivers reduced advisory fees as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Equity Fund $ 386,474 $ 298,579 $ 250,968
Value Equity Fund $ 71,673 $ 91,255 $ 91,692
Optimum Growth Fund $ 121,458 $ 155,809 $ 119,069
Income Fund $ 324,481 $ 262,853 $ 219,452
Total Return Bond Fund $1,016,516 $ 781,974 $ 600,960
International Equity Fund $ 600,158 $ 355,644 $ 0
</TABLE>

From June 22, 1998 to December 28, 1998, U.S. Trust Company, N.A.
("U.S. Trust, N.A.") served as the International Equity Fund's investment
adviser, pursuant to an advisory agreement substantially similar to the Advisory
Agreement currently in effect for such Fund. Prior to June 22, 1998, U.S. Trust
Company of The Pacific Northwest ("U.S. Trust Pacific") served as investment
adviser to the International Equity Fund pursuant to an advisory agreement
substantially similar to the Advisory Agreement currently in effect for the
Fund.

54
<PAGE>

For the period from June 22, 1998 to December 28, 1998, U.S. Trust,
N.A. received advisory fees of $141,527 with respect to the International Equity
Fund. For the same period, U.S. Trust, N.A. waived advisory fees of $209,295
with respect to the International Equity Fund.

For the period from April 1, 1998 to June 21, 1998, U.S. Trust Pacific
received advisory fees of $38,550 with respect to the International Equity Fund.
For the same period, U.S. Trust Pacific waived advisory fees of $51,988 with
respect to the International Equity Fund.

For the fiscal year ended March 31, 1998, U.S. Trust Pacific received
advisory fees of $215,112 with respect to the International Equity Fund. For the
same period, U.S. Trust Pacific waived advisory fees of $221,324 with respect to
the International Equity Fund.

Prior to December 28, 1998, Harding, Loevner Management, L.P.
("Harding Loevner") served as the International Equity Fund's sub-adviser,
pursuant to an investment sub-advisory agreement (a "Sub-Advisory Agreement")
with U.S. Trust, N.A. Under the Sub-Advisory Agreement, Harding Loevner was
entitled to receive from U.S. Trust, N.A. fees at a maximum annual rate equal to
0.50% of the International Equity Fund's average daily net assets.

Harding Loevner made the day-to-day investment decisions for the
International Equity Fund and placed the purchase and sales orders for
securities transactions of such Fund, subject in all cases to the general
supervision of U.S. Trust, N.A. Harding Loevner furnished at its own expense all
services, facilities and personnel necessary in connection with managing the
International Equity Fund's investments and effecting securities transactions
for such Fund.

For the fiscal year ended March 31, 1999, Harding Loevner received
sub-advisory fees of $135,769 with respect to the International Equity Fund. For
the same period, Harding Loevner waived sub-advisory fees of $84,911 with
respect to the International Equity Fund.

For the fiscal year ended March 31, 1998, Harding Loevner received
sub-advisory fees of $216,523 with respect to the International Equity Fund.

Administrators
--------------

CGFSC, Federated Services Company (an affiliate of the Distributor)
and U.S. Trust Company (together, the "Administrators") serve as the Trust's
administrators and provide the Funds with general administrative and operational
assistance. Until July 31, 2000, Federated Services Company's subsidiary,
Federated Administrative Services, served as administrator to the Trust. On July
31, 2000, Federated Services Company assumed all of its subsidiary's rights and
obligations under the Administration Agreement. Under the Administration
Agreement, the Administrators have agreed to maintain office facilities for the
Funds, furnish the Funds with statistical and research data, clerical,
accounting, and bookkeeping services, and certain other services required by the
Funds, and to compute the net asset values, net income and realized capital
gains or losses, if any, of the Funds. The Administrators prepare semiannual
reports to the SEC, prepare federal and state tax returns, prepare filings with
state

55
<PAGE>

securities commissions, arrange for and bear the cost of processing Share
purchase and redemption orders, maintain the Funds' financial accounts and
records, and generally assist in the Funds' operations.

The Administrators also provide administrative services to the
investment portfolios of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds,
Inc., which are also advised by U.S. Trust and its affiliates and distributed by
the Distributor. For services provided to all of the investment portfolios of
the Trust, Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. (except
for the international portfolios of Excelsior Funds, Inc. and Excelsior
Institutional Trust), the Administrators are entitled jointly to fees, computed
daily and paid monthly, based on the combined aggregate average daily net assets
of the three companies (excluding the international portfolios of the Trust and
Excelsior Funds, Inc.) as follows:

Combined Aggregate Average Daily Net Assets
of the Trust, Excelsior Funds, Inc. and
Excelsior Tax-Exempt Funds, Inc. (excluding
the international portfolios of the Trust
and Excelsior Funds, Inc.)
--------------------------

Annual Fee
----------

First $200 million............................................ 0.200%
Next $200 million............................................. 0.175%
Over $400 million............................................. 0.150%

Administration fees payable to the Administrators by each portfolio of
the Trust, Excelsior Funds, Inc., and Excelsior Tax-Exempt Funds, Inc. are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time.

Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company and U.S. Trust New York served as the
Trust's administrators pursuant to an administration agreement substantially
similar to the administration agreement currently in effect for the Trust.

For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators were paid the following administration fees:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Equity Fund $293,462 $231,504 $194,009
Value Equity Fund $ 72,228 $ 53,266 $ 46,129
Optimum Growth Fund $153,552 $108,405 $ 66,246
Income Fund $122,299 $ 83,501 $ 87,287
Total Return Bond Fund $404,662 $ 97,318 $ 82,241
International Equity Fund $216,690 $308,927 $229,777
</TABLE>

56
<PAGE>

For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:

<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Equity Fund $ 0 $ 0 $ 0
Value Equity Fund $ 0 $ 0 $ 0
Optimum Growth Fund $ 0 $ 0 $ 0
Income Fund $ 0 $ 0 $ 0
Total Return Bond Fund $ 0 $ 0 $ 0
International Equity Fund $ 0 $ 0 $12,243
</TABLE>

Shareholder Organizations
-------------------------

The Trust has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
Shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's Shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a) acting
as recordholder of Shares; (b) assisting in processing purchase, exchange and
redemption transactions; (c) transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem Shares; (d) providing periodic
statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Trust to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any fees
that they may charge in connection with a Customer's investment.

The Trust's agreements with Shareholder Organizations are governed by
an Administrative Services Plan (the "Plan") adopted by the Trust. Pursuant to
the Plan, the Trust's Board of Trustees will review, at least quarterly, a
written report of the amounts expended under the Trust's agreements with
Shareholder Organizations and the purposes for which the expenditures were made.
In addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of the Trust's Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust (as defined in the 1940
Act) and have no direct or indirect financial interest in such arrangements (the
"Disinterested Trustees").

Any material amendment to the Trust's arrangements with Shareholder
Organizations must be approved by a majority of the Trust's Board of Trustees
(including a majority of the Disinterested Trustees). So long as the Trust's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Trust's Board of Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) will be committed
to the discretion of such Disinterested Trustees.

57
<PAGE>

For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:

<TABLE>
<CAPTION>
Amounts Paid to Affiliates of
Total Paid U.S. Trust
---------- ----------
<S> <C> <C>
Equity Fund $ 0 $ 0

Value Equity Fund $ 0 $ 0

Optimum Growth $13,786 $ 0

Income Fund $ 0 $ 0

Total Return Bond Fund $ 0 $ 0

International Equity Fund $ 0 $ 0
</TABLE>

For the fiscal years ended March 31, 1999 and 1998, the Funds did not
make any payments to Shareholder Organizations.

Expenses
--------

The expenses of the Trust include the compensation of its trustees who
are not affiliated with the Adviser; governmental fees; interest charges; taxes;
fees and expenses of the Adviser and Administrators, of independent auditors, of
legal counsel and of any transfer agent, custodian, registrar or dividend
disbursing agent of the Trust; insurance premiums; and expenses of calculating
the net asset value of, and the net income on, Shares of each Fund.

Expenses of the Trust also include expenses of distributing and
redeeming Shares and servicing shareholder accounts; expenses of preparing,
printing and mailing prospectuses, reports, notices, proxy statements and
reports to shareholders and to governmental offices and commissions; expenses of
shareholder and Trustee meetings; expenses relating to the issuance,
registration and qualification of Shares of each Fund and the preparation,
printing and mailing of prospectuses for such purposes; and membership dues in
the Investment Company Institute allocable to the Trust.

Transfer Agent and Custodian
----------------------------

58
<PAGE>

securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Trust's Board of Trustees concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation. Communications to
the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.

CGFSC serves as transfer agent for the Funds pursuant to a Transfer
Agency Agreement. Under this Agreement, CGFSC has agreed to perform the
following functions, among others: (i) issue and redeem Shares of the Funds;
(ii) address and mail all communications by the Funds to their shareholders,
including reports to shareholders, dividend and distribution notices, and proxy
materials for their meetings of shareholders; (iii) respond to correspondence by
shareholders and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to the Trust's Board of Trustees
concerning the Funds' operations. For its transfer agency and dividend
disbursement services, CGFSC is entitled to receive from the Trust such
compensation as may be agreed upon from time to time between the Trust and
CGFSC. In addition, CGFSC is entitled to be reimbursed for its out-of-pocket
expenses for the cost of forms, postage, processing purchase and redemption
orders, handling of proxies, and other similar expenses in connection with the
above services.

CGFSC may delegate its transfer agency obligations to another transfer
agent registered or qualified under applicable law, provided that CGFSC shall
remain liable for the performance of all of its transfer agency duties under the
Transfer Agency Agreement, notwithstanding any such delegation.

INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116 serve as auditors of the Trust. The Funds' Financial Highlights
included in the Prospectuses and the financial statements for the fiscal year
ended March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.

COUNSEL
-------

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Trust, and Mr. Malloy, Assistant Secretary of the Trust, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103-6996,
is counsel to the Trust and will pass upon the legality of the Shares offered by
the Prospectuses.

59
<PAGE>

TAXATION
--------

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each series of the Trust is treated
as a separate corporate entity and has qualified and intends to continue to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"). Such qualification generally relieves a Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions would be
taxable as ordinary income to shareholders to the extent of the Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a year, the Fund would be
subject to corporate income taxes and/or excise taxes in respect of the
shortfall or, if the shortfall is large enough, the Fund could be disqualified
as a regulated investment company.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The Funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Fund on December 31
of such year if such dividends are actually paid during January of the following
year.

Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so either that they are not subject to backup withholding or that
they are "exempt recipients."

Any investment by a Fund in zero coupon bonds, certain securities
purchased at a market discount, and similar instruments will cause a Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, a
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.

60
<PAGE>

While certain of the Funds might invest in municipal securities, the
interest on which might otherwise be exempt from tax, it is generally not
expected that any Fund will satisfy the requirements under the Code to pass-
through such exempt income to shareholders as tax-exempt dividends.

Any Fund's transactions in options, futures contracts, and forward
currency exchange contracts will be subject to special tax rules that may affect
the amount, timing, and character of Fund income and distributions to
shareholders. In addition, foreign exchange gains or losses realized by any Fund
will generally be treated as ordinary income or loss by the Fund. Investment by
a Fund in certain "passive foreign investment companies" may also have to be
limited in order to avoid a tax on the Fund. Such a Fund may elect (if such
election is available) to mark to market any investments in "passive foreign
investment companies" on the last day of each year. This election may cause a
Fund to recognize income prior to the receipt of cash payments with respect to
those investments; in order to distribute this income and avoid tax on the Fund,
the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold.

The tax principles applicable to transactions in financial instruments
and futures contacts and options that may be engaged in by the International
Equity Fund, and investments in passive foreign investment companies ("PFICs"),
are complex and, in some cases, uncertain. Such transactions and investments may
cause a Fund to recognize taxable income prior to the receipt of cash, thereby
requiring the Fund to liquidate other positions, or to borrow money, so as to
make sufficient distributions to shareholders to avoid corporate level tax.
Moreover, some or all of the taxable income recognized may be ordinary income or
short-term capital gain, so that the distributions may be taxable to
Shareholders as ordinary income. In addition, in the case of any shares of a
PFIC in which a Fund invests, the Fund may be liable for corporate-level tax on
any ultimate gain or distributions on the shares if the Fund fails to make an
election to recognize income annually during the period of its ownership of the
PFIC shares.

If the International Equity Fund holds more than 50% of its assets in
foreign stock and securities at the close of its taxable year, the Fund may
elect to "pass through" to the Fund's shareholders foreign income taxes paid. If
the Fund so elects, shareholders will be required to treat their pro rata
portion of the foreign income taxes paid by the Fund as part of the amounts
distributed to them by the Fund and thus includable in their gross income for
federal income tax purposes. Shareholders who itemize deductions would then be
allowed to claim a deduction or credit (but not both) on their federal income
tax returns for such amounts, subject to certain limitations. Shareholders who
do not itemize deductions would (subject to such limitations) be able to claim a
credit but not a deduction. No deduction will be permitted to individuals in
computing their alternative minimum tax liability. If the International Equity
Fund does not qualify or elect to "pass through" to the Fund's shareholders
foreign income taxes paid, shareholders will not be able to claim any deduction
or credit for any part of the foreign income taxes paid by the Fund.

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be

61
<PAGE>

changed by legislative or administrative action. Shareholders are advised to
consult their tax advisers concerning their specific situations and the
application of state, local and foreign taxes.

DESCRIPTION OF THE TRUST
------------------------

The Trust's Trust Instrument permits the Trustees of the Trust to
issue an unlimited number of full and fractional shares of beneficial interest
(par value $0.00001 per share) of each class of each Fund and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in each Fund. The Trust reserves
the right to create and issue any number of series or classes; investments in
each series participate equally in the earnings, dividends and assets of the
particular series only and no other series. Currently, the Trust has six active
series, although additional series may be established from time to time.

The shares of the Value Equity and Optimum Growth Funds are classified
into two separate classes of shares representing Retail Shares and Institutional
Shares. Retail Shares have different expenses than Institutional Shares which
may affect performance.

Each share (irrespective of class designation) of a Fund represents an
interest in that Fund that is proportionate with the interest represented by
each other share. Shares have no preference, preemptive, conversion or similar
rights. Shares when issued are fully paid and nonassessable, except as set forth
below. Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote and will vote in the aggregate and not by class
or series, except as otherwise expressly required by law. Separate votes,
however, are taken by each class or series on matters affecting an individual
class or series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Shareholders of all
series of the Trust will vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series of the Trust could control the outcome of these votes.

The Trust is not required to and has no current intention to hold
annual meetings of shareholders, although the Trust will hold special meetings
of shareholders when in the judgment of the Board of Trustees of the Trust it is
necessary or desirable to submit matters for a shareholder vote. Shareholders
have the right to remove one or more Trustees of the Trust at a shareholders
meeting by a vote of two-thirds of the outstanding shares of the Trust.
Shareholders also have the right to remove one or more Trustees of the Trust
without a meeting by a declaration in writing by a specified number of
shareholders. Upon liquidation or dissolution of a Fund, shareholders would be
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.

The assets of the Trust received for the issue or sale of the shares
of each class of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are specifically allocated to
such class and series and constitute the underlying assets of such class and
series. The underlying assets of each series are segregated on the books of

62
<PAGE>

account, and are to be charged with the liabilities in respect to such series
and with such a share of the general liabilities of the Trust. Expenses with
respect to any two or more series are to be allocated in proportion to the asset
value of the respective series except where allocations of direct expenses can
otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given class or series, or which are general or allocable to two
or more series. In the event of the dissolution or liquidation of the Trust or
any series, the holders of the shares of any series are entitled to receive as a
class the value of the underlying assets of such shares available for
distribution to shareholders.

The Trustees may amend the Trust Instrument without shareholder
approval, except shareholder approval is required for any amendment (a) which
affects the voting rights of shareholders under the Trust Instrument, (b) which
affects shareholders' rights to approve certain amendments to the Trust
Instrument, (c) required to be approved by shareholders by law or the
Registration Statement, or (d) submitted to shareholders for their approval by
the Trustees in their discretion. Pursuant to Delaware business trust law and
the Trust Instrument, the Trustees may, without shareholder approval, (i) cause
the Trust to merge or consolidate with one or more entities, if the surviving or
resulting entity is the Trust or another open-end management investment company
registered under the 1940 Act, or a series thereof, that will succeed to or
assume the Trust's registration under the 1940 Act, or (ii) cause the Trust to
incorporate under the laws of the State of Delaware.

The Trust Instrument provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust unless it
is finally adjudicated that they engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in their offices,
or unless it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees, or in a
written opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.

Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation on personal liability which is extended to
shareholders of private for profit corporations organized under the General
Corporation Law of the State of Delaware. However, the courts of other states
may not apply Delaware law and shareholders may, under certain circumstances be
held personally liable for the obligations of the Trust. The Trust Instrument
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and provides for indemnification and reimbursement of expenses out
of Fund property for any shareholder held personally liable for the obligations
of a Fund solely by reason of his being or

63
<PAGE>

having been a shareholder. The Trust Instrument also provides for the
maintenance, by or on behalf of the Trust and each Fund, of appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust and each Fund, their shareholders, Trustees,
officers, employees and agents, covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which Delaware law did not
apply, inadequate insurance existed and a Fund itself was unable to meet its
obligations.

CODE OF ETHICS
--------------

The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics that allow for personnel subject to the codes to
invest in securities, including securities that may be purchased or held by the
Funds.

MISCELLANEOUS
-------------

As of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the Trust's outstanding shares as agent or custodian for
their customers, but did not own such share beneficially because they did not
have voting investment discretion with respect to such shares.

As of July 7, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding
Institutional Shares of a Fund were as follows: Equity Fund: PJM Interconnection
DB Plan, c/o United States Trust Company of New York, 114 West 47/th/ Street,
New York, New York, 10036, 9.65%; Value Equity Fund: U.S. Trust Retirement Fund,
c/o United States Trust Company of New York, 114 West 47/th/ Street, New York,
New York, 10036, 81.78%; Optimum Growth Fund: U.S. Trust Retirement Fund, c/o
United States Trust Company of New York, 114 West 47/th/ Street, New York, New
York, 10036, 50.44%; U.S. Trust Company of New York, Trustee FBO U.S. Trust
Plan, U.S. Trust Co. of Pacific Northwest, 4380 S.W. Macadam Avenue, Suite 450,
Portland, Oregon, 97201, 22.00%; International Equity Fund: Planned Parenthood
NY, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 5.56%; The Liberty Fund, c/o United States Trust Company
of New York, 114 West 47/th/ Street, New York, New York, 10036, 14.87%; and The
Flourence Gould Foundation, c/o United States Trust Company of New York, 114
West 47/th/ Street, New York, New York, 10036, 13.77%; Income Fund: Eugene
Higgins Residuary, c/o United States Trust Company of New York, 114 West 47/th/
Street, New York, New York, 10036, 56.18%; Persimmom Charitable, c/o United
States Trust Company of New York, 114 West 47/th/ Street, New York, New York,
10036, 15.22%; and Planned Parenthood NY, c/o United States Trust Company of New
York, 114 West 47/th/ Street, New York, New York, 10036, 8.77%; Total Return
Bond Fund: The Flourence Gould Foundation, c/o United States Trust Company of
New York, 114 West 47/th/ Street, New York, New York, 10036, 13.16%; and The
Liberty Fund, c/o United States Trust Company of New York, 114 West 47/th/
Street, New York, New York, 10036, 10.32%; and Institutional Money Fund: Robin
Hood Foundation, 111 Broadway, 19/th/ Floor, New York, New York, 10066,
5.36%.

64
<PAGE>

As of July 7, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding Retail
Shares of a Fund were as follows: Value Equity Fund: George S. Warburg, 820
Hartford Turnpike, Hamden, Connecticut, 06517-1600, 43.00%; William P. Cleary,
9343 246/th/ Street, Floral Park, New York, 11001, 18.97%; and Joan M. McClurg,
6-1 Brooke Club Drive, Ossining, New York, 10562-3698, 11.76%; Optimum Growth
Fund: Avrett Free & Ginsberg, Attn: William Lahr, 800 Third Avenue, New York,
New York, 10022, 18.47%; and Charles Schwab & Co., Inc., Special Custody a/c
for, Attn: Mutual Funds, 101 Montgomery Street, San Francisco, California,
94104, 9.14%.

FINANCIAL STATEMENTS
--------------------

The audited financial statements and notes thereto in the Trust's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report") are incorporated into this Statement of Additional
Information by reference. No other parts of the 2000 Annual Report are
incorporated by reference herein. The financial statements included in the 2000
Annual Report have been audited by the Trust's independent auditors, Ernst &
Young LLP, whose reports thereon also appear in the 2000 Annual Report and are
incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing. Additional copies of the 2000
Annual Report may be obtained at no charge by telephoning CGFSC at the telephone
number appearing on the front page of this Statement of Additional
Information.

65
<PAGE>

APPENDIX A
----------

Commercial Paper Ratings
------------------------

A Standard & Poor's commercial paper rating is a current opinion of the
creditworthiness of an obligor with respect to financial obligations 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 Standard &Poor's 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.

Local Currency and Foreign Currency Risks
-----------------------------------------

Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An obligor's capacity to repay foreign obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished

A-1
<PAGE>

from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.

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:

"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.

A-2
<PAGE>

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 best 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
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.

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

Thomson Financial BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:

A-3
<PAGE>

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

"TBW-2" - This designation represents Thomson Financial BankWatch's
second-highest category and indicates that while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1."

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

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------

The following summarizes the ratings used by Standard & Poor's 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" - 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

A-4
<PAGE>

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 Standard & Poor's
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" - The "r" highlights obligations that Standard & Poor's believes

A-5
<PAGE>

have significant noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.

-N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

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" - Bonds are judged to have speculative elements; thier future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.

"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.

"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.

"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.

"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.

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)

A-6
<PAGE>

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 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 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.

A-7
<PAGE>

"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 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. This is the lowest investment grade category.

"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 change 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" and "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. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serves as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90% - 100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50% - 90%,
and "D" the lowest recovery potential, i.e., below 50%.

Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.

A-8
<PAGE>

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

-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.

-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

-RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.

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

"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.

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

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

"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.

"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.

"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.

A-9
<PAGE>

"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.

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

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

Municipal Note Ratings
----------------------

A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a very strong
capacity to pay debt service 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.

"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. Margins of
protection 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.

A-10
<PAGE>

"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 uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.

A-11
<PAGE>

EXCELSIOR FUNDS, INC.

Energy and Natural Resources Fund
Real Estate Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 2000

This Statement of Additional Information is not a prospectus but
should be read in conjunction with the current prospectus for the Energy and
Natural Resources Fund and Real Estate Fund (individually, a "Fund" and
collectively, the "Funds") of Excelsior Funds, Inc. dated August 1, 2000 (the
"Prospectus"). A copy of the Prospectus may be obtained by writing Excelsior
Funds, Inc. c/o Chase Global Funds Services Company, 73 Tremont Street, Boston,
MA 02108-3913 or by calling (800) 446-1012. Capitalized terms not otherwise
defined have the same meaning as in the Prospectus.

The audited financial statements and related report of Ernst & Young
LLP, independent auditors, contained in the annual report to the Funds'
shareholders for the fiscal year ended March 31, 2000 are incorporated herein by
reference in the section entitled "Financial Statements." No other parts of the
annual report are incorporated herein by reference. Copies of the annual report
may be obtained upon request and without charge by calling (800) 446-1012.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY................................................................................... 1

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.................................................................. 1
Investment Philosophy and Strategies................................................................ 1
Additional Investment Policies -- Energy and Natural Resources Fund................................. 1
Additional Investment Policies -- Real Estate Fund.................................................. 3
Additional Information on Portfolio Instruments..................................................... 5
Investment Limitations.............................................................................. 16

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................................................... 19
Distributor......................................................................................... 19
Purchase of Shares.................................................................................. 19
Redemption Procedures............................................................................... 20
Other Redemption Information........................................................................ 21

INVESTOR PROGRAMS............................................................................................ 22
Systematic Withdrawal Plan.......................................................................... 22
Exchange Privilege.................................................................................. 23
Retirement Plans.................................................................................... 23
Automatic Investment Program........................................................................ 24
Additional Information.............................................................................. 24

DESCRIPTION OF CAPITAL STOCK................................................................................. 24

MANAGEMENT OF THE FUNDS...................................................................................... 27
Directors and Officers.............................................................................. 27
Investment Advisory and Administration Agreements................................................... 31
Shareholder Organizations........................................................................... 35
Expenses............................................................................................ 37
Custodian and Transfer Agent........................................................................ 37

PORTFOLIO TRANSACTIONS....................................................................................... 38

PORTFOLIO VALUATION.......................................................................................... 41

INDEPENDENT AUDITORS......................................................................................... 42

COUNSEL...................................................................................................... 42

ADDITIONAL INFORMATION CONCERNING TAXES...................................................................... 42

PERFORMANCE INFORMATION...................................................................................... 43

CODE OF ETHICS............................................................................................... 48

MISCELLANEOUS................................................................................................ 48
</TABLE>
<PAGE>

<TABLE>
<S> <C>
FINANCIAL STATEMENTS......................................................................................... 48

APPENDIX A................................................................................................... A-1
</TABLE>
<PAGE>

CLASSIFICATION AND HISTORY
--------------------------

Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as non-diversified under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company was organized as a Maryland corporation on
August 2, 1984. Prior to December 28, 1995, the Company was known as "UST Master
Funds, Inc." Prior to August 18, 1997, the Energy and Natural Resources Fund was
known as the Long-Term Supply of Energy Fund.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of the Energy and Natural Resources Fund
may not be changed without the vote of the holders of a majority of its
outstanding shares (as defined below). The investment objective of the Real
Estate Fund may be changed without shareholder approval. Except as expressly
noted below, each Fund's investment policies may be changed without shareholder
approval.

Investment Philosophy and Strategies
------------------------------------

In managing investments for the Funds, the Adviser follows a long-term
investment philosophy which generally does not change with the short-term
variability of financial markets or fundamental conditions. Its approach begins
with the conviction that all worthwhile investments are grounded in value. The
Adviser believes that an investor can identify fundamental values that
eventually should be reflected in market prices, such that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.

The Adviser's investment philosophy is to identify investment values
available in the market at attractive prices. Investment value arises from the
ability to generate earnings or from the ownership of assets or resources.
Underlying earnings potential and asset values are frequently demonstrable but
not recognized in the market prices of the securities representing their
ownership.

Additional Investment Policies -- Energy and Natural Resources Fund
-------------------------------------------------------------------

Under normal market conditions, at least 65% of the Energy and Natural
Resources Fund's total assets will be invested in the securities of companies
that are in the energy and other natural resources groups of industries. Energy
and natural resources encompass a number of traditional industry
classifications, including among others: mining of metals, coal and other
minerals; oil and gas extraction; production of petroleum, coal and newer
resources such as geothermal and solar energy; pipeline companies; and
agricultural industries including crops, livestock, and forestry and timberland.
Normally, investments in energy companies will constitute a substantial portion
of these investments, and at least 25% of the Fund's total assets will be
invested in crude oil, petroleum and natural gas companies. This policy reflects
the

-1-
<PAGE>

Adviser's belief that these hydrocarbon resources represent the primary
component of world energy needs. However, the amount may be reduced if there are
changes in governmental regulations, world economic and political events,
exploration or production spending, supply, demand or prices of crude oil,
petroleum, natural gas or other energy sources, and in the Adviser's opinion,
such changes would have an adverse affect on the securities of such companies.

The Fund's concentration in companies that are in the energy and other
natural resources groups of industries subjects it to certain risks. The value
of equity securities of such companies will fluctuate pursuant to market
conditions, generally, as well as the market for the particular natural resource
in which the issuer is involved. Furthermore, the values of natural resources
are affected by numerous factors including events occurring in nature and
international politics. For instance, events in nature (such as earthquakes or
fires in prime natural resources areas) and political events (such as coups or
military confrontations) can affect the overall supply of a natural resource and
thereby the value of companies involved in such natural resource. In addition,
inflationary pressures and rising interest rates may affect the demand for
certain natural resources such as timber. Accordingly, the Fund may shift its
emphasis from one natural resources industry to another depending on prevailing
trends or developments.

As noted above, the Fund expects to invest a substantial portion of
its assets in energy companies. Energy-related investments are affected
generally by supply, demand, and other competitive factors for the companies'
specific products and services. They are also affected by unpredictable factors
such as the supply and demand for oil, gas, electricity and other energy
sources, prices of such energy sources, exploration and production spending,
governmental regulation, and world economic and political events. In addition,
utilities firms in the energy field are subject to a variety of factors
affecting the public utilities industries, including: difficulty obtaining
adequate returns on invested capital which are typically subject to the control
and scrutiny of public service commissions; restrictions on operations and
increased costs and delays as a result of environmental considerations; costs of
and ability to secure financing for large construction and development projects;
difficulties in obtaining secure energy resources; the uncertain effects of
conservation efforts; and a variety of issues concerning financing, governmental
approval and environmental aspects of nuclear power facilities.

The Fund may invest up to 35% of its total assets in gold and other
precious metal bullion and coins ("precious metals"). Precious metals will only
be bought from and sold to banks (both U.S. and foreign), and dealers who are
members of, or affiliated with members of, a regulated U.S. commodities
exchange, in accordance with applicable investment laws. Precious metal bullion
will not be purchased in any form that is not readily marketable. Coins will not
be purchased for their numismatic value and will not be considered for the Fund
it they cannot be bought or sold in an active market. Any bullion or coins
purchased by the Fund will be delivered to and stored with a qualified custodian
bank in the United States. Investors should be aware that precious metals do not
generate income, offering only the potential for capital appreciation and
depreciation, and may subject the Fund to higher custody and transaction costs
than those normally associated with the ownership of securities. Investments
relating to precious metals are considered speculative.

-2-
<PAGE>

In addition to its authority to purchase precious metals, the Fund may
invest to a significant degree in companies in the precious metals industry.
Investments related to precious metals are considered speculative and are
affected by a variety of worldwide economic, financial and political factors.
Prices of precious metals may fluctuate sharply over short periods due to
several factors, including: changes in inflation or expectations regarding
inflation in various countries; currency fluctuations; metal sales by
governments, central banks or international agencies; investment speculation;
changes in industrial and commercial demand; and governmental prohibitions or
restrictions on the private ownership of certain precious metals. Under current
federal tax law, the Fund would fail to qualify as a regulated investment
company if its gains from the sale or other disposition of precious metals were
to exceed 10% of the Fund's annual gross income. Therefore, this limitation may
cause the Fund to hold or sell precious metals or securities when it would not
otherwise be advantageous to do so.

At present, South Africa, the United States, Australia, Canada and the
Commonwealth of Independent States (which includes Russia and certain other
countries that were part of the former Soviet Union) are the five major
producers of gold bullion. Therefore, political and economic conditions in these
and other gold-producing countries may pose certain risks to the Fund's
investments in gold and gold-related companies. These include the effect of
social and political unrest on mining production and gold prices, as well as the
threat of nationalization or expropriation by the various governments involved.

Additional Investment Policies -- Real Estate Fund
--------------------------------------------------

Under normal market conditions, at least 65% of the Real Estate Fund's
total assets will be invested in companies principally engaged in the real
estate business, such as real estate investment trusts ("REITs"), real estate
developers, mortgage lenders and servicers, construction companies and building
material suppliers. A company is "principally engaged" in the real estate
business if, at the time of investment, the company derives at least 50% of its
revenues from the ownership, construction, financing, management or sale of
commercial, industrial or residential real estate, or that such company has at
least 50% of its assets in such real estate.

It is expected that the Fund will invest a majority of its assets in
shares of REITs during normal market and economic conditions. REITs pool
investors' funds for investment primarily in income-producing real estate or
real estate related loans or interests. Unlike corporations, REITs do not have
to pay income taxes if they meet certain requirements of the Internal Revenue
Code of 1986, as amended (the "Code"). To qualify, a REIT must distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of
that income from rents, mortgages and sales of property.

REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rental and lease payments.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs make loans to commercial real estate
developers and derive their income primarily from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs.

-3-
<PAGE>

Although the Fund will not invest in real estate directly, it is
subject to the same risks that are associated with the direct ownership of real
estate. In general, real estate values are affected by a variety of factors,
including: supply and demand for properties; the economic health of the country,
different regions and local markets; and the strength of specific industries
renting properties. An equity REIT's performance ultimately depends on the types
and locations of the properties it owns and on how well it manages its
properties. For instance, rental income could decline because of extended
vacancies, increased competition from nearby properties, tenants' failure to pay
rent, or incompetent management. Property values could decrease because of
overbuilding, environmental liabilities, uninsured damages caused by natural
disasters, a general decline in the neighborhood, rent controls, losses due to
casualty or condemnation, increases in property taxes and/or operating expenses,
or changes in zoning laws or other factors.

Changes in interest rates could affect the performance of REITs. In
general, during periods of rising interest rates, REITs may lose some of their
appeal to investors who may be able to obtain higher yields from other income-
producing investments, such as long-term bonds. Higher interest rates may also
mean that it is more expensive to finance property purchases, renovations and
improvements, which could hinder a REIT's performance. During periods of
declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by such mortgage REITs.

While equity REITs are affected by changes in the value of the
underlying properties they own, mortgage REITs are affected by changes in the
value of the properties to which they have extended credit. REITs may not be
diversified and are subject to the risks involved with financing projects. REITs
may also be subject to substantial cash flow dependency and self-liquidation. In
addition, REITs could possibly fail to qualify for tax-free pass-through of
income under the Code or to maintain their exemptions from registration under
the 1940 Act.

Such factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to a REIT. In the event of a default by a
borrower or lessee, a REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments.

Under certain circumstances the Fund could own real estate directly as
a result of a default on debt securities it owns. If the Fund has rental income
or income from the direct disposition of real property, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company.

* * *

Under normal market and economic conditions, the Energy and Natural
Resources and Real Estate Funds will invest at least 65% of their total assets
in common stock, preferred stock and securities convertible into common stock.
Normally, up to 35% of each

-4-
<PAGE>

Fund's total assets may be invested in other securities and instruments
including, e.g., other investment-grade debt securities (i.e., debt obligations
classified within the four highest ratings of a nationally recognized
statistical rating organization such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, if unrated,
determined by the Adviser to be of comparable quality), warrants, options and
futures instruments as described in more detail below. During temporary
defensive periods or when the Adviser believes that suitable stocks or
convertible securities are unavailable, each Fund may hold cash and/or invest
some or all of its assets in U.S. government securities, high-quality money
market instruments and repurchase agreements collateralized by the foregoing
obligations.

Portfolio holdings will include equity securities of companies having
capitalizations of varying amounts, and the Funds may invest in the securities
of high growth, small companies when the Adviser expects earnings and the price
of the securities to grow at an above-average rate. Certain securities owned by
the Funds may be traded only in the over-the-counter market or on a regional
securities exchange, may be listed only in the quotation service commonly known
as the "pink sheets," and may not be traded every day or in the volume typical
of trading on a national securities exchange. As a result, there may be a
greater fluctuation in the value of a Fund's shares, and a Fund may be required,
in order to satisfy redemption requests or for other reasons, to sell these
securities at a discount from market prices, to sell during periods when such
disposition is not desirable, or to make many small sales over a period of time.

The Funds may invest in the securities of foreign issuers directly or
indirectly through sponsored and unsponsored American Depository Receipts
("ADRs"). ADRs represent receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities of foreign issuers.
The Energy and Natural Resources Fund may also invest in sponsored and
unsponsored European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs"). EDRs are receipts issued in Europe typically by non-U.S. banks or
trust companies and foreign branches of U.S. banks which evidence ownership of
foreign or U.S. securities. GDRs are receipts structured similarly to EDRs and
are marketed globally. ADRs may be listed on a national securities exchange or
may be traded in the over-the-counter market. EDRs are designed for use in
European exchange and over-the-counter markets. GDRs are designed for trading in
non-U.S. securities markets. ADRs, EDRs and GDRs traded in the over-the-counter
market which do not have an active or substantial secondary market will be
considered illiquid and therefore will be subject to a Fund's limitation with
respect to such securities. ADR prices are denominated in U.S. dollars although
the underlying securities are denominated in a foreign currency. Investments in
ADRs, EDRs and GDRs involve risks similar to those accompanying direct
investments in foreign securities.

Additional Information on Portfolio Instruments
-----------------------------------------------

Options
-------

The Funds may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
purchases would be in an amount not exceeding 5% of each such Fund's net assets.
Such options may relate to particular securities or to various stock and bond
indices. Purchase of options is a highly specialized

-5-
<PAGE>

activity which entails greater than ordinary investment risks, including a
substantial risk of a complete loss of the amounts paid as premiums to the
writer of the options. Regardless of how much the market price of the underlying
security increases or decreases, the option buyer's risk is limited to the
amount of the original investment for the purchase of the option. However,
options may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by the Funds will be valued at
the last sale price or, in the absence of such a price, at the mean between bid
and asked prices.

-6-
<PAGE>

When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by that Fund is included in the liability
section of that Fund's statement of assets and liabilities as a deferred credit.
The amount of the deferred credit will be subsequently marked to market to
reflect the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated expiration
date, or if the Fund involved enters into a closing purchase transaction, the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold), and the deferred
credit related to such option will be eliminated. If an option is exercised, the
Fund involved may deliver the underlying security from its portfolio or purchase
the underlying security in the open market. In either event, the proceeds of the
sale will be increased by the net premium originally received, and the Fund
involved will realize a gain or loss. Premiums from expired call options written
by the Funds and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses. The use of covered call
options is not a primary investment technique of the Funds and such options will
normally be written on underlying securities as to which the Adviser does not
anticipate significant short-term capital appreciation.

Repurchase Agreements
---------------------

Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

Securities subject to repurchase agreements are held by the Funds'
custodian (or sub-custodian) or in the Federal Reserve/Treasury book-entry
system. The seller under a repurchase agreement will be required to maintain the
value of the securities which are subject to the agreement and held by a Fund at
not less than the repurchase price. Default or bankruptcy of the seller would,
however, expose a Fund to possible delay in connection with the disposition of
the underlying securities or loss to the extent that proceeds from a sale of the
underlying securities were less than the repurchase price under the agreement.
Repurchase agreements are considered loans by a Fund under the 1940 Act.

Futures Contracts and Related Options
-------------------------------------

-7-
<PAGE>

recognized exchanges or in other established financial markets. A futures
contract on foreign currency creates a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of a foreign currency for an amount fixed in U.S. dollars.
Foreign currency futures, which operate in a manner similar to interest rate
futures contracts, may be used by the Funds to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.

Futures contracts will not be entered into for speculative purposes,
but to hedge risks associated with a Fund's securities investments. The Funds
will engage in futures transactions only to the extent permitted by the
Commodity Futures Trading Commission ("CFTC") and the Securities and Exchange
Commission ("SEC"). When investing in futures contracts, the Funds must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When a Fund takes a long position in a futures contract, it must
maintain a segregated account containing liquid assets equal to the purchase
price of the contract, less any margin or deposit. When a Fund takes a short
position in a futures contract, the Fund must maintain a segregated account
containing liquid assets in an amount equal to the market value of the
securities underlying such contract (less any margin or deposit), which amount
must be at least equal to the market price at which the short position was
established. Asset segregation requirements are not applicable when a Fund
"covers" an options or futures position generally by entering into an offsetting
position. Each Fund will limit its hedging transactions in futures contracts and
related options so that, immediately after any such transaction, the aggregate
initial margin that is required to be posted by the Fund under the rules of the
exchange on which the futures contract (or futures option) is traded, plus any
premiums paid by the Fund on its open futures options positions, does not exceed
5% of the Fund's total assets, after taking into account any unrealized profits
and unrealized losses on the Fund's open contracts (and excluding the amount
that a futures option is "in-the-money" at the time of purchase). An option to
buy a futures contract is "in-the-money" if the then-current purchase price of
the underlying futures contract exceeds the exercise or strike price; an option
to sell a futures contract is "in-the-money" if the exercise or strike price
exceeds the then-current purchase price of the contract that is the subject of
the option. In addition, the use of futures contracts is further restricted to
the extent that no more than 10% of a Fund's total assets may be hedged.

Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge.

-8-
<PAGE>

possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions. There
may be an imperfect correlation, or no correlation at all, between movements in
the price of the futures contracts (or options) and movements in the price of
the instruments being hedged. In addition, investments in futures may subject a
Fund to losses due to unanticipated market movements which are potentially
unlimited. Further, there is no assurance that a liquid market will exist for
any particular futures contract (or option) at any particular time.
Consequently, a Fund may realize a loss on a futures transaction that is not
offset by a favorable movement in the price of securities which it holds or
intends to purchase or may be unable to close a futures position in the event of
adverse price movements. In addition, in some situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market.

As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.

Utilization of futures transactions involves the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom such
Fund has an open position in a futures contract or related option.

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

The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

-9-
<PAGE>

Options on Futures Contracts
----------------------------

Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.

Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the instruments being
hedged, an option may or may not be less risky than ownership of the futures
contract or such instruments. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Funds do not currently intend to write
futures options, and will not do so in the future absent any necessary
regulatory approvals.

When-Issued and Forward Transactions
------------------------------------

Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.

-10-
<PAGE>

It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.

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

Forward Currency Transactions
-----------------------------

Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchange, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency involved instead of cash
payment as in the case of futures contracts.

-11-
<PAGE>

transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation requirements are not applicable when
the Fund "covers" a forward currency position generally by entering into an
offsetting position.

The transaction costs to the Funds of engaging in forward currency
transactions vary with factors such as the currency involved, the length of the
contract period and prevailing currency market conditions. Because currency
transactions are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities being hedged, but it
does establish a rate of exchange that can be achieved in the future. Thus,
although forward currency contracts used for transaction or position hedging
purposes may limit the risk of loss due to an increase in the value of the
hedged currency, at the same time they limit potential gain that might result
were the contracts not entered into. Further, the Adviser may be incorrect in
its expectations as to currency fluctuations, and a Fund may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, a Fund may
not be able to contract to sell or purchase that currency at an advantageous
price.

At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.

Securities Lending
------------------

To increase return on its portfolio securities, each Fund may lend its
portfolio

-12-
<PAGE>

securities to broker/dealers pursuant to agreements requiring the loans to be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Collateral for such loans may include
cash, securities of the U.S. government, its agencies or instrumentalities, or
an irrevocable letter of credit issued by a bank, or any combination thereof.
Such loans will not be made if, as a result, the aggregate of all outstanding
loans of a Fund exceeds 30% of the value of its total assets. When a Fund lends
its securities, it continues to receive interest or dividends on the securities
lent and may simultaneously earn interest on the investment of the cash loan
collateral, which will be invested in readily marketable, high-quality, short-
term obligations. Although voting rights, or rights to consent, attendant to
lent securities pass to the borrower, such loans may be called at any time and
will be called so that the securities may be voted by a Fund if a material event
affecting the investment is to occur.

There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.

Money Market Instruments
------------------------

The Funds may invest in "money market instruments," which include,
among other things, bank obligations, commercial paper and corporate bonds with
remaining maturities of 13 months or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. Investments in bank
obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No. 17
below under "Investment Limitations"). Investments in time deposits are limited
to no more than 5% of the value of a Fund's total assets at the time of
purchase.

Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire unrated commercial paper that is determined by
the Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Fund.

-13-
<PAGE>

principal of the instrument or may resell the instrument to a third party. The
absence of an active secondary market, however, could make it difficult for a
Fund to dispose of the instrument if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for this or other reasons, suffer a loss with
respect to such instrument.

Government Obligations
----------------------

Each Fund may invest in U.S. government obligations, including U.S.
Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.

Investment Company Securities
-----------------------------

Each Fund may invest in securities issued by other investment
companies which invest in high-quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method. In addition to the advisory fees and other expenses a Fund
bears directly in connection with its own operations, as a shareholder of
another investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses. As such, the Fund's
shareholders would indirectly bear the expenses of the Fund and the other
investment company, some or all of which would be duplicative. Such securities
will be acquired by each Fund within the limits prescribed by the 1940 Act,
which include, subject to certain exceptions, a prohibition against a Fund
investing more than 10% of the value of its total assets in such securities.

Each Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.

-14-
<PAGE>

the Portfolio Deposit required of an investor wishing to purchase a Creation
Unit that day.

Borrowing and Reverse Repurchase Agreements
-------------------------------------------

Each Fund may borrow funds, in an amount up to 10% of the value of its
total assets, for temporary or emergency purposes, such as meeting larger than
anticipated redemption requests, and not for leverage. Each Fund may also agree
to sell portfolio securities to financial institutions such as banks and broker-
dealers and to repurchase them at a mutually agreed date and price (a "reverse
repurchase agreement"). The SEC views reverse repurchase agreements as a form of
borrowing. At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account liquid assets having a value equal
to the repurchase price, including accrued interest. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the repurchase price of those securities.

Illiquid Securities
-------------------

Neither Fund will knowingly invest more than 15% of the value of its
net assets in securities that are illiquid. A security will be considered
illiquid if it may not be disposed of within seven days at approximately the
value at which the particular Fund has valued the security. Each Fund may
purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

Portfolio Turnover
------------------

-15-
<PAGE>

Investment Limitations
----------------------

The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of the Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Company or such Fund, or (b) 67% or more of the shares of the
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of the Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
a Fund may be changed by the Company's Board of Directors without shareholder
approval.

The following investment limitations are fundamental with respect to
each of the Funds. Each Fund may not:

1. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) the
Energy and Natural Resources Fund may lend portfolio securities in an amount not
exceeding 30% of its total assets, and (iii) the Real Estate Fund may lend
portfolio securities in accordance with its investment objective and policies;
and

2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Energy and Natural
Resources Fund, there is no limitation with respect to securities of companies
in the energy and other natural resources groups of industries or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
and (ii) with respect to the Real Estate Fund: (a) the Fund will concentrate its
investments in the securities of issuers principally engaged in the real estate
business, (b) there is no limitation with respect to securities issued or
guaranteed by the U.S. government, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and repurchase agreements secured
by such securities, and (c) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy.

The following investment limitations are fundamental with respect to
the Energy and Natural Resources Fund. The Fund may not:

3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;

4. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in

-16-
<PAGE>

real estate;

5. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitation contained in the Prospectus
might be considered to be the issuance of a senior security;

6. Purchase or sell commodities or invest in oil, gas, or other
mineral exploration or development programs; provided, however, that the Fund
may, in accordance with its investment objective and policies, (i) purchase
publicly traded securities of companies engaging in whole or in part in such
activities or invest in liquidating trust receipts, certificates of beneficial
ownership or other instruments, (ii) enter into commodity futures contracts and
other futures contracts, (iii) enter into options on commodities and futures
contracts, (iv) invest in gold and other precious metal bullion and coins, and
(v) enter into forward contracts on foreign currencies and precious metals; and

7. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) The Fund will not
purchase portfolio securities while borrowings in excess of 5% of its total
assets are outstanding. Optioned stock held in escrow is not deemed to be a
pledge.

The following investment limitations are operating policies with
respect to the Energy and Natural Resources Fund. The Fund may not:

1. Purchase securities on margin, make short sales of securities, or
maintain a short position;

2. Invest in companies for the purpose of exercising management or
control; and

3. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with respect to
the Real Estate Fund. The Fund may not:

1. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is not
deemed to be a pledge;

2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of

-17-
<PAGE>

certain portfolio securities acquired within the limitation on purchases of
restricted securities and except to the extent that the purchase of obligations
directly from the issuer thereof in accordance with its investment objective,
policies and limitations may be deemed to be underwriting;

3. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;

4. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and

5. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.

The following investment limitations are operating policies with
respect to the Real Estate Fund. The Fund may not:

1. Purchase securities on margin, make short sales of securities, or
maintain a short position;

2. Invest in companies for the purpose of exercising management or
control; and

* * *

The Funds may not invest in obligations of foreign branches of
financial institutions or in domestic branches of foreign banks if immediately
after such purchase (i) more than 5% of the value of their respective total
assets would be invested in obligations of any one foreign branch of the
financial institution or domestic branch of a foreign bank; or (ii) more than
20% of their respective total assets would be invested in foreign branches of
financial institutions or in domestic branches of foreign banks. In addition,
the Real Estate Fund will not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding. These investment policies may
be changed by the Company's Board of Directors without shareholder approval.

For the purpose of Investment Limitation Nos. 4 and 13, the
prohibition of

-18-
<PAGE>

purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts.

In addition to the above investment limitations, each Fund currently
intends to refrain from entering into arbitrage transactions.

If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Fund's investments will not constitute a violation of such limitation.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------

Distributor
-----------

Shares are continuously offered for sale by Edgewood Services, Inc.
(the "Distributor"), a registered broker-dealer and the Company's sponsor and
distributor. The Distributor is a wholly-owned subsidiary of Federated
Investors, Inc. and is located at 5800 Corporate Drive, Pittsburgh, PA 15237-
5829. The Distributor has agreed to use appropriate efforts to solicit all
purchase orders.

At various times the Distributor may implement programs under which a
dealer's sales force may be eligible to win nominal awards for certain sales
efforts or under which the Distributor will make payments to any dealer that
sponsors sales contests or recognition programs conforming to criteria
established by the Distributor, or that participates in sales programs sponsored
by the Distributor. The Distributor in its discretion may also from time to
time, pursuant to objective criteria established by the Distributor, pay fees to
qualifying dealers for certain services or activities which are primarily
intended to result in sales of shares of the Funds. If any such program is made
available to any dealer, it will be made available to all dealers on the same
terms and conditions. Payments made under such programs will be made by the
Distributor out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

Purchase of Shares
------------------

Shares of the Funds are offered for sale at their net asset value per
share next computed after a purchase request is received in good order by the
Company's sub-transfer agent or by an authorized broker or designated
intermediary. The Distributor has established several

-19-
<PAGE>

procedures for purchasing shares in order to accommodate different types of
investors.

Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.

Shares may be purchased directly by individuals ("Direct Investors")
or by institutions ("Institutional Investors" and, collectively with Direct
Investors, "Investors"). Shares may also be purchased by Customers of the
Adviser, its affiliates and correspondent banks, and other Shareholder
Organizations that have entered into agreements with the Company. A Shareholder
Organization may elect to hold of record shares for its Customers and to record
beneficial ownership of shares on the account statements provided by it to its
Customers. If it does so, it is the Shareholder Organization's responsibility to
transmit to the Distributor all purchase requests for its Customers and to
transmit, on a timely basis, payment for such requests to Chase Global Funds
Services Company ("CGFSC"), the Funds' sub-transfer agent, in accordance with
the procedures agreed to by the Shareholder Organization and the Distributor.
Confirmations of all such Customer purchases (and redemptions) will be sent by
CGFSC to the particular Shareholder Organization. As an alternative, a
Shareholder Organization may elect to establish its Customers' accounts of
record with CGFSC. In this event, even if the Shareholder Organization continues
to place its Customers' purchase (and redemption) requests with the Funds, CGFSC
will send confirmations of such transactions and periodic account statements
directly to the shareholders of record. Shares in the Funds bear the expense of
fees payable to Shareholder Organizations for such services. See "Shareholder
Organizations."

Redemption Procedures
---------------------

Customers of Shareholder Organizations holding shares of record may
redeem all or part of their investments in a Fund in accordance with procedures
governing their accounts at the Shareholder Organizations. It is the
responsibility of the Shareholder Organizations to transmit redemption requests
to CGFSC and credit such Customer accounts with the redemption proceeds on a
timely basis. Redemption requests for Institutional Investors must be
transmitted to CGFSC by telephone at (800) 446-1012 or by terminal access. No
charge for wiring redemption payments to Shareholder Organizations or
Institutional Investors is imposed by the Company, although Shareholder
Organizations may charge a Customer's account for wiring redemption proceeds.
Information relating to such redemption services and charges, if any, is
available from the Shareholder Organizations. An Investor redeeming shares
through a registered investment adviser or certified financial planner may incur
transaction charges in connection with such redemptions. Such Investors should
contact their registered investment adviser or certified financial planner for
further information on transaction fees. Investors may

-20-
<PAGE>

redeem all or part of their shares in accordance with any of the procedures
described below (these procedures also apply to Customers of Shareholder
Organizations for whom individual accounts have been established with CGFSC).

CGFSC may require additional supporting documents for redemptions made
by corporations, executors, administrators, trustees and guardians. A redemption
request will not be deemed to be properly received until CGFSC receives all
required documents in good order. Payment for shares redeemed will ordinarily be
made by mail within five Business Days after receipt by CGFSC of the redemption
request in good order. Questions with respect to the proper form for redemption
requests should be directed to CGFSC at (800) 446-1012 (from overseas, call
(617) 557-8280).

Direct Investors who have so indicated on the Application, or have
subsequently arranged in writing to do so, may redeem shares by instructing
CGFSC by wire or telephone to wire the redemption proceeds directly to the
Direct Investor's account at any commercial bank in the United States.
Institutional Investors may also redeem shares by instructing CGFSC by telephone
at (800) 446-1012 or by terminal access.

Other Redemption Information
----------------------------

The Company may suspend the right of redemption or postpone the date
of payment for shares for more than 7 days during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC.

In the event that shares are redeemed in cash at their net asset
value, a shareholder may receive in payment for such shares an amount that is
more or less than his original investment due to changes in the market prices of
that Fund's portfolio securities.

-21-
<PAGE>

The Company reserves the right to honor any request for redemption or
repurchase of a Fund's shares by making payment in whole or in part in
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing a Fund's net asset value (a "redemption in
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash. The Company has filed a notice
of election with the SEC under Rule 18f-1 of the 1940 Act. Therefore, a Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder of the
Fund.

Under certain circumstances, the Company may, in its discretion,
accept securities as payment for shares. Securities acquired in this manner will
be limited to securities issued in transactions involving a bona fide
---------
reorganization or statutory merger, or other transactions involving securities
that meet the investment objective and policies of the Fund acquiring such
securities.

INVESTOR PROGRAMS
-----------------

Systematic Withdrawal Plan
--------------------------

An Investor who owns shares with a value of $10,000 or more may begin
a Systematic Withdrawal Plan. The withdrawal can be on a monthly, quarterly,
semiannual or annual basis. There are four options for such systematic
withdrawals. The Investor may request:

(1) A fixed-dollar withdrawal;

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value
of the account); or

(4) A declining-balance withdrawal.

Prior to participating in a Systematic Withdrawal Plan, the Investor
must deposit any outstanding certificates for shares with CGFSC. Under this
Plan, dividends and distributions are automatically reinvested in additional
shares of a Fund. Amounts paid to investors under this Plan should not be
considered as income. Withdrawal payments represent proceeds from the sale of
shares, and there will be a reduction of the shareholder's equity in the Fund
involved if the amount of the withdrawal payments exceeds the dividends and
distributions paid on the shares and the appreciation of the Investor's
investment in the Fund. This in turn may result in a complete depletion of the
shareholder's investment. An Investor may not participate in a program of
systematic investing in a Fund while at the same time participating in the
Systematic Withdrawal Plan with respect to an account in the same Fund.
Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the Systematic
Withdrawal Plan directly from their Shareholder Organizations.

-22-
<PAGE>

Exchange Privilege
------------------

Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for Shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.

Shares may be exchanged by telephone or mail and must be made to
accounts of identical registration. There is no exchange fee imposed by the
Companies or Excelsior Institutional Trust. In order to prevent abuse of this
privilege to the disadvantage of other shareholders, the Companies and Excelsior
Institutional Trust reserve the right to limit the number of exchange requests
of Investors to no more than six per year. Customers of Shareholder
Organizations may obtain information on the availability of, and the procedures
and fees relating to, such program directly from their Shareholder
Organizations.

For federal income tax purposes, exchanges are treated as sales on
which the shareholder will realize a gain or loss, depending upon whether the
value of the shares to be given up in exchange is more or less than the basis in
such shares at the time of the exchange. Generally, a shareholder may include
sales loads incurred upon the purchase of shares in his or her tax basis for
such shares for the purpose of determining gain or loss on a redemption,
transfer or exchange of such shares. However, if the shareholder effects an
exchange of shares for shares of another portfolio of the Companies within 90
days of the purchase and is able to reduce the sales load otherwise applicable
to the new shares (by virtue of the Companies' exchange privilege), the amount
equal to such reduction may not be included in the tax basis of the
shareholder's exchanged shares but may be included (subject to the limitation)
in the tax basis of the new shares.

Retirement Plans
----------------

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

. Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit themselves and
their employees; and

. Keogh Plans for self-employed individuals.

-23-
<PAGE>

Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

Automatic Investment Program
----------------------------

The Automatic Investment Program is one means by which an Investor may
use "dollar cost averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at predetermined
intervals. This may help Investors to reduce their average cost per share
because the agreed upon fixed investment amount allows more shares to be
purchased during periods of lower share prices and fewer shares during periods
of higher prices. In order to be effective, dollar cost averaging should usually
be followed on a sustained, consistent basis. Investors should be aware,
however, that shares bought using dollar cost averaging are purchased without
regard to their price on the day of investment or to market trends. In addition,
while Investors may find dollar cost averaging to be beneficial, it will not
prevent a loss if an Investor ultimately redeems his shares at a price which is
lower than their purchase price. The Company may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently is
contemplated. An Investor may also implement the dollar cost averaging method on
his own initiative or through other entities.

Additional Information
----------------------

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK
----------------------------

The Company's Charter authorizes its Board of Directors to issue up to
thirty-five billion full and fractional shares of common stock, $.001 par value
per share, and to classify or reclassify any unissued shares of the Company into
one or more classes or series by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. The Company's authorized common stock is currently
classified into 46 series of shares representing interests in 18 investment
portfolios.

Each share in a Fund represents an equal proportionate interest in the
particular Fund with other shares of the same class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
such Fund as are declared in the discretion of the

-24-
<PAGE>

Company's Board of Directors.

Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of a liquidation or dissolution of a Fund, its
shareholders are entitled to receive the assets available for distribution
belonging to that Fund and a proportionate distribution, based upon the relative
asset values of the Company's portfolios, of any general assets of the Company
not belonging to any particular portfolio of the Company which are available for
distribution. In the event of a liquidation or dissolution of the Company, its
shareholders will be entitled to the same distribution process.

Shareholders of the Company are entitled to one vote for each full
share held, and fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.

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

The Company's Charter authorizes its Board of Directors, without
shareholder approval (unless otherwise required by applicable law), to: (a) sell
and convey the assets of a Fund to another management investment company for
consideration which may include securities issued by the purchaser and, in
connection therewith, to cause all outstanding shares of the Fund involved to be
redeemed at a price which is equal to their net asset value and which may be
paid in cash or by distribution of the securities or other consideration
received from the sale and conveyance; (b) sell and convert a Fund's assets into
money and, in connection therewith, to cause all outstanding shares of the Fund
involved to be redeemed at their net asset value; or (c) combine the assets
belonging to a Fund with the assets belonging to another portfolio of the
Company, if the Board of Directors reasonably determines that such combination
will not have a material adverse effect on shareholders of any portfolio
participating in such combination, and, in connection therewith, to cause all
outstanding shares of the Fund involved to be redeemed at their net asset value
or converted into shares of another class of the Company's common stock at net
asset value. The exercise of such authority by the Board of Directors will be
subject to the provisions of the 1940 Act, and the Board of Directors will not
take any action described in this paragraph unless the proposed action has been
disclosed in

-25-
<PAGE>

writing to the particular Fund's shareholders at least 30 days prior thereto.

Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's common stock (or of the shares of a Fund voting separately as a
class) in connection with any corporate action, unless otherwise provided by law
(for example, by Rule 18f-2, discussed above) or by the Company's Charter, the
Company may take or authorize such action upon the favorable vote of the holders
of more than 50% of the outstanding common stock of the Company voting without
regard to class.

Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.

-26-
<PAGE>

MANAGEMENT OF THE FUNDS
-----------------------

Directors and Officers
----------------------

The business and affairs of the Funds are managed under the direction
of the Company's Board of Directors. The directors and executive officers of the
Company, their addresses, ages, principal occupations during the past five
years, and other affiliations are as follows:

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Retired; Chairman of the Boards (since
238 June Road Board, President 1997), and President, Treasurer and
Stamford, CT 06903 and Treasurer Director (since 1995) of the Company and
Age: 69 Excelsior Tax-Exempt Funds, Inc. Chairman of
the Boards (since 1997); President, Treasurer
and Trustee (since 1995) of Excelsior Funds and
Excelsior Institutional Trust; Vice Chairman of
U.S. Trust Corporation and U.S. Trust New York
(from February 1990 until September 1995); and
Chairman, U.S. Trust Company (from March 1993
to May 1997).

Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996);
1251 Avenue of the Americas Trustee of Excelsior Institutional Trust
9/th/ Floor and Excelsior Funds (since 1994); Director,
New York, NY 10020 Parsons Brinkerhoff, Inc. (engineering
Age: 57 firm) (since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Chairman,
MetroCashcard International, Inc. (since
1999); Director, Hotelvision, Inc. (since
1999); Director, Alliance Group Services,
Inc. (since 1998); Director, Hyperion Total
Return Fund, Inc. and three other funds for
which Hyperion Capital Management, Inc.
serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(from 1993 to 1998); Member of Advisory
Board, Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992 to
1994).
</TABLE>
___________________

/1/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-27-
<PAGE>

Wolfe J. Frankl Director Retired; Director of the Company and
2320 Cumberland Road Excelsior Tax-Exempt Funds, Inc. (since
Charlottesville, VA 22901-7726 1986); Director of UST Master Variable
Age: 79 Series, Inc. (from 1994 to June 1997);
Trustee of Excelsior Institutional Trust
(since 1995); Director, Deutsche Bank
Financial, Inc. (since 1989); Director, The
Harbus Corporation (since 1951); and Trustee,
HSBC Funds Trust and HSBC Mutual Funds Trust
(since 1988).

Morrill Melton Hall, Jr. Director Director of the Company and Excelsior Tax-Exempt
Comprehensive Health Services, Inc. Funds, Inc. (since July 30, 2000); Trustee of
8229 Boone Blvd., Suite 700 Excelsior Institutional Trust (since July 30, 2000);
Vienna, VA 22182 Chief Executive Officer, Comprehensive Health
Age: 55 Services, Inc. (health care management and
administration).

Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Funds, Inc. (since 1996);
New York, NY 10128 Trustee of Excelsior Institutional Trust
Age: 61 and Excelsior Funds (since 1994); Vice
President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group for
The South Fork, Bridgehampton, New York (since
1993); and Member, Advisory Committee, Knight
Journalism Fellowships, Massachusetts Institute
of Technology (since 1984).

Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987);
800 Second Avenue Director of UST Master Variable Series,
New York, NY 10017 Inc. (from 1994 to June 1997); Trustee of
Age: 74 Excelsior Institutional Trust (since 1995);
President Emeritus, The Church Pension Fund
and its affiliated companies (since 1966);
Trustee, H.B. and F.H. Bugher Foundation
and Director of its wholly owned
subsidiaries - Rosiclear Lead and Flourspar
Mining Co. and The Pigmy Corporation (since
1984); Director, Morehouse Publishing Co.
(1974-1998); Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since 1982); and
Director, Infinity Funds, Inc. (since 1995).
</TABLE>

-28-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of the Company and
6549 Pine Meadows Drive Excelsior Tax-Exempt Funds, Inc. (since
Spring Hill, FL 34606 1985); Chairman of the Board of the Company
Age: 74 and Excelsior Tax-Exempt Funds, Inc.
(1991-1997) and Excelsior Institutional
Trust (1996-1997); President and Treasurer
of the Company and Excelsior Tax-Exempt
Funds, Inc. (1994-1997) and Excelsior
Institutional Trust (1996-1997); Chairman
of the Board, President and Treasurer of
UST Master Variable Series, Inc.
(1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18/th/ & Cherry Streets
Philadelphia, PA 19103-6996
Age: 57

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ & Cherry Streets
Philadelphia, PA 19103-6996
Age: 41

Eddie Wang Assistant Secretary Manager of Blue Sky Compliance, Chase
Chase Global Funds Global Funds Services Company (November
Services Company 1996 to present); and Officer and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 39 1996).

Patricia M. Leyne Assistant Secretary Vice President, Senior Manager of Fund
Chase Global Funds Administration, Chase Global Funds Services
Services Company Company (since August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 33 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services Company
(from September 1995 to November 1996); Fund
Administrator, Chase Global Funds Services
Company (from February 1993 to September 1995).
</TABLE>

_________________

/2/ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-29-
<PAGE>

Each director of the Company receives an annual fee of $9,000 from
each of Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000
from Excelsior Institutional Trust plus a meeting fee of $1,500 from each of
Excelsior Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from
Excelsior Institutional Trust for each meeting attended and is reimbursed for
expenses incurred in attending meetings. The Chairman of the Board is entitled
to receive an additional $5,000 per annum from each of the foregoing Companies
for services in such capacity. Prior to December 1999, each of Messrs. Drake,
Piel and Wonham received $4,000 from Excelsior Funds plus a per-Company meeting
fee of $250 and each of these persons was reimbursed for expenses incurred in
attending meetings of Excelsior Funds. The Chairman of the Board of Excelsior
Funds received $5,000 per annum for services in such capacity. In addition,
Messrs. Drake, Piel and Robinson each receive $2,000 per annum for their
services on the Company's Nominating Committee. Drinker Biddle & Reath LLP, of
which Messrs. McConnel and Malloy are partners, receives legal fees as counsel
to the Company. The employees of CGFSC do not receive any compensation from the
Company for acting as officers of the Company. No person who is currently an
officer, director or employee of the Adviser serves as an officer, director or
employee of the Company. As of July 7, 2000, the directors and officers of the
Company as a group owned beneficially less than 1% of the outstanding shares of
each fund of the Company, and less than 1% of the outstanding shares of all
funds of the Company in the aggregate.

-30-
<PAGE>

The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.

<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or from the
Compensation Retirement Benefits Estimated Annual Company and
Name of from the Accrued as Part of Benefits Fund Complex*
Person/Position Company Fund Expenses Upon Retirement Paid to Directors
--------------- ------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Donald L. Campbell***
Director $ 9,000 None None $22,000(3)**

Rodman L. Drake
Director $15,500 None None $38,750(4)**

Joseph H. Dugan
Director $16,500 None None $38,250(3)**

Wolfe J. Frankl
Director $15,000 None None $35,000(3)**

Jonathan Piel
Director $17,000 None None $42,000(4)**

Robert A. Robinson
Director $17,000 None None $39,500(3)**

Alfred C. Tannachion
Director $16,500 None None $38,250(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None None $52,000(4)**
</TABLE>

__________________
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund
and Excelsior Institutional Trust, and until December 15, 1999,
Excelsior Funds.
** Number of investment companies in the Fund Complex for which director
served as director or trustee.

*** Donald L. Campbell resigned as a director of the Companies on July 31,
2000.

Investment Advisory and Administration Agreements
-------------------------------------------------

United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the

-31-
<PAGE>

Energy and Natural Resources Fund pursuant to an advisory agreement
substantially similar to the Investment Advisory Agreement currently in effect
for the Fund.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.

For the fiscal years ended March 31, 2000, 1999 and 1998, the Company
paid the Adviser fees for advisory services as follows:

<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Energy and Natural
Resources Fund $276,345 $219,983 $225,193

Real Estate Fund $269,174 $295,825 $109,381
</TABLE>

-32-
<PAGE>

Real Estate Fund $72,449 $86,406 $28,552
</TABLE>

The Investment Advisory Agreements provide that the Adviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of such agreements, except that
U.S. Trust New York and U.S. Trust Company shall be jointly, but not severally,
liable for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for advisory services or a loss resulting from willful
misfeasance, bad faith or gross negligence in the performance of their duties or
from reckless disregard by them of their duties and obligations thereunder. In
addition, the Adviser has undertaken in the Investment Advisory Agreements to
maintain its policy and practice of conducting its Asset Management Group
independently of its Banking Group.

-33-
<PAGE>

the Funds, furnish the Funds with statistical and research data, clerical,
accounting and bookkeeping services, and certain other services required by the
Funds, and to compute the net asset value, net income and realized capital gains
or losses, if any, of the respective Funds. The Administrators prepare
semiannual reports to the SEC, prepare federal and state tax returns, prepare
filings with state securities commissions, arrange for and bear the cost of
processing share purchase and redemption orders, maintain the Funds' financial
accounts and records, and generally assist in the Funds' operations.

Prior to May 16, 1997, CGFSC, Federated Administrative Services, a
subsidiary of Federated Services Company, and U.S. Trust New York served as the
Company's administrators pursuant to an administration agreement substantially
similar to the Administration Agreement currently in effect for the
Company.

The Administrators also provide administrative services to the other
investment portfolios of the Company and to all of the investment portfolios of
Excelsior Tax-Exempt Fund and Excelsior Institutional Trust which are also
advised by U.S. Trust and its affiliates and distributed by the Distributor. For
services provided to all of the investment portfolios of the Company, Excelsior
Tax-Exempt Fund and Excelsior Institutional Trust (except for the international
portfolios of the Company and Excelsior Institutional Trust), the Administrators
are entitled jointly to fees, computed daily and paid monthly, based on the
combined aggregate average daily net assets of the three companies (excluding
the international portfolios of the Company and Excelsior Institutional Trust)
as follows:

Combined Aggregate Average Daily Net Assets
of the Company, Excelsior Tax-Exempt Fund and
Excelsior Institutional Trust (excluding
the international portfolios of the Company
and Excelsior Institutional Trust)
----------------------------------

Annual Fee
----------

First $200 million................................................ 0.200%
Next $200 million ................................................ 0.175%
Over $400 million ................................................ 0.150%

Administration fees payable to the Administrators by each portfolio of
the Company, Excelsior Tax-Exempt Fund and Excelsior Institutional Trust are
allocated in proportion to their relative average daily net assets at the time
of determination. From time to time, the Administrators may voluntarily waive
all or a portion of the administration fee payable to them by a Fund, which
waivers may be terminated at any time.

-34-
<PAGE>

For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:

Real Estate Fund $52,195 $58,438 $20,453
</TABLE>

For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:

Real Estate Fund $ 46 $ 43 $ 0
</TABLE>

Shareholder Organizations
-------------------------

The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40% of the average daily net assets of the Fund's shares beneficially owned by
Customers of the Shareholder Organization. Such services may include: (a) acting
as recordholder of shares; (b) assisting in processing purchase, exchange and
redemption transactions; (c) transmitting and receiving funds in connection with
Customer orders to purchase, exchange or redeem shares; (d) providing periodic
statements showing a Customer's account balances and confirmations of
transactions by the Customer; (e) providing tax and dividend information to
shareholders as appropriate; (f) transmitting proxy statements, annual reports,
updated prospectuses and other communications from the Company to Customers; and
(g) providing or arranging for the provision of other related services. It is
the responsibility of Shareholder Organizations to advise Customers of any fees
that they may charge in connection with a Customer's investment.

The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company. Pursuant
to the Plan, the

-35-
<PAGE>

Company's Board of Directors will review, at least quarterly, a written report
of the amounts expended under the Company's agreements with Shareholder
Organizations and the purposes for which the expenditures were made. In
addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of the Company's directors, including a majority of the
directors who are not "interested persons" of the Company as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").

Any material amendment to the Company's arrangements with Shareholder
Organizations must be approved by a majority of the Company's Board of Directors
(including a majority of the Disinterested Directors). So long as the Company's
arrangements with Shareholder Organizations are in effect, the selection and
nomination of the members of the Company's Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company will be
committed to the discretion of such Disinterested Directors.

For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:

<TABLE>
<CAPTION> Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------
<S> <C> <C>
Energy and Natural Resources Fund $58,922 $14,480

Real Estate Fund $32,706 $32,440
</TABLE>

For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:

Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------

Energy and Natural Resources Fund $48,699 $15,896

Real Estate Fund $37,486 $37,231

-36-
<PAGE>

For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:

Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- --------------------------

Energy and Natural Resources Funds $29,091 $21,008

Real Estate Fund $ 1,794 $ 1,794

Expenses
--------

Except as otherwise noted, the Adviser and the Administrators bear all
expenses in connection with the performance of their services. The Funds bear
the expenses incurred in their operations. Expenses of the Funds include: taxes;
interest; fees (including fees paid to the Company's directors and officers who
are not affiliated with the Distributor or the Administrators); SEC fees; state
securities qualifications fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; advisory,
administration and administrative servicing fees; charges of the custodian,
transfer agent, and dividend disbursing agent; certain insurance premiums;
outside auditing and legal expenses; costs of independent pricing services;
costs of shareholder reports and shareholder meetings; and any extraordinary
expenses. The Funds also pay for brokerage fees and commissions in connection
with the purchase of portfolio securities.

Custodian and Transfer Agent
----------------------------

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Funds' assets. Under the
Custodian Agreement, Chase has agreed to: (i) maintain a separate account or
accounts in the name of the Funds; (ii) make receipts and disbursements of money
on behalf of the Funds; (iii) collect and receive all income and other payments
and distributions on account of the Funds' portfolio securities; (iv) respond to
correspondence from securities brokers and others relating to its duties; (v)
maintain certain financial accounts and records; and (vi) make periodic reports
to the Company's Board of Directors concerning the Funds' operations. Chase may,
at its own expense, open and maintain custody accounts with respect to the Funds
with other banks or trust companies, provided that Chase shall remain liable for
the performance of all its custodial duties under the Custodian Agreement,
notwithstanding any delegation. Communications to the custodian should be
directed to Chase, Mutual Funds Service Division, 3 Chase MetroTech Center, 8th
Floor, Brooklyn, NY 11245.

-37-
<PAGE>

(iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend-disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.

U.S. Trust New York may, at its own expense, delegate its transfer
agency obligations to another transfer agent registered or qualified under
applicable law, provided that U.S. Trust New York shall remain liable for the
performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

PORTFOLIO TRANSACTIONS
----------------------

Subject to the general control of the Company's Board of Directors,
the Adviser is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of all portfolio securities of the Funds.

The Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year. The Funds' portfolio turnover rates may also be
affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Funds' portfolio
turnover rates.

-38-
<PAGE>

Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. In executing portfolio
transactions for the Funds, the Adviser may use affiliated brokers in accordance
with the requirements of the 1940 Act. The Adviser may also take into account
the sale of Fund shares in allocating brokerage transactions.

For the fiscal years ended March 31, 2000, 1999 and 1998, the Funds
paid brokerage commissions as follows:

<TABLE>
<CAPTION>
Total % of Total
Brokerage Amount of
Total Commissions % of Total Transaction on
Brokerage Paid to Commission which Commissions
Commissions Affiliated Paid to UST were Paid to UST
Paid Persons Securities Corp./1/ Securities Corp./1/
---- ------- ---------------- ----------------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 2000:
--------------------------------

Energy and Natural Resources Fund $334,065 $ 0 0 0

Real Estate Fund $ 60,959 $ 0 0 0

Fiscal year ended March 31, 1999:
--------------------------------

Energy and Natural Resources Fund $199,479 $ 0 0 0

Real Estate Fund $ 61,187 $ 0 0 0

Fiscal year ended March 31, 1998:
--------------------------------

Energy and Natural Resources Fund $122,934 $ 630 0.51% 0.62%

Real Estate Fund $103,563 $ 0 0 0
</TABLE>

/1/ UST Securities Corp. is an affiliate of an Adviser.

Transactions in domestic over-the-counter markets are generally
principal transactions with dealers, and the costs of such transactions involve
dealer spreads rather than brokerage commissions. With respect to over-the-
counter transactions, the Funds, where possible, will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better prices and execution are available elsewhere.

-39-
<PAGE>

The Investment Advisory Agreements between the Company and the Adviser
provide that, in executing portfolio transactions and selecting brokers or
dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

In addition, the Investment Advisory Agreements authorize the Adviser,
to the extent permitted by law and subject to the review of the Company's Board
of Directors from time to time with respect to the extent and continuation of
the policy, to cause the Funds to pay a broker which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser to the accounts as to which it exercises investment discretion. Such
brokerage and research services might consist of reports and statistics on
specific companies or industries, general summaries of groups of stocks and
their comparative earnings, or broad overviews of the stock market and the
economy.

Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Adviser and does not
reduce the investment advisory fees payable by the Funds. Such information may
be useful to the Adviser in serving the Funds and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser in carrying out its obligations to the Funds.

During the fiscal year ended March 31, 2000, the Adviser directed Fund
brokerage transactions to brokers because of research services provided. The
amounts of such transactions and their related commissions are as follows:

<TABLE>
<CAPTION>
Fund Amount of Transactions Related Commission
---- ---------------------- ------------------
<S> <C> <C>
Energy and Natural Resources Fund $334,065 $55,444
Real Estate Fund $ 60,959 $17,748
</TABLE>

Portfolio securities will not be purchased from or sold to the
Adviser, Distributor, or any of their affiliated persons (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted by
the SEC.

Investment decisions for the Funds are made independently from those
for other investment companies, common trust funds and other types of funds
managed by the Adviser. Such other investment companies and funds may also
invest in the same securities as the Funds. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
investment company or common trust fund, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to the Fund and such other investment company
or common trust fund.

-40-
<PAGE>

In some instances, this investment procedure may adversely affect the price paid
or received by the Funds or the size of the position obtained by the Funds. To
the extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other
investment companies or common trust funds in order to obtain best execution.

PORTFOLIO VALUATION
-------------------

Assets in the Funds which are traded on a recognized domestic stock
exchange are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on the national
securities market. Securities traded only on over-the-counter markets are valued
on the basis of closing over-the-counter bid prices. Securities for which there
were no transactions are valued at the average of the most recent bid and asked
prices. An option or futures contract is valued at the last sales price quoted
on the principal exchange or board of trade on which such option or contract is
traded, or in the absence of a sale, the mean between the last bid and asked
prices. Gold and silver bullion held by the Energy and Natural Resources Fund
will be valued at the last spot settlement price on the Commodity Exchange,
Inc., and platinum and palladium bullion will be valued at the last spot
settlement price or, if not available, the settlement price of the nearest
contract month on the New York Mercantile Exchange. Restricted securities and
securities, precious metals or other assets for which market quotations are not
readily available are valued at fair value, pursuant to guidelines adopted by
the Company's Board of Directors.

Portfolio securities which are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an event subsequent
to the time where value was so established is likely to have changed such value,
then the fair value of those securities will be determined by consideration of
other factors under the direction of the Board of Directors. A security which is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security. Investments in
debt securities having a maturity of 60 days or less are valued based upon the
amortized cost method. All other foreign securities are valued at the last
current bid quotation if market quotations are available, or at fair value as
determined in accordance with guidelines adopted by the Board of Directors. For
valuation purposes, quotations of foreign securities in foreign currency are
converted to U.S. dollars equivalent at the prevailing market rate on the day of
conversion. Some of the securities acquired by a Fund may be traded on foreign
exchanges or over-the-counter markets on days which are not Business Days. In
such cases, the net asset value of the shares may be significantly affected on
days when investors can neither purchase nor redeem the Fund's shares. The
Company's administrators have undertaken to price the securities in the Funds'
portfolio, and may use one or more independent pricing services in connection
with this service.

-41-
<PAGE>

INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Company. The Funds' Financial Highlights
included in the Prospectus and the financial statements for the period ended
March 31, 2000 incorporated by reference in this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods included in
their reports thereon which appear therein.

COUNSEL
-------

Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of the
Company, and Mr. Malloy, Assistant Secretary of the Company, are partners), One
Logan Square, 18/th/ and Cherry Streets, Philadelphia, Pennsylvania 19103, is
counsel to the Company.

ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each Fund is treated as a separate
corporate entity and has qualified and intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). Such qualification generally relieves a Fund of liability for
federal income taxes to the extent its earnings are distributed in accordance
with applicable requirements. If, for any reason, a Fund does not qualify for a
taxable year for the special federal tax treatment afforded regulated investment
companies, such Fund would be subject to federal tax on all of its taxable
income at regular corporate rates, without any deduction for distributions to
shareholders. In such event, dividend distributions would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits and would be eligible for the dividends received deduction
in the case of corporate shareholders. Moreover, if a Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.

A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). The funds intend to make sufficient
distributions or deemed distributions of their ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.

Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received

-42-
<PAGE>

by shareholders and paid by a Fund on December 31 of such year if such dividends
are actually paid during January of the following year.

With respect to the Real Estate Fund, the dividends received deduction
is not available for dividends attributable to distributions made by a REIT to
the Fund. In addition, distributions paid by REITs often include a "return of
capital." The Code requires a REIT to distribute at least 95% of its taxable
income to investors. In many cases, however, because of "non-cash" expenses such
as property depreciation, an equity REIT's cash flow will exceed its taxable
income. The REIT may distribute this excess cash to offer a more competitive
yield. This portion of the distribution is deemed a return of capital, and is
generally not taxable to shareholders. However, if shareholders receive a return
of capital, the basis of their shares is decreased by the amount of such return
of capital. This, in turn, affects the capital gain or loss realized when shares
of the REIT are exchanged or sold. If the Real Estate Fund makes distributions
in excess of its earnings, a shareholder's basis in the Fund will be reduced by
the amount of such return of capital if such shareholder elects to receive
distributions in cash (as opposed to having them reinvested in additional shares
of the Fund). If a shareholder's basis is reduced to zero, any further return of
capital distribution is taxable as a capital gain.

The foregoing discussion is based on federal tax laws and regulations
which are in effect on the date of this Statement of Additional Information;
such laws and regulations may be changed by legislative or administrative
action. Shareholders are advised to consult their tax advisers concerning their
specific situations and the application of state, local and foreign taxes.

PERFORMANCE INFORMATION
-----------------------

The Funds may advertise the "average annual total return" for their
shares. Such total return figure reflects the average percentage change in the
value of an investment in a Fund from the beginning date of the measuring period
to the end of the measuring period. Average total return figures will be given
for the most recent one-year period, and may be given for other periods as well
(such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:

-43-
<PAGE>

ERV /1/n/
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year (or other) periods at the end of the
applicable period (or a fractional portion
thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation, expressed in years.

Each Fund may also advertise the "aggregate total return" for its
shares for various periods, representing the cumulative change in the value of
an investment in the Fund for the specific period. The aggregate total return is
computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:

ERV
Aggregate Total Return = [(-----)] - 1
P

The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in a Fund during
the periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all nonrecurring charges at the end of the
measuring period.

Based on the foregoing calculations, the average annual total returns
for the Funds were as follows:

-44-
<PAGE>

Average Annual Total Returns

<TABLE>
<CAPTION>
For the Period from
For the Year Ended For the 5 Years December 31, 1992 until
3/31/00 Ended 3/31/00 3/31/00
------------------ --------------- -----------------------
<S> <C> <C> <C>
Energy and Natural Resources 44.61% 19.37% 15.60%/1/
Fund

Real Estate Fund 0.58% N/A (6.38)%/2/
</TABLE>

/1/ Commenced operation on December 31, 1992.

/2/ Commenced operation on October 1, 1997.

Based on the foregoing calculations, the aggregate annual total
returns for the Funds were as follows:

Aggregate Annual Total Returns

<TABLE>
<CAPTION>
For the Period from
For the 5 Years Commencement of
Ended 3/31/00 Operations until 3/31/00
--------------- ------------------------
<S> <C> <C>
Energy and Natural 147.40% 186.20%/1/
Resources Fund

Real Estate Fund N/A (15.20)%/2/
</TABLE>

/1/ Commenced operation on December 31, 1992.

/2/ Commenced operation on October 1, 1997.

The Funds may also from time to time include in advertisements, sales
literature and communications to shareholders a total return figure that is not
calculated according to the formulas set forth above in order to compare more
accurately a Fund's performance with other measures of investment return. For
example, in comparing a Fund's total return with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, a Fund may
calculate its aggregate total return for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment of each dividend or other distribution at net
asset value on the reinvestment date. Percentage

-45-
<PAGE>

increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value.

The total return of the Funds may be compared to that of other mutual
funds with similar investment objectives and to other relevant indices or to
ratings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. The total return of the Real Estate Fund may be compared to the
S&P REIT Index, an unmanaged index of over 100 publicly-traded equity, mortgage
and hybrid REITs which have high levels of liquidity and market capitalizations
of at least $100 million, or the Morgan Stanley REIT Index, an unmanaged index
of all publicly-traded equity REITs (except health care REITs) which have total
market capitalizations of at least $100 million and are considered liquid. Total
return and yield data as reported in national financial publications such as
Money Magazine, Forbes, Barron's, The Wall Street Journal and The New York
----- -------- ------ -------- --- ---- ------ ------- --- --- ----
Times, or in publications of a local or regional nature, may also be used in
-----
comparing the performance of a Fund. Advertisements, sales literature or reports
to shareholders may from time to time also include a discussion and analysis of
each Fund's performance, including, without limitation, those factors,
strategies and techniques that, together with market conditions and events,
materially affected each Fund's performance.

The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements, sales literature or communications to shareholders may summarize
the substance of information contained in shareholder reports (including the
investment composition of a Fund), as well as the views of the Adviser as to
current market, economy, trade and interest rate trends, legislative, regulatory
and monetary developments, investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include in advertisements charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to, stocks,
bonds, Treasury bills and shares of a Fund. In addition, advertisements, sales
literature or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.

The Real Estate Fund may advertise the standardized effective 30-day
(or one month) yield calculated in accordance with the method prescribed by the
SEC for mutual funds.

-46-
<PAGE>

Such yield will be calculated for the Fund according to the following formula:

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

Where: a = dividends and interest earned during the
period.

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

c = average daily number of shares outstanding that
were entitled to receive dividends.

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

For the purpose of determining interest earned during the period
(variable "a" in the formula), the Real Estate Fund will compute the yield to
maturity of any debt obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest). Such yield
is then divided by 360, and the quotient is multiplied by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. It is assumed in the above calculation that each
month contains 30 days. Also, the maturity of a debt obligation with a call
provision is deemed to be the next call date on which the obligation reasonably
may be expected to be called or, if none, the maturity date. The Fund will
calculate interest gained on tax-exempt obligations issued without original
issue discount and having a current market discount by using the coupon rate of
interest instead of the yield to maturity. In the case of tax-exempt obligations
with original issue discount, where the discount based on the current market
value exceeds the then-remaining portion of original issue discount, the yield
to maturity is the imputed rate based on the original issue discount
calculation. Conversely, where the discount based on the current market value is
less than the remaining portion of the original issue discount, the yield to
maturity is based on the market value.

Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged by the Real Estate Fund to all shareholder accounts
and to the particular series of shares in proportion to the length of the base
period and the Fund's mean (or median) account size. Undeclared earned income
will be subtracted from the maximum offering price per share (variable "d" in
the formula). Based on the foregoing calculations, the Real Estate Fund's
standardized effective yield for the 30-day period ended March 31, 2000 was
6.48%.

Performance and yields will fluctuate and any quotation of performance
and yield should not be considered as representative of a Fund's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an invest in the Funds with bank

-47-
<PAGE>

deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance and yield are generally functions
of the kind and quality of the instruments held in a portfolio, portfolio
maturity, operating expenses, and market conditions. Any fees charged by
Shareholder Organizations with respect to accounts of Customers that have
invested in shares will not be included in calculations of performance and
yield.

CODE OF ETHICS
--------------

The Fund, U.S. Trust New York, U.S. Trust Company and the Distributor
have adopted codes of ethics for personnel subject to the codes to invest in
securities including securities that may be purchased or held by the Fund.

MISCELLANEOUS
-------------

As used herein, "assets allocable to the Fund" means the consideration
received upon the issuance of shares in the Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale of such investments, any funds or payments derived
from any reinvestment of such proceeds, and a portion of any general assets of
the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to a particular Fund, are conclusive.

As of July 7, 2000, U.S. Trust and its affiliates held of record
substantially all of the Company's outstanding shares as agent or custodian for
their customers, but did not own such shares beneficially because they did not
have voting or investment discretion with respect to such shares.

As of July 7, 2000, the name, address and percentage ownership of each
person that owned beneficially or of record 5% or more of the outstanding shares
of a Fund were as follows: ENERGY AND NATURAL RESOURCES FUND: Charles Schwab &
---------------------------------
Co., Inc., Special Custody A/C for, Attn: Mutual Funds, 101 Montgomery Street,
San Francisco, California 94104, 18.88%; REAL ESTATE FUND: U.S. Trust Retirement
----------------
Fund, c/o United States Trust Company of New York, 114 West 47/th/ Street, New
York, New York, 10036, 12.20%; and Eugene Higgins Residuary, c/o United States
Trust Company of New York, 114 West 47/th/ Street, New York, New York, 10036,
7.30%.

FINANCIAL STATEMENTS
--------------------

The audited financial statements and notes thereto in the Company's
Annual Report to Shareholders for the fiscal year ended March 31, 2000 (the
"2000 Annual Report")

-48-
<PAGE>

for the Funds are incorporated in this Statement of Additional Information by
reference. No other parts of the 2000 Annual Report are incorporated by
reference herein. The financial statements included in the 2000 Annual Report
for the Funds have been audited by the Company's independent auditors, Ernst &
Young LLP whose reports thereon also appear in the 2000 Annual Report and are
incorporated herein by reference. Such financial statements have been
incorporated herein in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing. Additional copies of the 2000
Annual Report may be obtained at no charge by telephoning CGFSC at the telephone
number appearing on the front page of this Statement of Additional
Information.

-49-
<PAGE>

APPENDIX A
----------

Commercial Paper Ratings
------------------------

Local Currency and Foreign Currency Risks
-----------------------------------------

A-1
<PAGE>

from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.

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

A-2
<PAGE>

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

A-3
<PAGE>

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

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------

The following summarizes the ratings used by Standard & Poor's 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.

"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

A-4
<PAGE>

or economic conditions which could lead to the obligor's inadequate 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.

-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" - The "r" highlights obligations that Standard & Poor's believes

A-5
<PAGE>

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

"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.

"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.

"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.

A-6
<PAGE>

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

A-7
<PAGE>

A-8
<PAGE>

-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.

-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.

"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.

A-9
<PAGE>

"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.

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

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

Municipal Note Ratings
----------------------

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

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

A-10
<PAGE>

EXCELSIOR FUNDS, INC.

Blended Equity Fund
Value and Restructuring Fund
Small Cap Fund
Large Cap Growth Fund
Technology Fund

STATEMENT OF ADDITIONAL INFORMATION

August 1, 2000

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Blended Equity, Value
and Restructuring, Small Cap, Large Cap Growth and Technology Funds
(individually, a "Fund" and collectively, the "Funds") of Excelsior Funds, Inc.
dated August 1, 2000 (the "Prospectus"). A copy of the Prospectus may be
obtained by writing Excelsior Funds, Inc. c/o Chase Global Funds Services
Company, 73 Tremont Street, Boston, MA 02108-3913 or by calling (800) 446-1012.
Capitalized terms not otherwise defined have the same meaning as in the
Prospectus.

The audited financial statements and related report of Ernst & Young LLP,
independent auditors, contained in the annual report to the Funds' shareholders
for the fiscal year ended March 31, 2000 are incorporated herein by reference in
the section entitled "Financial Statements." No other parts of the annual report
are incorporated herein by reference. Copies of the annual report may be
obtained upon request and without charge by calling (800) 446-1012.
<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
CLASSIFICATION AND HISTORY................................................. 1

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS.............................. 1
Additional Investment Policies.................................. 1
Additional Information on Portfolio Instruments................. 2

INVESTMENT LIMITATIONS................................................... 13

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 18
Distributor..................................................... 18
Purchase of Shares.............................................. 19
Redemption Procedures........................................... 20
Other Redemption Information.................................... 21

INVESTOR PROGRAMS........................................................ 21
Systematic Withdrawal Plan...................................... 21
Exchange Privilege.............................................. 22
Retirement Plans................................................ 23
Automatic Investment Program.................................... 23
Additional Information.......................................... 24

DESCRIPTION OF CAPITAL STOCK............................................. 24

MANAGEMENT OF THE FUNDS.................................................. 26
Directors and Officers.......................................... 26
Investment Advisory and Administration Agreements............... 31
Shareholder Organizations....................................... 34
Expenses........................................................ 36
Custodian and Transfer Agent.................................... 37

PORTFOLIO TRANSACTIONS................................................... 38

PORTFOLIO VALUATION...................................................... 41

INDEPENDENT AUDITORS..................................................... 42

COUNSEL.................................................................. 42

ADDITIONAL INFORMATION CONCERNING TAXES.................................. 42

PERFORMANCE INFORMATION.................................................. 43
</TABLE>
<PAGE>

<TABLE>
<S> <C>
CODE OF ETHICS............................................................. 47

MISCELLANEOUS.............................................................. 47

FINANCIAL STATEMENTS....................................................... 48

APPENDIX A................................................................. A-1
</TABLE>
<PAGE>

CLASSIFICATION AND HISTORY
--------------------------

Excelsior Funds, Inc. (the "Company") is an open-end, management
investment company. Each Fund is a separate series of the Company and is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Company was organized as a Maryland corporation on August
2, 1984. Prior to December 28, 1995, the Company was known as "UST Master Funds,
Inc." Each of the Funds (except the Technology Fund) offer two share classes,
Shares which are discussed in this Statement of Additional Information ("SAI")
and Advisory Shares which are discussed in a separate SAI. The Technology Fund
offers only Shares. Prior to August 1, 1997, the Blended Equity Fund, Value and
Restructuring Fund and Small Cap Fund were known as the Equity Fund, Business
and Industrial Restructuring Fund and Early Life Cycle Fund, respectively.

INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
-------------------------------------------

The following information supplements the description of the
investment objectives, strategies and risks of the Funds as set forth in the
Prospectus. The investment objective of each of the Blended Equity, Value and
Restructuring and Small Cap Funds may not be changed without the vote of the
holders of a majority of its outstanding shares (as defined below). The
investment objective of the Large Cap Growth and Technology Funds may be changed
without shareholder approval. Except as expressly noted below, each Fund's
investment policies may be changed without shareholder approval.

Additional Investment Policies
------------------------------

Under normal market and economic conditions, each of the Blended
Equity, Value and Restructuring, Small Cap and Large Cap Growth Funds will
invest at least 65% of its total assets in common stock, preferred stock and
securities convertible into common stock. The Technology Fund will invest at
least 65% of its total assets in equity securities of technology companies.
Technology companies are those companies that are expected to benefit from the
development, advancement and use of technology. These companies may be in a
variety of industries, and may include computer hardware, software, electronic
components and systems, telecommunications, internet, biotechnology, media and
information services companies or other companies that use technology
extensively in the development of new or improved products or processes.
Normally, up to 35% of each Fund's total assets may be invested in other
securities and instruments including, e.g., other investment-grade debt
securities (i.e., debt obligations classified within the four highest ratings of
a nationally recognized statistical rating organization such as Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Services
("S&P") or, if unrated, determined by the Adviser to be of comparable quality),
warrants, options and futures instruments as described in more detail below.
During temporary defensive periods or when the Adviser believes that suitable
stocks or convertible securities are unavailable, each Fund may hold cash and/or
invest some or all of its assets in U.S. government securities, high-quality
money market instruments and repurchase agreements collateralized by the
foregoing obligations.

-1-
<PAGE>

Portfolio holdings will include equity securities of companies having
capitalizations of varying amounts, and the Funds may invest in the securities
of high growth, small companies when the Adviser expects earnings and the price
of the securities to grow at an above-average rate. The Small Cap Fund
emphasizes such companies. Certain securities owned by the Funds may be traded
only in the over-the-counter market or on a regional securities exchange, may be
listed only in the quotation service commonly known as the "pink sheets," and
may not be traded every day or in the volume typical of trading on a national
securities exchange. As a result, there may be a greater fluctuation in the
value of a Fund's shares, and a Fund may be required, in order to satisfy
redemption requests or for other reasons, to sell these securities at a discount
from market prices, to sell during periods when such disposition is not
desirable, or to make many small sales over a period of time.

Additional Information on Portfolio Instruments
-----------------------------------------------

Options
-------

The Value and Restructuring, Small Cap, Large Cap Growth and
Technology Funds may purchase put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
purchases would be in an amount not exceeding 5% of each such Fund's net assets.
Such options may relate to particular securities or to various stock and bond
indices. Purchase of options is a highly specialized activity which entails
greater than ordinary investment risks, including a substantial risk of a
complete loss of the amounts paid as premiums to the writer of the options.
Regardless of how much the market price of the underlying security increases or
decreases, the option buyer's risk is limited to the amount of the original
investment for the purchase of the option. However, options may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities. A listed call option gives the purchaser of the
option the right to buy from a clearing corporation, and the writer has the
obligation to sell to the clearing corporation, the underlying security at the
stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by the Value and Restructuring,
Small Cap, Large Cap Growth and Technology Funds will be

-2-
<PAGE>

valued at the last sale price or, in the absence of such a price, at the mean
between bid and asked prices.

-3-
<PAGE>

treated as short-term capital gains for Federal income tax purposes, and losses
on closing purchase transactions are short-term capital losses. The use of
covered call options is not a primary investment technique of the Funds and such
options will normally be written on underlying securities as to which the
Adviser does not anticipate significant short-term capital appreciation.

Repurchase Agreements
---------------------

Each Fund may agree to purchase portfolio securities subject to the
seller's agreement to repurchase them at a mutually agreed upon date and price
("repurchase agreements"). The Funds will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Funds will not enter into repurchase agreements with the Adviser or any of
its affiliates. Repurchase agreements with remaining maturities in excess of
seven days will be considered illiquid securities and will be subject to the
limitations described below under "Illiquid Securities." The repurchase price
under a repurchase agreement generally equals the price paid by a Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the securities underlying the repurchase agreement).

Futures Contracts and Related Options
-------------------------------------

Each Fund may invest in futures contracts and options thereon. They
may enter into interest rate futures contracts and other types of financial
futures contracts, including foreign currency futures contracts, as well as any
index or foreign market futures which are available on recognized exchanges or
in other established financial markets. A futures contract on foreign currency
creates a binding obligation on one party to deliver, and a corresponding
obligation on another party to accept delivery of, a stated quantity of a
foreign currency for an amount fixed in U.S. dollars. Foreign currency futures,
which operate in a manner similar to interest rate futures contracts, may be
used by the Funds to hedge against exposure to fluctuations in exchange rates
between the U.S. dollar and other currencies arising from multinational
transactions.

-4-
<PAGE>

a segregated account containing liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Fund takes a short position in a
futures contract, the Fund must maintain a segregated account containing liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established. Asset segregation
requirements are not applicable when a Fund "covers" an options or futures
position generally by entering into an offsetting position. Each Fund will limit
its hedging transactions in futures contracts and related options so that,
immediately after any such transaction, the aggregate initial margin that is
required to be posted by the Fund under the rules of the exchange on which the
futures contract (or futures option) is traded, plus any premiums paid by the
Fund on its open futures options positions, does not exceed 5% of the Fund's
total assets, after taking into account any unrealized profits and unrealized
losses on the Fund's open contracts (and excluding the amount that a futures
option is "in-the-money" at the time of purchase). An option to buy a futures
contract is "in-the-money" if the then-current purchase price of the underlying
futures contract exceeds the exercise or strike price; an option to sell a
futures contract is "in-the-money" if the exercise or strike price exceeds the
then-current purchase price of the contract that is the subject of the option.
In addition, the use of futures contracts is further restricted to the extent
that no more than 10% of a Fund's total assets may be hedged.

Transactions in futures as a hedging device may subject a Fund to a
number of risks. Successful use of futures by a Fund is subject to the ability
of the Adviser to correctly predict movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. There may be an imperfect
correlation, or no correlation at all, between movements in the price of the
futures contracts (or options) and movements in the price of the instruments
being hedged. In addition, investments in futures may subject a Fund to losses
due to unanticipated market movements which are potentially unlimited. Further,
there is no assurance that a liquid market will exist for any particular futures
contract (or option) at any particular time. Consequently, a Fund may realize a
loss on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase or may be unable to
close a futures position in the event of adverse price movements. In addition,
in some situations, if a Fund has insufficient cash, it may have to sell
securities to meet daily

-5-
<PAGE>

variation margin requirements at a time when it may be disadvantageous to do so.
Such sales of securities may be, but will not necessarily be, at increased
prices which reflect the rising market.

As noted above, the risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit, before any
deduction for the transaction costs, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract.

Utilization of futures transactions involves the risk of loss by a
Fund of margin deposits in the event of bankruptcy of a broker with whom such
Fund has an open position in a futures contract or related option.

The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.

Options on Futures Contracts
----------------------------

Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.

-6-
<PAGE>

Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the instruments being
hedged, an option may or may not be less risky than ownership of the futures
contract or such instruments. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Fund because the maximum amount at risk is the premium paid
for the options (plus transaction costs). Although permitted by their
fundamental investment policies, the Funds do not currently intend to write
futures options, and will not do so in the future absent any necessary
regulatory approvals.

When-Issued and Forward Transactions
------------------------------------

Each Fund may purchase eligible securities on a "when-issued" basis
and may purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by a Fund to purchase or sell particular
securities with payment and delivery taking place in the future, beyond the
normal settlement date, at a stated price and yield. Securities purchased on a
"forward commitment" or "when-issued" basis are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. When a Fund agrees to purchase securities on a "when-issued" or "forward
commitment" basis, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment and, in such case, the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a Fund's net assets will fluctuate to a greater degree when
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund will set aside cash or liquid assets to
satisfy its purchase commitments in the manner described above, its liquidity
and ability to manage its portfolio might be affected in the event its forward
commitments or commitments to purchase "when-issued" securities ever exceed 25%
of the value of its assets.

It is expected that "forward commitments" and "when-issued" purchases
will not exceed 25% of the value of a Fund's total assets absent unusual market
conditions, and that the length of such commitments will not exceed 45 days. The
Funds do not intend to engage in "when-issued" purchases and "forward
commitments" for speculative purposes, but only in furtherance of their
investment objectives.

-7-
<PAGE>

delivered to the Fund on the settlement date. In these cases, the Fund may
realize a taxable capital gain or loss.

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

Forward Currency Transactions
-----------------------------

Each Fund will conduct its currency exchange transactions either on a
spot (i.e., cash) basis at the rate prevailing in the currency exchange markets,
or by entering into forward currency contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency for a
set price at a future date. In this respect, forward currency contracts are
similar to foreign currency futures contracts; however, unlike futures contracts
which are traded on recognized commodities exchanges, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency involved instead of cash
payment as in the case of futures contracts.

A Fund's participation in forward currency contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging involves the purchase or sale of foreign currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities. The purpose of
transaction hedging is to "lock in" the U.S. dollar equivalent price of such
specific securities. Position hedging is the sale of foreign currency with
respect to portfolio security positions denominated or quoted in that currency.
The Funds will not speculate in foreign currency exchange transactions.
Transaction and position hedging will not be limited to an overall percentage of
a Fund's assets, but will be employed as necessary to correspond to particular
transactions or positions. A Fund may not hedge its currency positions to an
extent greater than the aggregate market value (at the time of entering into the
forward contract) of the securities held in its portfolio denominated, quoted
in, or currently convertible into that particular currency. When the Funds
engage in forward currency transactions, certain asset segregation requirements
must be satisfied to ensure that the use of foreign currency transactions is
unleveraged. When a Fund takes a long position in a forward currency contract,
it must maintain a segregated account containing liquid assets equal to the
purchase price of the contract, less any margin or deposit. When a Fund takes a
short position in a forward currency contract, the Fund must maintain a
segregated account containing liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Asset segregation

-8-
<PAGE>

requirements are not applicable when a Fund "covers" a forward currency position
generally by entering into an offsetting position.

At or before the maturity of a forward sale contract, a Fund may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting transaction, will incur a
gain or a loss to the extent that movement has occurred in forward contract
prices. Should forward prices decline during the period between a Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to sell is less than the price of the currency it has
agreed to purchase in the offsetting contract. The foregoing principles
generally apply also to forward purchase contracts.

Real Estate Investment Trusts
-----------------------------

Each Fund, other than the Technology Fund, may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may subject
these Funds to certain risks. REITs may be affected by changes in the value of
the underlying property owned by the trust. REITs are dependent upon specialized
management skill, may not be diversified and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers, self liquidation and the possibility of failing to
qualify for the beneficial tax treatment available to REITs under the Internal
Revenue Code of 1986, as amended (the "Code"), and to maintain exemption from
the 1940 Act. As a shareholder in a REIT, each of these Funds would bear, along
with other shareholders, its pro rata portion of the REIT's operating expenses.
These expenses would be in addition to the advisory and other expenses these
Funds bear directly in connection with its own operations.

-9-
<PAGE>

Securities Lending
------------------

To increase return on its portfolio securities, each Fund may lend its
portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank, or any
combination thereof. Such loans will not be made if, as a result, the aggregate
of all outstanding loans of a Fund exceeds 30% of the value of its total assets.
When a Fund lends its securities, it continues to receive interest or dividends
on the securities lent and may simultaneously earn interest on the investment of
the cash loan collateral, which will be invested in readily marketable, high-
quality, short-term obligations. Although voting rights, or rights to consent,
attendant to lent securities pass to the borrower, such loans may be called at
any time and will be called so that the securities may be voted by a Fund if a
material event affecting the investment is to occur.

There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are made
only to borrowers deemed by the Adviser to be of good standing and when, in the
Adviser's judgment, the income to be earned from the loan justifies the
attendant risks.

Money Market Instruments
------------------------

All Funds may invest in "money market instruments," which include,
among other things, bank obligations, commercial paper and corporate bonds with
remaining maturities of 13 months or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. Investments in bank
obligations of foreign branches of domestic financial institutions or of
domestic branches of foreign banks are limited so that no more than 5% of the
value of a Fund's total assets may be invested in any one branch, and no more
than 20% of a particular Fund's total assets at the time of purchase may be
invested in the aggregate in such obligations (see investment limitation No. 22
below under "Investment Limitations." With respect to the Value and
Restructuring, Small Cap, Large Cap and Technology Funds, this limitation may be
changed by the Company's Board of Directors without shareholder approval).
Investments in time deposits are limited to no more than 5% of the value of a
Fund's total assets at the time of purchase.

Investments by the Funds in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In
addition, each Fund may acquire

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<PAGE>

unrated commercial paper that is determined by the Adviser at the time of
purchase to be of comparable quality to rated instruments that may be acquired
by the particular Fund.

Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by a Fund, the Fund may, from time to time as specified in
the instrument, demand payment of the principal of the instrument or may resell
the instrument to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of the instrument if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for this or
other reasons, suffer a loss with respect to such instrument.

Government Obligations
----------------------

All Funds may invest in U.S. government obligations, including U.S.
Treasury Bills and the obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, the
Farmers Home Administration, the Export-Import Bank of the United States, the
Small Business Administration, the Government National Mortgage Association, the
Federal National Mortgage Association, the General Services Administration, the
Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the
Federal Intermediate Credit Banks and the Maritime Administration.

Debt Securities and Convertible Securities
------------------------------------------

The Technology Fund may invest in investment grade debt and
convertible securities of domestic and foreign issuers. The convertible
securities in which the Technology Fund may invest include any debt securities
or preferred stock which may be converted into common stock or which carry the
right to purchase common stock. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of
time. Debt obligations rated in the lowest of the top four investment grade
ratings ("Baa" by Moody's and "BBB" by S&P) are considered to have some
speculative characteristics and may be more sensitive to adverse economic change
than higher rated securities. The Technology Fund will sell in an orderly
fashion as soon as possible any convertible and non-convertible debt securities
it holds if they are downgraded below "Baa" by Moody's or below "BBB" by S&P.
Foreign debt and convertible securities are generally unrated.

Investment Company Securities
-----------------------------

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<PAGE>

duplicative. Such securities will be acquired by each Fund within the limits
prescribed by the 1940 Act, which include, subject to certain exceptions, a
prohibition against a Fund investing more than 10% of the value of its total
assets in such securities.

Borrowing and Reverse Repurchase Agreements
-------------------------------------------

Illiquid Securities
-------------------

No Fund will knowingly invest more than 10% (15%, with respect to the
Large Cap Growth and Technology Funds) of the value of its net assets in
securities that are illiquid. A security will be considered illiquid if it may
not be disposed of within seven days at approximately the value at which the
particular Fund has valued the security. Each Fund may

-12-
<PAGE>

purchase securities which are not registered under the Securities Act of 1933,
as amended (the "Act"), but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Act. Any such security will not
be considered illiquid so long as it is determined by the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading market
exists for that security. This investment practice could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers are no longer interested in purchasing these restricted
securities.

Portfolio Turnover
------------------

Each Fund may sell a portfolio investment immediately after its
acquisition if the Adviser believes that such a disposition is consistent with
the investment objective of the particular Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. The annual portfolio turnover rate of the Technology Fund is not
expected to exceed 100%. A rate of 100% indicates that the equivalent of all of
the Fund's assets have been sold and reinvested in a calendar year. A high rate
of portfolio turnover may involve correspondingly greater brokerage commission
expenses and other transaction costs, which must be borne directly by a Fund and
ultimately by its shareholders. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes.

Investment Limitations
----------------------

The investment limitations enumerated below are matters of fundamental
policy. Fundamental investment limitations may be changed with respect to a Fund
only by a vote of the holders of a majority of such Fund's outstanding shares.
As used herein, a "vote of the holders of a majority of the outstanding shares"
of the Company or a particular Fund means, with respect to the approval of an
investment advisory agreement or a change in a fundamental investment policy,
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Company or such Fund, or (b) 67% or more of the shares of the
Company or such Fund present at a meeting if more than 50% of the outstanding
shares of the Company or such Fund are represented at the meeting in person or
by proxy. Investment limitations which are "operating policies" with respect to
a Fund may be changed by the Company's Board of Directors without shareholder
approval.

The following investment limitations are fundamental with respect to
each of the Funds. Each Fund may not:

1. Make loans, except that (i) each Fund may purchase or hold debt
securities in accordance with its investment objective and policies, and may
enter into repurchase agreements with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, (ii) each
of the Blended Equity, Value and Restructuring and Small Cap Funds may lend
portfolio securities in an amount not exceeding 30% of its total assets, and
(iii)

-13-
<PAGE>

the Large Cap Growth and Technology Funds may lend portfolio securities in
accordance with their investment objectives and policies; and

2. Purchase any securities which would cause more than 25% of the
value of its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (i) with respect to the Blended Equity Fund,
there is no limitation with respect to securities issued or guaranteed by the
U.S. government or domestic bank obligations, (ii) with respect to the Value and
Restructuring and Small Cap Funds, there is no limitation with respect to
securities issued or guaranteed by the U.S. government, (iii) with respect to
the Large Cap Growth and Technology Funds, there is no limitation with respect
to securities issued or guaranteed by the U.S. government, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and
repurchase agreements secured by such securities, (iv) with respect to the
Technology Fund, the Fund will concentrate its investments in the securities of
technology companies; and (v) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry for purposes of
this policy.

The following investment limitations are fundamental with respect to
each of the Blended Equity, Value and Restructuring and Small Cap Funds. Each
such Fund may not:

4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate;

5. Purchase securities of any one issuer, other than U.S. government
obligations, if immediately after such purchase more than 5% of the value of its
total assets would be invested in the securities of such issuer, except that up
to 25% of the value of its total assets may be invested without regard to this
5% limitation;

6. Borrow money except from banks for temporary purposes, and then
in amounts not in excess of 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed and 10% of the value of its total assets at the time
of such borrowing. (This borrowing provision is included solely to facilitate
the orderly sale of portfolio securities to accommodate abnormally heavy
redemption requests and is not for leverage purposes.) A Fund will not purchase
portfolio securities while borrowings in excess of 5% of its total assets are
outstanding. Optioned stock held in escrow is not deemed to be a pledge; and

-14-
<PAGE>

7. Issue any senior securities, except insofar as any borrowing in
accordance with a Fund's investment limitation contained in the Prospectus might
be considered to be the issuance of a senior security.

The following investment limitations are fundamental with respect to
the Large Cap Growth Fund. The Fund may not:

8. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is not
deemed to be a pledge;

9. Purchase securities of any one issuer, other than securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
or other investment companies if, immediately after such purchase, more than 5%
of the value of its total assets would be invested in the securities of such
issuer, except that up to 25% of the value of its total assets may be invested
without regard to this 5% limitation;

10. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;

11. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;

12. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and

13. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.

The following investment limitations are fundamental with respect to
the Technology Fund. The Fund may not:

14. Borrow money or mortgage, pledge or hypothecate its assets except
to the extent permitted under the 1940 Act. Optioned stock held in escrow is not
deemed to be a pledge.

-15-
<PAGE>

15. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
its investment objective, policies and limitations may be deemed to be
underwriting;

16. Purchase or sell real estate, except that (a) the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by real estate or interests therein, and (b) the
Fund may hold and sell any real estate it acquires as a result of the Fund's
ownership of such securities;

17. Issue any senior securities, except insofar as any borrowing in
accordance with the Fund's investment limitations might be considered to be the
issuance of a senior security; and

18. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that the Fund may: (a) purchase publicly traded securities of
companies engaging in whole or in part in such activities or invest in
liquidating trust receipts, certificates of beneficial ownership or other
instruments in accordance with its investment objective and policies, and (b)
purchase and sell options, forward contracts, futures contracts and futures
options.

The following investment limitations are fundamental with respect to
the Blended Equity and Technology Funds, but are operating policies with respect
to the Value and Restructuring, Small Cap and Large Cap Growth Funds. No Fund
may:

19. Purchase securities on margin, make short sales of securities, or
maintain a short position;

20. Invest in companies for the purpose of exercising management or
control; and

21. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation, reorganization, or
acquisition of assets or where otherwise permitted by the 1940 Act.

The following investment limitations are fundamental with respect to
the Blended Equity Fund. The Fund may not:

22. Invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks, if immediately after such
purchase (i) more than 5% of the value of its total assets would be invested in
obligations of any one foreign branch of the financial institution or domestic
branch of a foreign bank; or (ii) more than 20% of its total assets

-16-
<PAGE>

would be invested in foreign branches of financial institutions or in domestic
branches of foreign banks;

23. Knowingly invest more than 10% of the value of its total assets
in illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and other securities
for which market quotations are not readily available;

24. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that the Fund may write covered
call options with respect to its portfolio securities that are traded on a
national securities exchange, and may enter into closing purchase transactions
with respect to such options if, at the time of the writing of such option, the
aggregate value of the securities subject to the options written by the Fund
does not exceed 25% of the value of its total assets;

25. Invest more than 5% of its total assets in securities issued by
companies which, together with any predecessor, have been in continuous
operation for fewer than three years; and

26. Purchase or sell commodities futures contracts or invest in oil,
gas, or other mineral exploration or development programs; provided, however,
that this shall not prohibit the Fund from purchasing publicly traded securities
of companies engaging in whole or in part in such activities.

The following investment limitation is fundamental with respect to the
Value and Restructuring and Small Cap Funds. The Value and Restructuring and
Small Cap Funds may not:

27. Purchase or sell commodities or commodities futures contracts or
invest in oil, gas, or other mineral exploration or development programs;
provided, however, that (i) this shall not prohibit either Fund from purchasing
publicly traded securities of companies engaging in whole or in part in such
activities or from investing in liquidating trust receipts, certificates of
beneficial ownership or other instruments in accordance with their investment
objectives and policies, and (ii) each Fund may enter into futures contracts and
futures options.

* * *

In addition to the investment limitations described above, no Fund may
invest in the securities of any single issuer if, as a result, the Fund holds
more than 10% of the outstanding voting securities of such issuer.

The Value and Restructuring, Small Cap, Large Cap Growth and
Technology Funds may not invest in obligations of foreign branches of financial
institutions or in domestic branches of foreign banks if immediately after such
purchase (i) more than 5% of the value of their respective total assets would be
invested in obligations of any one foreign branch of the financial institution
or domestic branch of a foreign bank; or (ii) more than 20% of their respective
total assets would be invested in foreign branches of financial institutions or
in

-17-
<PAGE>

domestic branches of foreign banks. In addition, the Large Cap Growth and
Technology Funds will not purchase portfolio securities while borrowings in
excess of 5% of their total assets are outstanding. These investment policies
may be changed by the Company's Board of Directors without shareholder approval.

The Blended Equity Fund will not invest more than 25% of the value of
its total assets in domestic bank obligations.

Each Fund currently intends to limit its investments in warrants so
that, valued at the lower of cost or market value, they do not exceed 5% of the
Fund's net assets. For the purpose of this limitation, warrants acquired by a
Fund in units or attached to securities will be deemed to be without value. Each
Fund also intends to refrain from entering into arbitrage transactions.

For the purpose of Investment Limitation Nos. 4 and 16, the
prohibition of purchases of real estate includes acquisition of limited
partnership interests in partnerships formed with a view toward investing in
real estate, but does not prohibit purchases of shares in real estate investment
trusts.

The Blended Equity Fund may not purchase or sell commodities except as
provided in Investment Limitation No. 26 above.

In addition to the above investment limitations, the Technology Fund
currently intends to refrain from entering into arbritage transactions.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------

Distributor
-----------

-18-
<PAGE>

for certain services or activities which are primarily intended to result in
sales of shares of the Funds. If any such program is made available to any
dealer, it will be made available to all dealers on the same terms and
conditions. Payments made under such programs will be made by the Distributor
out of its own assets and not out of the assets of the Funds.

In addition, the Distributor may offer to pay a fee from its own
assets to financial institutions for the continuing investment of customers'
assets in the Funds or for providing substantial marketing, sales and
operational support. The support may include initiating customer accounts,
participating in sales, educational and training seminars, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution.

Purchase of Shares
------------------

Shares may be sold to customers ("Customers") of financial
institutions ("Shareholder Organizations"). Shares are also offered for sale
directly to institutional investors and to members of the general public.
Different types of Customer accounts at the Shareholder Organizations may be
used to purchase shares, including eligible agency and trust accounts. In
addition, Shareholder Organizations may automatically "sweep" a Customer's
account not less frequently than weekly and invest amounts in excess of a
minimum balance agreed to by the Shareholder Organization and its Customer in
shares selected by the Customer. Investors purchasing shares may include
officers, directors, or employees of the particular Shareholder Organization.

-19-
<PAGE>

periodic account statements directly to the shareholders of record. Shares in
the Funds bear the expense of fees payable to Shareholder Organizations for such
services. See "Shareholder Organizations."

Redemption Procedures
---------------------

-20-
<PAGE>

the United States. Institutional Investors may also redeem shares by instructing
CGFSC by telephone at (800) 446-1012 or by terminal access.

Other Redemption Information
----------------------------

The Company may suspend the right of redemption or postpone the date
of payment for shares for more than seven days during any period when (a)
trading on the Exchange is restricted by applicable rules and regulations of the
SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC.

INVESTOR PROGRAMS
-----------------

Systematic Withdrawal Plan
--------------------------

(1) A fixed-dollar withdrawal;

-21-
<PAGE>

(2) A fixed-share withdrawal;

(3) A fixed-percentage withdrawal (based on the current value of the
account); or

(4) A declining-balance withdrawal.

Exchange Privilege
------------------

Investors and Customers of Shareholder Organizations may exchange
shares having a value of at least $500 for shares of any other portfolio of the
Company or Excelsior Tax-Exempt Funds, Inc. ("Excelsior Tax-Exempt Fund" and,
collectively with the Company, the "Companies") or for shares of Excelsior
Institutional Trust. An exchange involves a redemption of all or a portion of
the shares in a Fund and the investment of the redemption proceeds in shares of
another portfolio. The redemption will be made at the per share net asset value
of the shares being redeemed next determined after the exchange request is
received in good order. The shares of the portfolio to be acquired will be
purchased at the per share net asset value of those shares next determined after
receipt of the exchange request in good order.

-22-
<PAGE>

of another portfolio of the Companies within 90 days of the purchase and is able
to reduce the sales load otherwise applicable to the new shares (by virtue of
the Companies' exchange privilege), the amount equal to such reduction may not
be included in the tax basis of the shareholder's exchanged shares but may be
included (subject to the limitation) in the tax basis of the new shares.

Retirement Plans
----------------

Shares are available for purchase by Investors in connection with the
following tax-deferred prototype retirement plans offered by United States Trust
Company of New York ("U.S. Trust New York"):

. IRAs (including "rollovers" from existing retirement plans) for
individuals and their spouses;

. Profit Sharing and Money-Purchase Plans for corporations and
self-employed individuals and their partners to benefit
themselves and their employees; and

. Keogh Plans for self-employed individuals.

Investors investing in the Funds pursuant to Profit Sharing and Money-
Purchase Plans and Keogh Plans are not subject to the minimum investment and
forced redemption provisions described above. The minimum initial investment for
IRAs is $250 per Fund and the minimum subsequent investment is $50 per Fund.
Detailed information concerning eligibility, service fees and other matters
related to these plans can be obtained by calling (800) 446-1012 (from overseas,
call (617) 557-8280). Customers of Shareholder Organizations may purchase shares
of the Funds pursuant to retirement plans if such plans are offered by their
Shareholder Organizations.

Automatic Investment Program
----------------------------

The Automatic Investment Program permits Investors to purchase shares
(minimum of $50 per Fund per transaction) at regular intervals selected by the
Investor. The minimum initial investment for an Automatic Investment Program
account is $50 per Fund. Provided the Investor's financial institution allows
automatic withdrawals, shares are purchased by transferring funds from an
Investor's checking, bank money market or NOW account designated by the
Investor. At the Investor's option, the account designated will be debited in
the specified amount, and shares will be purchased, once a month, on either the
first or fifteenth day, or twice a month, on both days.

-23-
<PAGE>

more shares to be purchased during periods of lower share prices and fewer
shares during periods of higher prices. In order to be effective, dollar cost
averaging should usually be followed on a sustained, consistent basis. Investors
should be aware, however, that shares bought using dollar cost averaging are
purchased without regard to their price on the day of investment or to market
trends. In addition, while Investors may find dollar cost averaging to be
beneficial, it will not prevent a loss if an Investor ultimately redeems his
shares at a price which is lower than their purchase price. The Company may
modify or terminate this privilege at any time or charge a service fee, although
no such fee currently is contemplated. An Investor may also implement the dollar
cost averaging method on his own initiative or through other entities.

Additional Information
----------------------

Customers of Shareholder Organizations may obtain information on the
availability of, and the procedures and fees relating to, the above programs
directly from their Shareholder Organizations.

DESCRIPTION OF CAPITAL STOCK
----------------------------

-24-
<PAGE>

cumulative and, accordingly, the holders of more than 50% of the aggregate of
the Company's shares may elect all of the Company's directors, regardless of
votes of other shareholders.

Certificates for shares will not be issued unless expressly requested
in writing to CGFSC and will not be issued for fractional shares.

-25-
<PAGE>

MANAGEMENT OF THE FUNDS
-----------------------

Directors and Officers
----------------------

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Frederick S. Wonham/1/ Chairman of the Retired; Chairman of the Boards (since
238 June Road Board, President 1997) and President, Treasurer and Director
Stamford, CT 06903 and Treasurer (since 1995) of the Company and Excelsior
Age: 69 Tax-Exempt Funds, Inc.; Chairman of the
Boards (since 1997), President, Treasurer
and Trustee (since 1995) of Excelsior
Funds and Excelsior Institutional Trust;
Vice Chairman of U.S. Trust Corporation
and U.S. Trust New York (from February
1990 until September 1995); and Chairman,
U.S. Trust Company (from March 1993 to
May 1997).

Rodman L. Drake Director Director of the Company and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996);
1251 Avenue of the Americas Trustee of Excelsior Institutional Trust
9th Floor and Excelsior Funds (since 1994); Director,
New York, NY 10020 Parsons Brinkerhoff, Inc. (engineering
Age: 57 firm) (since 1995); President, Continuation
Investments Group, Inc. (since 1997);
President, Mandrake Group (investment and
consulting firm) (1994-1997); Chairman,
MetroCashcard International Inc. (since
1999); Director, Hotelivision, Inc. (since
1999); Director, Alliance Group Services,
Inc. (since 1998); Director, Hyperion Total
Return Fund, Inc. and three other funds for
which Hyperion Capital Management, Inc.
serves as investment adviser (since 1991);
Co-Chairman, KMR Power Corporation (power
plants) (from 1993 to 1996); Director, The
Latin America Smaller Companies Fund, Inc.
(from 1993 to 1998); Member of Advisory
Board, Argentina Private Equity Fund L.P.
(from 1992 to 1996) and Garantia L.P.
(Brazil) (from 1993 to 1996); and Director,
Mueller Industries, Inc. (from 1992 to
1994).
</TABLE>

____________________

1 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-26-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Joseph H. Dugan Director Retired; Director of the Company and
913 Franklin Lake Road Excelsior Tax-Exempt Fund (since 1984);
Franklin Lakes, NJ 07417 Director of UST Master Variable Series,
Age: 75 Inc. (from 1994 to June 1997); and Trustee
of Excelsior Institutional Trust (since
1995).

Wolfe J. Frankl Director Retired; Director of the Company and
2320 Cumberland Road Excelsior Tax-Exempt Funds, Inc. (since
Charlottesville, VA 22901-7726 1986); Director of UST Master Variable
Age: 79 Series, Inc. (from 1994 to June 1997);
Trustee of Excelsior Institutional Trust
(since 1995); Director, Deutsche Bank
Financial, Inc. (since 1989); Director,
The Harbus Corporation (since 1951);
and Trustee, HSBC Funds Trust and
HSBC Mutual Funds Trust (since 1988).

Morrill Melton Hall, Jr. Director Director of the Company and Excelsior
Comprehensive Health Services, Inc. Tax-Exempt Funds, Inc. (since July 30, 2000);
8229 Boone Blvd., Suite 700 Trustee of Excelsior Institutional Trust
Vienna, VA 22182 (since July 30, 2000); Chief Executive Officer,
Age: 55 Comprehensive Health Services, Inc. (health
care management and administration).

Jonathan Piel Director Director of the Company and Excelsior
558 E. 87th Street Tax-Exempt Funds, Inc. (since 1996);
New York, NY 10128 Trustee of Excelsior Institutional Trust
Age: 61 and Excelsior Funds (since 1994); Vice
President and Editor, Scientific American,
Inc. (from 1986 to 1994); Director, Group
for The South Fork, Bridgehampton, New
York (since 1993); and Member, Advisory
Committee, Knight Journalism Fellowships,
Massachusetts Institute of Technology
(since 1984).

Robert A. Robinson Director Director of the Company and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987);
445 Fifth Avenue Director of UST Master Variable Series,
New York, NY 10016 Inc. (from 1994 to June 1997); Trustee of
Age: 74 Excelsior Institutional Trust (since 1995);
President Emeritus, The Church Pension Fund
and its affiliated companies (since 1966);
Trustee, H.B. and F.H. Bugher Foundation
and Director of its wholly owned
subsidiaries -- Rosiclear Lead and
Flourspar Mining Co. and The Pigmy
Corporation (since 1984); Director,
Morehouse Publishing Co. (1974-1998);
Trustee, HSBC Funds Trust and HSBC Mutual
Funds Trust (since 1982); and Director,
Infinity Funds, Inc. (since 1995).
</TABLE>

-27-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Alfred C. Tannachion/2/ Director Retired; Director of the Company and
6549 Pine Meadows Drive Excelsior Tax-Exempt Funds, Inc. (since
Spring Hill, FL 34606 1985); Chairman of the Board of the Company
Age: 74 and Excelsior Tax-Exempt Funds, Inc.
(1991-1997) and Excelsior Institutional
Trust (1996-1997); President and Treasurer
of Excelsior Funds, Inc. and Excelsior
Tax-Exempt Funds, Inc. (1994-1997) and
Excelsior Institutional Trust (1996-1997);
Chairman of the Board, President and
Treasurer of UST Master Variable Series,
Inc. (1994-1997); and Trustee of Excelsior
Institutional Trust (since 1995).

W. Bruce McConnel, III Secretary Partner of the law firm of Drinker
One Logan Square Biddle & Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 57

Michael P. Malloy Assistant Secretary Partner of the law firm of Drinker Biddle &
One Logan Square Reath LLP.
18/th/ and Cherry Streets
Philadelphia, PA 19103-6996
Age: 41

Eddie Wang Assistant Manager of Blue Sky Compliance, Chase
Chase Global Funds Secretary Global Funds Services Company (November
Services Company 1996 to present); and Officer and Manager
73 Tremont Street of Financial Reporting, Investors Bank &
Boston, MA 02108-3913 Trust Company (January 1991 to November
Age: 39 1996).

Patricia M. Leyne Assistant Vice President, Senior Manager of Fund
Chase Global Funds Treasurer Administration, Chase Global Funds Services
Services Company Company (sine August 1999); Assistant Vice
73 Tremont Street President, Senior Manager of Fund
Boston, MA 02108-3913 Administration, Chase Global Funds Services
Age: 33 Company (from July 1998 to August 1999);
Assistant Treasurer, Manager of Fund
Administration, Chase Global Funds Services
Company (from November 1996 to July 1998);
Supervisor, Chase Global Funds Services
Company (from September 1995 to November
1996); Fund Administrator, Chase Global
Funds Services Company (from February
1993 to September 1995).
</TABLE>

______________________
2 This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-28-
<PAGE>

Each director receives an annual fee of $9,000 from each of Excelsior
Funds, Inc. and Excelsior Tax-Exempt Funds, Inc. and $4,000 from Excelsior
Institutional Trust plus a meeting fee of $1,500 from each of Excelsior Funds,
Inc. and Excelsior Tax-Exempt Funds, Inc. and $250 from Excelsior Institutional
Trust for each meeting attended and is reimbursed for expenses incurred in
attending meetings. The Chairman of the Board is entitled to receive an
additional $5,000 per annum from each of the foregoing Companies for services in
such capacity. Prior to December 1999, each of Messrs. Drake, Piel and Wonham
received $4,000 from Excelsior Funds plus a per-Company meeting fee of $250 and
each of these persons was reimbursed for expenses incurred in attending meetings
of Excelsior Funds. The Chairman of the Board of Excelsior Funds received $5,000
per annum for services in such capacity. In addition, Messrs. Drake, Piel and
Robinson each receive $2,000 per annum for their services on the Company's
Nominating Committee. Drinker Biddle & Reath LLP, of which Messrs. McConnel and
Malloy are partners, receives legal fees as counsel to the Company. The
employees of CGFSC do not receive any compensation from the Company for acting
as officers of the Company. No person who is currently an officer, director or
employee of the Adviser serves as an officer, director or employee of the
Company. As of July 7, 2000, the directors and officers of the Company as a
group owned beneficially less than 1% of the outstanding shares of each fund of
the Company, and less than 1% of the outstanding shares of all funds of the
Company in the aggregate.

-29-
<PAGE>

The following chart provides certain information about the fees
received by the Company's directors in the most recently completed fiscal year.

<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement Estimated from the Company
Compensation Benefits Accrued Annual and Fund
Name of from as Part of Benefits Upon Complex*
Person/Position the Company Fund Expenses Retirement Paid to Directors
--------------- ----------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Donald L. Campbell***
Director $ 9,000 None None $22,000(3)**

Rodman L. Drake
Director $15,500 None None $38,750(4)**

Joseph H. Dugan
Director $16,500 None None $38,250(3)**

Wolfe J. Frankl
Director $15,000 None None $35,000(3)**

Jonathan Piel
Director $17,000 None None $42,000(4)**

Robert A. Robinson
Director $17,000 None None $39,500(3)**

Alfred C. Tannachion
Director $16,500 None None $38,250(3)**

Frederick S. Wonham
Chairman of the Board,
President and Treasurer $21,500 None None $52,000(4)**
</TABLE>

____________________
* The "Fund Complex" consists of the Company, Excelsior Tax-Exempt Fund
and Excelsior Institutional Trust, and, until December 15, 1999,
Excelsior Funds.
** Number of investment companies in the Fund Complex for which director served
as director or trustee.

*** Donald L. Campbell resigned as a director of the Companies as of July 31,
2000.

-30-
<PAGE>

Investment Advisory and Administration Agreements
-------------------------------------------------

United States Trust Company of New York ("U.S. Trust New York") and
U.S. Trust Company (together with U.S. Trust New York, "U.S. Trust" or the
"Adviser") serve as co-investment advisers to the Funds. In the Investment
Advisory Agreements, the Adviser has agreed to provide the services described in
the Prospectus. The Adviser has also agreed to pay all expenses incurred by it
in connection with its activities under the respective agreements other than the
cost of securities, including brokerage commissions, purchased for the Funds.

Prior to May 16, 1997, U.S. Trust New York served as investment
adviser to the Blended Equity, Value and Restructuring and Small Cap Funds
pursuant to advisory agreements substantially similar to the Investment Advisory
Agreements currently in effect for such Funds.

For the services provided and expenses assumed pursuant to the
Investment Advisory Agreements, the Adviser is entitled to be paid a fee
computed daily and paid monthly, at the annual rate of 0.75% of the average
daily net assets of each of the Large Cap Growth Funds, 0.60% of the average
daily net assets of each of the Value and Restructuring and Small Cap Funds and
1.00% of the average daily net assets of the Technology Fund. For services
provided to the Blended Equity Fund, the Adviser is entitled, as of August 1,
2000, to a fee computed daily and paid monthly, at the annual rate of 0.75% of
average daily net assets on assets up to $1 billion; 0.70% of average daily net
assets on the next $500 million; and 0.65% of average daily net assets on assets
of $1.5 billion or more. Prior to August 1, 2000, the Adviser was entitled to
receive a fee computed daily and paid monthly, at the annual rate of 0.75% of
average daily net assets.

From time to time, the Adviser may voluntarily waive all or a portion
of the advisory fees payable to it by a Fund, which waiver may be terminated at
any time.

For the fiscal years ended March 31, 2000, 1999 and 1998, the Company
paid the Adviser fees for advisory services as follows:

<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Blended Equity Fund $5,744,728 $4,320,430 $3,139,705

Value and Restructuring Fund $3,997,358 $2,624,874 $1,163,708

Small Cap Fund $ 279,608 $ 241,815 $ 320,547

Large Cap Growth Fund $2,299,892 $ 803,946 $ 65,472
</TABLE>

-31-
<PAGE>

Value and Restructuring Fund $829,279 $639,405 $ 84,739

Small Cap Fund $ 67,988 $ 51,882 $ 41,845

Large Cap Growth Fund $178,145 $ 44,157 $ 16,680
</TABLE>

Since the Technology Fund had not commenced investment operations as
of March 31, 2000, no advisory fees or fee waivers have been provided.

-32-
<PAGE>

CGFSC, Federated Services Company (an affiliate of the
Distributor) and U.S. Trust Company (together, the "Administrators") serve as
the Company's administrators and provide the Funds with general administrative
and operational assistance. Until July 31, 2000, Federated Services Company's
subsidiary, Federated Administrative Services, served as the Company's
administrator. On July 31, 2000, Federated Services Company assumed all of its
subsidiary's rights and obligations under the Administration Agreement. Under
the Administration Agreement, the Administrators have agreed to maintain office
facilities for the Funds, furnish the Funds with statistical and research data,
clerical, accounting and bookkeeping services, and certain other services
required by the Funds, and to compute the net asset value, net income and
realized capital gains or losses, if any, of the respective Funds. The
Administrators prepare semiannual reports to the SEC, prepare federal and state
tax returns, prepare filings with state securities commissions, arrange for and
bear the cost of processing share purchase and redemption orders, maintain the
Funds' financial accounts and records, and generally assist in the Funds'
operations.

First $200 million........................................ 0.200%
Next $200 million......................................... 0.175%
Over $400 million......................................... 0.150%

-33-
<PAGE>

For the fiscal years ended March 31, 2000, 1999 and 1998, the fees
paid by the Funds for administration services were as follows:

<TABLE>
<CAPTION>
Fiscal Year ended Fiscal Year ended Fiscal Year ended
March 31, 2000 March 31, 1999 March 31, 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Blended Equity Fund $1,238,650 $ 952,859 $ 707,403

Value and Restructuring Fund $1,034,523 $ 712,300 $ 315,023

Small Cap Fund $ 74,865 $ 74,865 $ 92,358

Large Cap Growth Fund $ 485,030 $ 171,488 $ 16,759
</TABLE>

For the fiscal years ended March 31, 2000, 1999 and 1998, the
Administrators waived the following administration fees:

Value and Restructuring Fund $190,210 $120,091 $ 3,331

Small Cap Fund $ 24 $ 28 $ 52

Large Cap Growth Fund $ 17,645 $ 1,525 N/A
</TABLE>

Since the Technology Fund had not commenced investment operations as
of March 31, 2000, no administration fees or fee waivers have been provided.

Shareholder Organizations
-------------------------

The Company has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative services to their Customers who beneficially own
shares in consideration for a Fund's payment of not more than the annual rate of
0.40%, (0.25% with respect to the Technology Fund), of the average daily net
assets of the Fund's shares beneficially owned by Customers of the Shareholder
Organization. Such services may include: (a) acting as recordholder of shares;
(b) assisting in processing purchase, exchange and redemption transactions; (c)
transmitting and receiving funds in connection with Customer orders to purchase,
exchange or redeem shares; (d) providing periodic statements showing a
Customer's account balances and confirmations of transactions by the Customer;
(e) providing tax and dividend information to shareholders as appropriate; (f)
transmitting proxy statements, annual

-34-
<PAGE>

reports, updated prospectuses and other communications from the Company to
Customers; and (g) providing or arranging for the provision of other related
services. It is the responsibility of Shareholder Organizations to advise
Customers of any fees that they may charge in connection with a Customer's
investment.

The Company's agreements with Shareholder Organizations are governed
by an Administrative Services Plan (the "Plan") adopted by the Company. Pursuant
to the Plan, the Company's Board of Directors will review, at least quarterly, a
written report of the amounts expended under the Company's agreements with
Shareholder Organizations and the purposes for which the expenditures were made.
In addition, the arrangements with Shareholder Organizations will be approved
annually by a majority of the Company's directors, including a majority of the
directors who are not "interested persons" of the Company as defined in the 1940
Act and have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").

For the fiscal year ended March 31, 2000, the Company made payments to
Shareholder Organizations in the following amounts:

<TABLE>
<CAPTION>
Amounts Paid to Affiliates
Total Paid Of U.S. Trust
---------- -------------
<S> <C> <C>
Blended Equity Fund $ 383,171 $ 357,558

Value and Restructuring Fund $1,019,489 $ 269,466

Small Cap Fund $ 68,012 $ 67,857

Large Cap Growth Fund $ 195,790 $ 117,152
</TABLE>

-35-
<PAGE>

For the fiscal year ended March 31, 1999, the Company made payments to
Shareholder Organizations in the following amounts:

Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------

Blended Equity Fund $234,639 $223,499

Value and Restructuring Fund $759,496 $215,581

Small Cap Fund $ 51,910 $ 51,808

Large Cap Growth Fund $ 45,682 $ 36,963

For the fiscal year ended March 31, 1998, the Company made payments to
Shareholder Organizations in the following amounts:

Amounts Paid to Affiliates
Total Paid of U.S. Trust
---------- -------------

Blended Equity Fund $182,660 $175,989

Value and Restructuring Fund $ 88,070 $ 55,667

Small Cap Fund $ 41,897 $ 41,636

Large Cap Growth Fund $ 1,501 $ 1,501

Since the Technology Fund had not commenced investment operations as
of March 31, 2000, no payments made to Shareholder Organizations or payments
made to affiliates of U.S. Trust have been provided.

Expenses
--------

-36-
<PAGE>

Custodian and Transfer Agent
----------------------------

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary
of The Chase Manhattan Corporation, serves as custodian of the Funds' assets.
Under the Custodian Agreement, Chase has agreed to: (i) maintain a separate
account or accounts in the name of the Funds; (ii) make receipts and
disbursements of money on behalf of the Funds; (iii) collect and receive all
income and other payments and distributions on account of the Funds' portfolio
securities; (iv) respond to correspondence from securities brokers and others
relating to its duties; (v) maintain certain financial accounts and records; and
(vi) make periodic reports to the Company's Board of Directors concerning the
Funds' operations. Chase may, at its own expense, open and maintain custody
accounts with respect to the Funds with other banks or trust companies, provided
that Chase shall remain liable for the performance of all its custodial duties
under the Custodian Agreement, notwithstanding any delegation. Communications to
the custodian should be directed to Chase, Mutual Funds Service Division, 3
Chase MetroTech Center, 8th Floor, Brooklyn, NY 11245.

U.S. Trust New York serves as the Funds' transfer agent and
dividend disbursing agent. In such capacity, U.S. Trust New York has agreed to:
(i) issue and redeem shares; (ii) address and mail all communications by the
Funds to their shareholders, including reports to shareholders, dividend and
distribution notices, and proxy materials for its meetings of shareholders;
(iii) respond to correspondence by shareholders and others relating to its
duties; (iv) maintain shareholder accounts; and (v) make periodic reports to the
Company's Board of Directors concerning the Funds' operations. For its transfer
agency, dividend-disbursing, and subaccounting services, U.S. Trust New York is
entitled to receive $15.00 per annum per account and subaccount. In addition,
U.S. Trust New York is entitled to be reimbursed for its out-of-pocket expenses
for the cost of forms, postage, processing purchase and redemption orders,
handling of proxies, and other similar expenses in connection with the above
services. U.S. Trust New York is located at 114 W. 47th Street, New York, New
York 10036.

U.S. Trust New York may, at its own expense, delegate its
transfer agency obligations to another transfer agent registered or qualified
under applicable law, provided that U.S. Trust New York shall remain liable for
the performance of all of its transfer agency duties under the Transfer Agency
Agreement, notwithstanding any delegation. Pursuant to this provision in the
agreement, U.S. Trust New York has entered into a sub-transfer agency
arrangement with CGFSC, an affiliate of Chase, with respect to accounts of
shareholders who are not Customers of U.S. Trust New York. CGFSC is located at
73 Tremont Street, Boston, Massachusetts 02108-3913. For the services provided
by CGFSC, U.S. Trust New York has agreed to pay CGFSC $15.00 per annum per
account or subaccount plus out-of-pocket expenses. CGFSC receives no fee
directly from the Company for any of its sub-transfer agency services. U.S.
Trust New York may, from time to time, enter into sub-transfer agency
arrangements with third party providers of transfer agency services.

-37-
<PAGE>

PORTFOLIO TRANSACTIONS
----------------------

Subject to the general control of the Company's Board of
Directors, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of all portfolio securities of the
Funds.

The Funds may engage in short-term trading to achieve their
investment objectives. Portfolio turnover may vary greatly from year to year as
well as within a particular year. The Funds' portfolio turnover rates may also
be affected by cash requirements for redemptions of shares and by regulatory
provisions which enable the Funds to receive certain favorable tax treatment.
Portfolio turnover will not be a limiting factor in making portfolio decisions.
See "Financial Highlights" in the Funds' Prospectus for the Fund's portfolio
turnover rates.

Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. In
executing portfolio transactions for the Funds, the Adviser may use affiliated
brokers in accordance with the requirements of the 1940 Act. The Adviser may
also take into account the sale of Fund shares in allocating brokerage
transactions.

During the last three fiscal years, the Company paid brokerage
commissions on behalf of each Fund as shown in the table below:

<TABLE>
<CAPTION>
% of Total
Amount of
Total Transaction on
Brokerage % of Total which
Total Commissions Commissions Commissions
Brokerage Paid to Paid to UST were paid to
Commissions Affiliated Securities UST Securities
Paid Persons Corp./1/ Corp./1/
---- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal year ended March 31, 2000:
--------------------------------
Blended Equity Fund $287,171 $0 0 0

Value and Restructuring Fund $994,939 $0 0 0

Small Cap Fund $138,144 $0 0 0

Large Cap Growth Fund $153,754 $0 0 0
</TABLE>

-38-
<PAGE>

Blended Equity Fund $288,573 $ 0 0% 0%

Value and Restructuring Fund $278,966 $525 0.19% 0.24%

Small Cap Fund $248,422 $ 0 0% 0%

Large Cap Growth Fund $ 89,509 $ 0 0% 0%

Fiscal year ended March 31, 1998:
--------------------------------

Blended Equity Fund $288,470 $ 0 0% 0%

Value and Restructuring Fund $412,406 $26,847 6.51% 7.74%

Small Cap Fund $131,936 $ 0 0% 0%

Large Cap Growth Fund $ 25,680 $ 0 0% 0%
</TABLE>
____________________________________

/1/ UST Securities Corporation is an affiliate of the Adviser.

Since the Technology Fund had not commenced investment
activities as of March 31, 2000, no brokerage commissions have been provided.

Transactions in domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Funds, where possible, will deal
directly with the dealers who make a market in the securities involved, except
in those circumstances where better prices and execution are available
elsewhere.

-39-
<PAGE>

The Investment Advisory Agreements between the Company and the
Adviser provide that, in executing portfolio transactions and selecting brokers
or dealers, the Adviser will seek to obtain the best net price and the most
favorable execution. The Adviser shall consider factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and
whether such broker or dealer is selling shares of the Company, and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.

In addition, the Investment Advisory Agreements authorize the
Adviser, to the extent permitted by law and subject to the review of the
Company's Board of Directors from time to time with respect to the extent and
continuation of the policy, to cause the Funds to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the overall
responsibilities of the Adviser to the accounts as to which it exercises
investment discretion. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of stocks and their comparative earnings, or broad overviews of the stock
market and the economy.

Fund Amount of Transactions Related Commission
---- ---------------------- ------------------

Blended Equity Fund $287,171 $ 1,037
Value and Restructuring Fund $994,939 $266,103
Small Cap Fund $138,144 $ 36,981
Large Cap Growth Fund $153,754 $ 13,758

-40-
<PAGE>

a Fund and another investment company or common trust fund, the transaction will
be averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Fund and such other
investment company or common trust fund. In some instances, this investment
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained by the Funds. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Funds with
those to be sold or purchased for other investment companies or common trust
funds in order to obtain best execution.

To the extent that the Technology Fund effects brokerage
transactions with any broker-dealer affiliated directly or indirectly with U.S.
Trust, such transactions, including the frequency thereof, the receipt of any
commissions payable in connection therewith, and the selection of the affiliated
broker-dealer effecting such transactions, will be fair and reasonable to the
shareholders of the Technology Fund.

The Company is required to identify any securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or
their parents held by the Funds as of the close of the most recent fiscal year.
As of March 31, 2000, the following Funds held the following securities of the
Company's regular brokers or dealers or their parents: The Large Cap Fund held
130,000 shares of common stock of Morgan Stanley Dean Witter & Co.; the Blended
Equity Fund held 465,388 shares of common stock of Morgan Stanley Dean Witter &
Co. and 29,687 shares of common stock of Bank of America Corp.; and the Value
and Restructuring Fund held 315,000 shares of common stock of Morgan Stanley
Dean Witter & Co. and 260,000 shares of common stock of Chase Manhattan Corp.

PORTFOLIO VALUATION
-------------------

Assets in the Funds which are traded on a recognized domestic
stock exchange are valued at the last sale price on the securities exchange on
which such securities are primarily traded or at the last sale price on the
national securities market. Securities traded only on over-the-counter markets
are valued on the basis of closing over-the-counter bid prices. Securities for
which there were no transactions are valued at the average of the most recent
bid and asked prices. An option or futures contract is valued at the last sales
price quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, the mean between the last bid
and asked prices. Restricted securities and securities or other assets for which
market quotations are not readily available are valued at fair value, pursuant
to guidelines adopted by the Company's Board of Directors.

-41-
<PAGE>

prevailing market rate on the day of conversion. Some of the securities acquired
by a Fund may be traded on foreign exchanges or over-the-counter markets on days
which are not Business Days. In such cases, the net asset value of the shares
may be significantly affected on days when investors can neither purchase nor
redeem the Fund's shares. The Company's administrators have undertaken to price
the securities in the Funds' portfolio, and may use one or more independent
pricing services in connection with this service.

INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP, independent auditors, 200 Clarendon Street,
Boston, MA 02116 , serve as auditors of the Company. The Funds' Financial
Highlights included in the Prospectus and the financial statements for the
period ended March 31, 2000 are incorporated by reference in this Statement of
Additional Information have been audited by Ernst Young LLP, for the periods
included in their reports thereon which appear therein.

COUNSEL
-------
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary
of the Company, and Mr. Malloy, Assistant Secretary of the Company, are
partners), One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania
19103, is counsel to the Company.

ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------

The following supplements the tax information contained in the
Prospectus.

For federal income tax purposes, each Fund is treated as a
separate corporate entity and has qualified and intends to continue to qualify
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification generally relieves a Fund of liability
for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, a Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, such Fund would be subject to federal tax on all
of its taxable income at regular corporate rates, without any deduction for
distributions to shareholders. In such event, dividend distributions would be
taxable as ordinary income to shareholders to the extent of the Fund's current
and accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareholders. Moreover, if a Fund
were to fail to make sufficient distributions in a year, the Fund would be
subject to corporate income taxes and/or excise taxes in respect of the
shortfall or, if the shortfall is large enough, the Fund could be disqualified
as a regulated investment company.

A 4% non-deductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable

-42-
<PAGE>

income and capital gain net income (excess of capital gains over capital
losses). The Funds intend to make sufficient distributions or deemed
distributions of their ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.

Dividends declared in October, November or December of any
year payable to shareholders of record on a specified date in such months will
be deemed to have been received by shareholders and paid by a Fund on December
31 of such year if such dividends are actually paid during January of the
following year.

Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding by
the Internal Revenue Service for failure properly to include on their return
payments of taxable interest or dividends, or who have failed to certify to the
Fund when required to do so either that they are not subject to backup
withholding or that they are "exempt recipients."

The foregoing discussion is based on federal tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action. Shareholders are advised to consult their tax advisers
concerning their specific situations and the application of state, local and
foreign taxes.

PERFORMANCE INFORMATION
-----------------------

The Funds may advertise the "average annual total return" for
their shares. Such total return figure reflects the average percentage change in
the value of an investment in a Fund from the beginning date of the measuring
period to the end of the measuring period. Average total return figures will be
given for the most recent one-year period, and may be given for other periods as
well (such as from the commencement of a Fund's operations, or on a year-by-year
basis). The average annual total return is computed by determining the average
annual compounded rate of return during specified periods that equates the
initial amount invested to the ending redeemable value of such investment
according to the following formula:

-43-
<PAGE>

ERV /1/n/
T = [(-----) - 1]
P

Where: T = average annual total return.

ERV= ending redeemable value
of a hypothetical $1,000
payment made at the
beginning of the 1, 5 or 10
year (or other) periods at
the end of the applicable
period (or a fractional
portion thereof).

P = hypothetical initial payment of $1,000.

n = period covered by the computation,
expressed in years.

Each Fund may also advertise the "aggregate total return" for
its shares for various periods, representing the cumulative change in the value
of an investment in the Fund for the specific period. The aggregate total return
is computed by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:

ERV
Aggregate Total Return = [(------)] - 1
P

The above calculations are made assuming that (1) all
dividends and capital gain distributions are reinvested on the reinvestment
dates at the price per share existing on the reinvestment date, (2) all
recurring fees charged to all shareholder accounts are included, and (3) for any
account fees that vary with the size of the account, a mean (or median) account
size in a Fund during the periods is reflected. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming complete redemption of
the hypothetical investment after deduction of all nonrecurring charges at the
end of the measuring period.

Based on the foregoing calculations, the average annual total
returns for each Fund other than the Technology Fund for the fiscal year ended
March 31, 2000 and the average annual total returns for the 5-year and 10-year
periods ended March 31, 2000, were as follows:

-44-

<PAGE>

<TABLE>
<CAPTION>
Average Annual Total Returns

For the Year Ended For the 5 Year Ended For the 10 Year Ended
3/31/00 3/31/00 3/31/00
------------------ ------------------- ---------------------
<S> <C> <C> <C>
Blended Equity Fund 22.90% 25.52% 18.75%

Value and Restructuring Fund* 42.41% 28.79% N/A

Small Cap Fund* 65.91% 12.33% N/A

Large Cap Growth Fund** 32.73% 49.04% N/A
</TABLE>

____________________________

* Commenced operations on December 31, 1992
** Commenced operations on October 1, 1997

Based on the foregoing calculations, the aggregate annual
total returns for each Fund other than the Technology Fund for the 5-year,
10-year and since inception periods ended March 31, 2000, were as follows:

<TABLE>
<CAPTION>
Aggregate Annual Total Returns

For the Since
For the 5 Years Ended For the 10 Years Ended Inception Period Ended
3/31/00 3/31/00 3/31/00
--------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Blended Equity Fund 211.53% 457.46% 1110.59%

Value and Restructuring Fund* 254.30% N/A 449.93%

Small Cap Fund* 78.83% N/A 157.47%

Large Cap Growth Fund N/A N/A 171.14%
</TABLE>

* Commenced operations on December 31, 1992.
** Commenced operations on October 1, 1997.

-45-
<PAGE>

The Funds may also from time to time include in
advertisements, sales literature and communications to shareholders a total
return figure that is not calculated according to the formulas set forth above
in order to compare more accurately a Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service, or with the performance of an index,
a Fund may calculate its aggregate total return for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value.

The total return of shares of a Fund may be compared to that
of other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the total return of a Fund may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. The total return of the Funds (other than the Technology Fund)
also may be compared to the Standard & Poor's 500 Stock Index ("S&P 500"), an
unmanaged index of common stocks of 500 companies, most of which are listed on
the Exchange, the Consumer Price Index, or the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of 30 industrial companies listed on
the Exchange. Total return and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
----- -------- ------ -------- --- ---- ------ -------
and The New York Times, or in publications of a local or regional nature, may
--- --- ---- -----
also be used in comparing the performance of a Fund. Advertisements, sales
literature or reports to shareholders may from time to time also include a
discussion and analysis of each Fund's performance, including, without
limitation, those factors, strategies and techniques that, together with market
conditions and events, materially affected each Fund's performance.

-46-
<PAGE>

limited to, stocks, bonds, Treasury bills and shares of a Fund. In addition,
advertisements, sales literature or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or communications may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.

Performance will fluctuate and any quotation of performance
should not be considered as representative of a Fund's future performance.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, operating expenses, and
market conditions. Any fees charged by Shareholder Organizations with respect to
accounts of Customers that have invested in shares will not be included in
calculations of performance.

CODE OF ETHICS
--------------

The Fund, U.S. Trust New York, U.S. Trust Company and the
Distributor have adopted codes of ethics which allow for personnel subject to
the codes to invest in securities, including securities that may be purchased or
held by the Funds.

MISCELLANEOUS
-------------

As used herein, "assets allocable to the Fund" means the
consideration received upon the issuance of shares in the Fund, together with
all income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Company not belonging to a particular portfolio of the Company. In
determining a Fund's net asset value, assets allocable to the Fund are charged
with the direct liabilities in respect of the Fund and with a share of the
general liabilities of the Company which are normally allocated in proportion to
the relative asset values of the Company's portfolios at the time of allocation.
Subject to the provisions of the Company's Charter, determinations by the Board
of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets with respect to a particular Fund, are conclusive.

As of July 7, 2000, U.S. Trust and its affiliates held of
record substantially all of the Funds' outstanding shares as agent or custodian
for their customers, but did not own such shares beneficially because they did
not have voting or investment discretion with respect to such shares.

As of July 7, 2000, the name, address and percentage ownership
of each person that owned beneficially or of record 5% or more of the
outstanding shares of a Fund were as follows: BLENDED EQUITY FUND: U.S. Trust
-------------------
Retirement Fund, c/o United States Trust Company of New York, 114 West 47/th/
Street, New York, New York 10036, 8.86%; and U.S. Trust Company of New York,
Trustee, FBO U.S. Trust Plan, Attn: Sandra Woolcock, 4380 SW Macadam Ave., Suite
450, Portland, Oregon 97201, 5.47%; VALUE AND
---------

-47-
<PAGE>

RESTRUCTURING FUND: Charles Schwab & Co., Inc., Special Custody A/C for Attn:
------------------
Mutual Funds, 101 Montgomery Street, San Francisco, California 94104, 27.59%,
SMALL CAP FUND U.S. Trust Retirement Fund, c/o United States Trust Company of
--------------
New York, 114 West 47/th/ Street, New York, New York 10036, 10.83%; TECHNOLOGY
----------
FUND: U.S. Trust Retirement Fund, c/o United States Trust Company of New York,
----
114 West 47/th/ Street, New York, New York 10036, 16.61%.

FINANCIAL STATEMENTS
--------------------

The audited financial statements and notes thereto in the
Company's Annual Report to Shareholders for the fiscal year ended March 31, 2000
(the "2000 Annual Report") for each Fund other than the Technology Fund are
incorporated in this Statement of Additional Information by reference. No other
parts of the 2000 Annual Report are incorporated by reference herein. The
financial statements included in the 2000 Annual Report for the Funds have been
audited by the Company's independent auditors, Ernst & Young LLP, whose reports
thereon also appear in the 2000 Annual Report and are incorporated herein by
reference. Such financial statements have been incorporated herein in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing. Additional copies of the 2000 Annual Report may be obtained at no
charge by telephoning CGFSC at the telephone number appearing on the front page
of this Statement of Additional Information.

-48-
<PAGE>

APPENDIX A
----------

Commercial Paper Ratings
------------------------

Local Currency and Foreign Currency Risks
-----------------------------------------

A-1
<PAGE>

from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.

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

A-2
<PAGE>

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

A-3
<PAGE>

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

"TBW-4" - This designation represents Thomson Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.

Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------

The following summarizes the ratings used by Standard & Poor's 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.

"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

A-4
<PAGE>

or economic conditions which could lead to the obligor's inadequate 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.

-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" - The "r" highlights obligations that Standard & Poor's believes

A-5
<PAGE>

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

"Caa" - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.

"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.

"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.

A-6
<PAGE>

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

A-7
<PAGE>

A-8
<PAGE>

-"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.

-"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.

"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.

"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial
circumstances.

A-9
<PAGE>

"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.

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

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

Municipal Note Ratings
----------------------

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

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

A-10
<PAGE>

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

Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.

A-11