EXCELSIOR INSTITUTIONAL TRUST, 497, 2000-11-13

EXCELSIOR INSTITUTIONAL TRUST
497, 2000-11-13

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Excelsior Institutional Trust--Shares

Prospectus

October 29, 2000

High Yield 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]
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Table of Contents

Excelsior Institutional Trust is a mutual fund family that offers shares in
separate investment portfolios which have individual investment goals and
strategies. This prospectus gives you important information about the High
Yield Fund (the "Fund") of Excelsior Institutional Trust that you should know
before investing. The Fund offers two classes of shares: Shares, which are of-
fered in this prospectus, and Institutional Shares, which are offered in a sep-
arate prospectus. Please read this prospectus and keep it for future reference.

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Page
<S> <C>
High Yield Fund.................................................... 2
More Information About Risk........................................ 3
More Information About Fund Investments............................ 5
Investment Adviser................................................. 5
Portfolio Manager.................................................. 6
Purchasing, Selling and Exchanging Fund Shares..................... 6
Dividends and Distributions........................................ 9
Taxes.............................................................. 9
How to Obtain More Information About Excelsior Institutional
Trust ............................................................ Back Cover
</TABLE>

An investment in the Fund is not a deposit in United States Trust Company of
New York or U.S. Trust Company and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
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High Yield Fund

FUND SUMMARY

Investment Goal High level of current income and, secondarily, capital
appreciation

Investment Focus Non-investment grade fixed-income securities

Share Price Volatility High

Principal Investment
Strategy Invests at least 65% of its assets in non-investment grade corporate
and government fixed-income securities

Investor Profile Investors seeking a high level of current income, and who are
willing to bear the risks of investing in non-investment grade fixed-income
securities

Investment Objective
The Fund seeks a high level of current income as its primary objective, and may
also consider the potential for capital appreciation as a secondary objective,
when consistent with its primary objective.

Investment Strategy of the High Yield Fund
The Fund invests, under normal circumstances, at least 65% of its total assets
in high yield, fixed-income securities rated, at the time of investment, below
investment grade (commonly known as "junk bonds"). Non-investment grade securi-
ties are those rated BB, Ba or below by a nationally recognized statistical
rating organization, or, if unrated, determined by the Adviser to be of compa-
rable quality. The Fund may invest in all types of fixed-income securities, in-
cluding:

. Senior and subordinated corporate debt obligations (such as bonds, deben-
tures, notes and commercial paper)
. Convertible and non-convertible corporate debt obligations
. Custodial receipts
. Municipal securities and obligations of the U.S. government, its agencies and
instrumentalities
. Preferred stock
. Mortgage and other asset-backed securities

Although the Fund invests primarily in the debt obligations of domestic is-
suers, it may invest up to 25% of its assets in obligations of foreign issuers
(including emerging countries), including obligations of foreign corporations,
banks and governments.

The Fund does not have any portfolio maturity limitation and may invest its as-
sets from time to time primarily in instruments with short, medium and long ma-
turities. The Fund may also purchase the securities of issuers that are in de-
fault.

In selecting securities for the Fund's portfolio, the Adviser does not rely
principally on the ratings assigned by the ratings agencies. It performs its
own independent investment analysis of each issuer to determine its creditwor-
thiness. In doing so, the Adviser considers a number of factors, including the
issuer's financial and managerial strength and its sensitivity to economic and
market conditions as well as other factors.

Principal Risks of Investing in the High Yield 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.

High yield bonds involve greater risks of default or downgrade and are more
volatile than investment grade securities. High yield bonds involve greater
risk of default or

2
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price declines than investment grade securities due to actual or perceived
changes in an issuer's creditworthiness. In addition, issuers of high yield
bonds may be more susceptible than other issuers to economic downturns. High
yield bonds are subject to the risk that the issuer may not be able to pay in-
terest or dividends and ultimately to repay principal upon maturity. Discontin-
uation 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 to
calculate how they will respond to changes in interest rates. The Fund may have
to reinvest prepaid amounts at lower interest rates.

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. These securities may be more volatile than other secu-
rities, and the risks associated with them 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.

Performance Information
There is no performance information for the Fund because it had not yet com-
menced operations as of the date of this prospectus.

Fund Fees and Expenses
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)

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Management Fees 0.80%
Distribution (12b-1) Fee 0.25%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
--------------------------------------------------------------------------------
Total Annual Fund Operating
Expenses 1.68%*
Fee Waiver 0.63%
--------------------------------------------------------------------------------
Net Annual Fund Operating Expenses 1.05%*
</TABLE>

* The Fund's total operating expenses and net operating expenses are estimated
based on expenses expected to be incurred. 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."

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 and returns might be different, your approxi-
mate costs of investing $10,000 in the Fund would be:

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1 Year 3 Years
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$107 $334
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More Information About Risk
High-Yield, Lower Rated Securities are subject 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 val-
ues.
. 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.

3
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Fixed Income Risk
The market value of fixed income investments change in response to interest
rate changes and other factors. During periods of falling interest rates, the
values of outstanding fixed income securities generally rise. During periods of
rising interest rates, the values of outstanding fixed income securities gener-
ally fall. Moreover, while securities with longer maturities tend to produce
higher yields, the prices of longer maturity 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 con-
sideration of yield, interest payments, final maturity and call features.

Call Risk
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 re-
quire a Fund to invest the resulting proceeds at lower interest rates.

Extension Risk
An issuer may exercise its right to pay principal on an obligation held by
the Fund (such as a mortgage-backed security) later than expected. This may
happen when there is a rise in interest rates. Under these circumstances, the
value of the obligation will decrease, and the Fund will also suffer from the
inability to invest in higher yielding securities.

Credit Risk
The possibility that an issuer will be unable to make timely payments of ei-
ther principal or interest. The Adviser performs credit analyses on all is-
suers of securities in which the Fund invests. Such analyses are based on in-
formation that is publicly available about issuers, and this information
and/or the Adviser's analyses may be incomplete or incorrect.

Event Risk
Securities may suffer declines in credit quality and market value due to is-
suer restructurings or other factors. This risk should be reduced because of
a Fund's multiple holdings.

Liquidity Risk
The Fund may not be able to pay redemption proceeds within the time period
stated in this prospectus, because of unusual market conditions, an unusually
high volume of redemption requests, or other reasons. Funds that invest in
non-investment grade fixed income securities or emerging country issuers will
be especially subject to the risk that during certain periods the liquidity
of particular issuers or industries, or all securities within these invest-
ment categories, will shrink or disappear suddenly and without warning as a
result of adverse economic, market or political events or adverse investor
perceptions whether or not accurate.

Mortgage-Backed Securities
Mortgage-backed securities are fixed income securities representing an interest
in a pool of underlying mortgage loans. They are sensitive to changes in inter-
est 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 decrease in mar-
ket price. When interest rates fall, however, mortgage-backed securities may
not gain as much in market value because of the expectation of additional mort-
gage 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 volatility risk of
that portfolio.

4
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tion costs are generally higher than those in the U.S. and expenses for custo-
dial arrangements of foreign securities may be somewhat greater than typical
expenses for custodial arrangements of similar U.S. securities. Some foreign
governments levy withholding taxes against dividend and interest income. Al-
though in some countries a portion of these taxes is recoverable, the non-re-
covered portion will reduce the income received from the securities comprising
the portfolio.

The securities of emerging countries are less liquid, are especially subject to
greater price volatility, have smaller market capitalizations, have less gov-
ernment regulation and are not subject to as extensive and frequent accounting,
financial and other reporting requirements as the securities markets of more
developed countries. The securities of issuers resident in emerging markets are
also subject to a greater risk of default than securities of issuers in non-
emerging countries or U.S. companies or the U.S. Government.

More Information About Fund Investments
In addition to the investments and strategies described in this prospectus, the
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 Addi-
tional 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, the Fund may take temporary defensive positions such as investing up to
100% of its assets in investments that would not ordinarily be consistent with
the Fund's objective. The Fund may not achieve its objective when so invested.
The Fund will do so only if the Adviser believes that the risk of loss out-
weighs the opportunity for capital gains or higher income. Of course, the 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 the Fund and, pursuant to
the investment advisory agreement, bear equal responsibility for management of
the 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 Com-
pany is a Connecticut state bank and trust company. Each is a wholly-owned sub-
sidiary of U.S. Trust Corporation, a registered bank holding company.

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 Ex-
ecutive Officer and a Director and significant shareholder of Schwab. As a re-
sult 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, 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 security subject to research.

5
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The Board of Trustees of Excelsior Institutional Trust supervises the Adviser
and establishes policies that the Adviser must follow in its management activi-
ties.

As compensation for its services, the Adviser is entitled to receive an advi-
sory fee in the amount of 0.80% of the Fund's average daily net assets.

Portfolio Manager
Richard B. Coons serves as the Fund's portfolio manager. Mr. Coons is a Senior
Vice President and head of the High Yield Department at U.S. Trust. He has been
with U.S. Trust since June 2000. Mr. Coons has 17 years of experience in high
yield analysis, trading, sales, and syndication. Most recently, he worked at
TritonPartners LLC, where he was Director of Research for a $1.5 billion high
yield management company. Prior to Triton, he held positions at NatWest Capital
Markets and Nationsbank Capital Markets. At these firms, Mr. Coons was a Senior
Trader in the high yield areas, which also included distressed markets, emerg-
ing markets, and corporate restructuring. Mr. Coons has also been a manager on
high yield transactions--structuring, marketing and placing deals in excess of
$500 million. In the past, Mr. Coons has worked at Goldman Sachs and Morgan
Stanley where he was a senior high yield trader and founded their high yield
departments. Mr. Coons is primarily responsible for the day to day management
of the Fund's portfolio. Research, analyses, trade execution and other facili-
ties 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 buy, sell (sometimes called "redeem") or exchange
shares of the Fund.

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

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 Institutional Trust, 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 investment program, write your check, payable in U.S. dollars, to
"Excelsior Institutional Trust" and include the name of the Fund on the check.
The 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 Institutional Trust
Credit DDA 9102732915

For Further Credit To:
Excelsior Institutional Trust
Wire Control Number
Excelsior Funds Account Registration (including account 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 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 the Fund to your institution.

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. The 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 the Fund receives your purchase request in good or-
der. We

6
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consider requests to be in "good order" when all required documents are prop-
erly completed, signed and received.

The 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, the Fund must receive your
purchase request in good order before 4:00 p.m., Eastern time.

How We Calculate NAV
NAV for one share of a class of a Fund is the value of that share's portion of
all of the assets of the class of the Fund less all of the liabilities of the
class.

In calculating NAV, the Fund generally values its investment portfolio at mar-
ket price. If market prices are unavailable or the Adviser thinks that they are
unreliable, 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.

The Fund may hold securities that are listed on foreign exchanges. These secu-
rities may trade on weekends or other days when the Fund does not calculate
NAV. As a result, the market value of the 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 the Fund.

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

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

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 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 your shares on any Busi-
ness Day by contacting the 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 institution may charge a fee for its services, in addi-
tion to the fees charged 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.

7
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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 the 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).

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 prob-ably 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
The 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 Shares of any portfolio of
Excelsior Funds, Inc., 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 or
reject an exchange if we deem the exchange would not be in the best interests
of the Fund or its shareholders. This limitation is not intended to limit a
shareholder's right to redeem shares of the Fund. Rather, the limitation is
intended to curb short-term trading. Shares can be exchanged directly by mail,
or by telephone if you previously selected the telephone exchange 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.

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.

Telephone Transactions
Purchasing, selling and exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Fund has certain safeguards and
procedures to confirm the identity of callers and the authenticity of instruc-
tions, the Fund is not liable for any losses or costs incurred by following
telephone instructions we reasonably believe to be genuine if the Fund follows
its telephone transactions procedures. If you or your financial institution
transact with the 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 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 Fund is permitted to pay an administrative servicing fee to certain share-
holder organizations for provid-

8
<PAGE>

ing services to their customers who hold shares of the Fund. These services may
include assisting in the processing of purchase, redemption and exchange re-
quests and providing periodic account statements. 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.

Distribution of Fund Shares
The Fund has adopted a distribution plan that allows shares of the Fund to pay
distribution fees for the sale and distribution of its shares in an amount not
to exceed the annual rate of 0.25% of the average daily net asset value of the
Fund's outstanding shares. Because these fees are paid out of the 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.

The Fund's 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 Fund. Subject to NASD regulation, compensation may in-
clude promotional and other merchandise, sales and training programs and other
special events sponsored by dealers. Compensation may also include payment for
reasonable expenses incurred in connection with trips taken by invited regis-
tered representatives for meetings or seminars of a business nature.

Dividends and Distributions
The Fund declares dividends from its income daily and distributes its income
monthly.

The Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on the 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.

Taxes
The 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 the Fund will generally be tax-
able regardless of whether they are paid in cash or reinvested in additional
shares. Distributions attributable to the net capital gain of the 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 in-
come. You will be notified annually of the tax status of distributions to you.

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. Additionally, any loss realized on a sale or redemption
of shares of the Fund may be disallowed under "wash sale" rules to the extent
the shares disposed of are replaced with other shares of the Fund within a pe-
riod of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to a dividend reinvestment in shares of the
Fund. If disallowed, the loss will be reflected in an adjustment to the basis
of the shares acquired.

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

It is expected that the Fund will be subject to foreign withholding taxes with
respect to dividends or interest, if any, received from sources in foreign
countries. The Fund may make an election to treat a proportionate amount of
such taxes as constituting a distribution to each shareholder, which would al-
low each shareholder either (1) to credit such proportionate amount of taxes
against U.S. federal income tax liability or (2) to take such amount as an
itemized deduction.

9
<PAGE>

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 the
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.

10
<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
Stamford, Connecticut 06905

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

More information about the Fund is available without charge through the follow-
ing:

Statement of Additional Information (SAI)
The SAI dated October 29, 2000 includes detailed information about Excelsior
Institutional Trust. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.

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

By Mail: Excelsior Institutional Trust, 73 Tremont Street, Boston, MA 02108-
3913

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 or 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 1-202-942-8090).
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 20549-6009. 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 811-4088.
<PAGE>

Excelsior Institutional Trust--
Institutional Shares

Prospectus

October 29, 2000

High Yield 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 which have individual investment goals and
strategies. This prospectus gives you important information about the High
Yield Fund (the "Fund") of Excelsior Institutional Trust that you should know
before investing. The Fund offers two class of shares: Institutional Shares,
which are offered in this prospectus, and Shares, which are offered in a sepa-
rate prospectus. Please read this prospectus and keep it for future reference.

<TABLE>
<CAPTION>
Page
<S> <C>
High Yield Fund.................................................... 2
More Information About Risk........................................ 4
More Information About Fund Investments............................ 5
Investment Adviser................................................. 5
Portfolio Manager.................................................. 6
Purchasing, Selling and Exchanging Fund Shares..................... 6
Dividends and Distributions........................................ 9
Taxes.............................................................. 9
How to Obtain More Information About Excelsior Institutional
Trust ............................................................ Back Cover
</TABLE>

An investment in the Fund is not a deposit in United States Trust Company of
New York or U.S. Trust Company and is not insured or guaranteed by the Federal
Deposit Insurance Agency or any other government agency.
<PAGE>

High Yield Fund
-----------------------------------------------------------------

FUND SUMMARY

Investment Goal High level of
current income and,
secondarily, capital
appreciation

Investment Focus Non-
investment grade fixed-income
securities

Share Price Volatility High

Principal Investment
Strategy Invests at least 65%
of its assets in non-
investment grade corporate and
government fixed-income
securities

Investor Profile Investors
seeking a high level of
current income, and who are
willing to bear the risks of
investing in non-investment
grade fixed-income securities

High yield bonds involve greater risks of default or downgrade and are more
volatile than investment grade securities. High yield bonds involve greater
risk of default or

2
<PAGE>

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

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.

Performance Information
There is no performance information for the Fund because it had not yet com-
menced operations as of the date of this prospectus.

Fund Fees and Expenses
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 0.80%
Other Expenses
Administrative Servicing Fee 0.40%
Other Operating Expenses 0.23%
Total Other Expenses 0.63%
------------------------------------------
Total Annual Fund Operating
Expenses 1.43%*
Fee Waiver and Reimbursement 0.63%
------------------------------------------
Net Annual Fund Operating Expenses 0.80%*
</TABLE>

* The Fund's total operating expenses and net operating expenses are estimated
based on expenses expected to be incurred. 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."

<TABLE>
<CAPTION>
1 Year 3 Years
-------------------
<S> <C> <C>
$82 $255
</TABLE>

3
<PAGE>

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

More Information About Risk
High-Yield, Lower Rated Securities are subject to additional risks associated
with investing in high-yield securities, including:

Event Risk
Securities may suffer declines in credit quality and market value due to is-
suer restructurings or other factors. This risk should be reduced because of
a Fund's multiple holdings.

4
<PAGE>

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

Foreign Security Risks
Investments in securities of foreign companies or governments can be more vola-
tile than investments in U.S. companies or governments. Diplomatic, political,
or economic developments, including nationalization or appropriation, could af-
fect investments in foreign countries. Foreign securities markets generally
have less trading volume and less liquidity than U.S. markets. While the Fund
will usually invest in foreign securities that are denominated in U.S. dollars,
the value of securities denominated in foreign currencies, and of dividends
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.

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

5
<PAGE>

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

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 Institutional Trust. U.S. Trust and its affiliates will not have
any obligation to make available or use any information regarding these propri-
etary investment activities for the benefit of the Fund. The research depart-
ment of U.S. Trust prepares research reports that are utilized by the Fund,
wealth managers of U.S. Trust and Schwab and its affiliates. It is U.S. Trust's
intention to distribute this information as simultaneously as possible to all
recipients. However, where the investment manager of an Excelsior Fund prepares
such research, that Fund may and often does receive and act upon that informa-
tion before it is disseminated to other parties, which in turn may have a nega-
tive 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.

As compensation for its services, the Adviser is entitled to receive an advi-
sory fee in the amount of 0.80% of the Fund's average daily net assets.

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

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, or
. 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 Institutional Trust, 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 Fund on the check. The 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 Institutional Trust
Credit DDA 910-2-733046
Account Registration
Account Number
Wire Control Number

6
<PAGE>

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

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 the Fund to your institution.

The price per share (the offering price) will be the net asset value per share
(NAV) next determined after the 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.

How We Calculate NAV
NAV for one share of a class of a Fund is the value of that share's portion of
all of the assets of the class of the Fund less all of the liabilities of the
class.

The Fund may hold securities that are listed on foreign exchanges. These secu-
rities may trade on weekends or other days when the Fund does 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 (sometimes called "redeem") shares by
following the procedures established when they opened their account or ac-
counts. 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 the 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.

7
<PAGE>

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

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

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 probably 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.

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 or reject an exchange if we deem the exchange would not be in the best in-
terests of the Fund or its shareholders. This limitation is not intended to
limit a shareholder's right to redeem shares of the Fund. Rather, the limita-
tion is intended to curb short-term trading. Shares can be exchanged directly
by mail, or by telephone if you previously selected the telephone exchange op-
tion on the account application.

Authorized Intermediaries
Certain intermediaries, such as brokers or other shareholder organizations, are
authorized to accept purchase, redemption and exchange requests for Fund
shares. Some of these organizations may charge a fee for these redemptions.
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 Fund is permitted to pay an administrative servicing fee to certain share-
holder organizations for providing services to their customers who hold shares
of the Fund. These services may include assisting in the processing of pur-
chase, redemption and exchange requests 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.

8
<PAGE>

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

Dividends and Distributions
The Fund declares dividends from its income daily and distributes its income
monthly.

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

Taxes
The 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 the Fund will generally be tax-
able regardless of whether they are paid in cash or reinvested in additional
shares. Distributions attributable to the net capital gain of the Fund will be
taxable to you as long-term capital gain, regardless of how long you have held
your shares. Other fund distri butions will generally be taxable as ordinary
income. You will be notified annually of the tax status of distributions to
you.

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
account statements for the periods during which you held shares.

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

9
<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
Stamford, Connecticut 06905

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

More information about the Fund is available without charge through the follow-
ing:

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

By Mail: Excelsior Institutional Trust, 73 Tremont Street, Boston, MA 02108-
3913

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

EXCELSIOR INSTITUTIONAL TRUST

High Yield Fund

STATEMENT OF ADDITIONAL INFORMATION

October 29, 2000

This Statement of Additional Information pertains to the Shares ("Shares")
and Institutional Shares (together with Shares, "Shares") of the High Yield Fund
(the "Fund") of Excelsior Institutional Trust. Shares and Institutional Shares
are sometimes referred to herein as "shares." This Statement of Additional
Information is not a prospectus but should be read in conjunction with the
current prospectuses for the Fund dated October 29, 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.
<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......................................... 22

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................... 25
Purchase of Shares............................................. 25
Redemption Procedures.......................................... 26
Other Redemption Information................................... 27

INVESTOR PROGRAMS................................................... 28
Systematic Withdrawal Plan..................................... 28
Exchange Privilege............................................. 29
Retirement Plans............................................... 29
Additional Information......................................... 30

RULE 12B-1 DISTRIBUTION PLAN........................................ 30

MANAGEMENT OF THE FUNDS............................................. 31
Trustees and Officers.......................................... 32
Investment Advisory Services................................... 36
Administrators................................................. 38

SHAREHOLDER ORGANIZATIONS........................................... 38
Expenses....................................................... 39
Custodian and Transfer Agent................................... 40

PORTFOLIO TRANSACTIONS.............................................. 40

PORTFOLIO VALUATION................................................. 42

INDEPENDENT AUDITORS................................................ 44

COUNSEL............................................................. 44

ADDITIONAL INFORMATION CONCERNING TAXES............................. 44

PERFORMANCE INFORMATION............................................. 46

DESCRIPTION OF THE TRUST............................................ 49

CODE OF ETHICS...................................................... 51

MISCELLANEOUS....................................................... 51

APPENDIX A.......................................................... A-1

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

-i-
<PAGE>

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

Excelsior Institutional Trust (the "Trust") is an open-end, management
investment company. The 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.

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

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

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

The Fund may invest in the following types of securities: corporate
debt obligations such as bonds, debentures, notes and commercial paper;
convertible and non-convertible corporate debt obligations; custodial receipts;
mortgage and other asset-backed securities; preferred stocks; and obligations
issued or guaranteed by the U.S. government and its agencies or
instrumentalities. The Fund is 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 Fund 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 Fund's total
assets will be invested in high yield, fixed-income securities rated at the time
of investment below investment-grade by 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).
"Non-investment grade securities" are securities that are rated below the four
highest ratings of Moody's or S&P (or are unrated obligations considered to be
of comparable quality by the Adviser). Non-investment grade securities 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

-1-
<PAGE>

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 securities market (and, in turn, on the 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
the 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 that
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 the 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, the Fund's trading in fixed-income securities to achieve
capital appreciation entails risks that capital losses rather than gains will
result.

The Fund may invest up to 25% of its total assets in obligations of
foreign issuers (including emerging countries), including obligations of foreign
corporations, banks and governments. When in the opinion of the Adviser a
defensive investment posture is warranted, the Fund may invest temporarily and
without limitation in high quality, short-term money market instruments and
fixed income instruments.

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

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

The 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
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.

-2-
<PAGE>

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.

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

The 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. The 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
the 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 the Fund may
decline below the repurchase price of those securities.

Common and Preferred Stock, Warrants and Rights
-----------------------------------------------

The High Yield Fund may invest in common and preferred stock, warrants
and rights. Preferred stocks are securities that represent an ownership
interest providing the holder with claims on the issuer's earnings and assets
before common stock owners but after bond owners. Unlike debt securities, the
obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.

Warrants and other rights are options to buy a stated number of shares
of common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.

-3-
<PAGE>

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 the 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.

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. In
addition, the securities of issuers resident in emerging markets are subject to
a greater risk of default than securities of issuers in non-emerging countries
or U.S. companies or the U.S. Government. 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 the
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 the Fund's assets may be released prior to
receipt of payment, may expose the 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

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<PAGE>

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.

The 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.

Investments in foreign securities denominated in foreign currencies
involve additional risks, including: (i) The Fund may incur substantial costs
in connection with conversions between various currencies; and (ii) Only a
limited market currently exists for hedging transactions relating to currencies
in certain emerging markets.

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

The Fund may buy and sell securities (and receive interest, dividends
and sale proceeds) in currencies other than the U.S. dollar. Therefore, the
Fund 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 Fund either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies. The cost of the 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 the
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. The 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.

The 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

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<PAGE>

position. Since consideration of the prospect for currency parities will be
incorporated into the Adviser's long-term investment decisions, the Fund 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 the 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 the Fund has agreed to deliver a foreign currency, it 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 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, the 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 the 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 the Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject the Fund to certain risks.

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, the Fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the Fund's ability to use
such contract to hedge or cross-hedge its assets. Also, with regard to the
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

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<PAGE>

exist between movements in the exchange rates of the foreign currencies
underlying the 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.

Foreign currency exchange transactions in emerging markets are subject
to a greater risk of default than transactions in non-emerging countries of U.S.
companies or the U.S. Government.

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

The Fund may invest in futures contracts and options thereon. It 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 Fund 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 the Fund's securities investments. The Fund
will engage in futures transactions only to the extent permitted by the CFTC and
the SEC. When investing in futures contracts, the Fund must satisfy certain
asset segregation requirements to ensure that the use of futures is unleveraged.
When the 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 the 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 the Fund "covers" an options or futures
position generally by entering into an offsetting position. The 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 the Fund's total assets may be hedged.

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<PAGE>

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 the
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or related option.

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

The 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 the 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. The 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.

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

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<PAGE>

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.

The 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. Rule 144A securities may be determined to be
liquid in accordance with guidelines established by the Adviser and approved by
the Trust's Board of Trustees. The Adviser will monitor the liquidity of Rule
144A securities for the 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).

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

The 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 (i.e., money market funds). In addition to the advisory fees and other
expenses the Fund bears directly in connection with its own operations, as a
shareholder of another investment company, the 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 the Fund within the limits prescribed by the 1940
Act, which include, subject to certain exceptions, a prohibition against the
Fund investing more than 10% of the value of its total assets in such
securities.

The Fund 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 ("AMEX")).
There is a 5% limit based on total assets on investments by the 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.

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<PAGE>

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 Fund could result in losses on SPDRs.

The Fund may also purchase iShares MSCI Index Funds issued by iShares,
Inc. ("iShares/SM/") and similar securities of other issuers. iShares/SM/ are
shares of an investment company that invests substantially all of its assets in
securities included in the Morgan Stanley Capital International indices for
specific countries. Because the expense associated with an investment in
iShares/SM/ can be substantially lower than the expense of small investments
directly in the securities comprising the indices it seeks to track, the Adviser
believes that investments in iShares/SM/ of countries that are included in the
EAFE Index can provide a cost-effective means of diversifying the Fund's assets
across a broader range of equity securities.

iShares/SM/ are listed on the AMEX, and were initially offered to the
public in 1996. The market prices of iShares/SM/ are expected to fluctuate in
accordance with both changes in the net asset values of their underlying indices
and supply and demand of iShares/SM/ on the AMEX. To date, iShares/SM/ have
traded at relatively modest discounts and premiums to their net asset values.
However, iShares/SM/ have a limited operating history, and information is
lacking regarding the actual performance and trading liquidity of iShares/SM/
for extended periods or over complete market cycles. In addition, there is no
assurance that the requirements of the AMEX necessary to maintain the listing of
iShares/SM/ will continue to be met or will remain unchanged.

In the event substantial market or other disruptions affecting
iShares/SM/ should occur in the future, the liquidity and value of the Fund's
shares could also be substantially and adversely affected, and the Fund's
ability to provide investment results approximating the performance of
securities in the EAFE could be impaired. If such disruptions were to occur, the
Fund could be required to reconsider the use of iShares/SM/ or other "country
funds" as part of its investment strategy.

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

The Fund may purchase mortgage and mortgage-related securities such as
pass-throughs and collateralized mortgage obligations that meet the 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

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<PAGE>

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 Fund 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 Fund derives from
mortgage-backed securities is reduced. In addition, like other fixed income
securities, Mortgage Securities generally decline in price when interest rates
rise.

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

The Fund may 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 Fund that
are derived from interest on municipal securities would be taxable to the Fund's
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 Fund 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.

The Fund's portfolio 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

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<PAGE>

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 Fund.

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 the
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 the Fund. The
Adviser will consider such an event in determining whether the Fund should
continue to hold the obligation.

The payment of principal and interest on most Municipal Obligations
purchased by the Fund 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. Private activity
bonds held by the Fund 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.

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<PAGE>

Among other instruments, the Fund 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 Fund 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 Fund nor
the Adviser will review the proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.

Options
-------

The 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 the 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 Fund will be valued at
the last sale price or, in the absence of such a price, at the mean between bid
and asked prices.

The Fund may engage in writing covered call options (options on
securities owned by the 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 the Fund may not exceed 25% of the
value of its net assets. By writing a covered call option, the 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.

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<PAGE>

When the 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. The 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.

When the 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 Fund 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 Fund and such options will normally be written on underlying securities
as to which the Adviser does not anticipate significant short-term capital
appreciation.

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

The 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 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

-14-
<PAGE>

investments. A high rate of portfolio turnover may involve correspondingly
greater brokerage commission expenses and other transaction costs, which must be
borne directly by the 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.

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 Trust's Board of Trustees. After purchase
by the 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 the 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
Appendix A to this Statement of Additional Information.

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

The 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 Fund will enter into repurchase agreements only
with financial institutions that are deemed to be creditworthy by the Adviser.
The Fund 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 the 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 Fund's
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 the
Fund at not less than the repurchase price. Default or bankruptcy of the seller
would, however, expose the 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 the Fund
under the 1940 Act.

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

To increase return on its portfolio securities, the Fund may lend its
portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured

-15-
<PAGE>

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 the Fund exceeds 30%
of the value of its total assets. When the 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 the 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.

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

In a short sale, the Fund sells a borrowed security and has a
corresponding obligation to the lender to return the identical security. The
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, the 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.

The Fund will not engage in short sales against the box for investment
purposes. The 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
the 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 the 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 the Fund owns. There are certain additional transaction costs
associated with short sales against the box, but the Fund will endeavor to
offset these costs with the income from the investment of the cash proceeds of
short sales.

-16-
<PAGE>

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

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

The Fund may invest in short-term income securities in accordance with
its investment objective and policies. The Fund 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, the 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 Fund 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. The 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" above. "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.

The 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

-17-
<PAGE>

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 banking institution for a specified period of time at a stated interest
rate. Time deposits which may be held by the Fund are not insured by the Federal
Deposit Insurance Corporation or any other agency of the U.S. government. The
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
and time deposits, 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.

-18-
<PAGE>

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 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.

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

The Fund 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 the Fund, at the Fund's option, specified Municipal Obligations
at a specified price. The amount payable to the 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 the 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 Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the 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 the 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 Fund intends 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 relevant financial information. The
Fund 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 the Fund will be valued at zero in determining
the Fund's net asset value.

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 GNMA 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

-19-
<PAGE>

right of the issuer to borrow from the Treasury; others, such as those issued by
the FNMA, 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.

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

The Fund may also purchase unsecured promissory notes ("Notes") which
are not readily marketable and have not been registered under the 1933 Act.
Notes that are considered to be illiquid securities will be subject to the
limitations or investments in illiquid securities discussed above.

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

The 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 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 the 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, the 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
the 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. The 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

-20-
<PAGE>

days' notice if there is no secondary market available for these obligations,
and in other securities that are deemed illiquid. See "Investment Restrictions"
below.

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

The 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 the 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 the 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 the 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.

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

The 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, the 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 the 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 the Fund starting on the day

-21-
<PAGE>

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

The Fund may acquire zero coupon obligations. 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,
the 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.

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

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

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

The investment limitations enumerated as (1) through (6) 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 the Fund's
outstanding shares. Policies (7) through (14) may be changed by the Trust's
Board of Trustees without shareholder approval. As used herein, a "vote of the
holders of a majority of the outstanding shares" of the Trust or the 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 the Fund, or (b) 67% or more
of the shares of the Trust or the Fund present at a meeting if more than 50% of
the outstanding shares of the Trust or the Fund are represented at the meeting
in person or by proxy. Investment limitations which are "operating policies"
with respect to the Fund may be changed by the Trust's Board of Trustees without
shareholder approval.

As a matter of fundamental policy, the 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, 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 Fund will not purchase securities while borrowings exceed 5% of
its respective total assets;

-22-
<PAGE>

(2) underwrite securities issued by other persons except insofar as the
Company or the 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 Company may hold
and sell, for the 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.

None of the above-referenced fundamental investment restrictions shall
prevent the 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.

The 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;

(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

-23-
<PAGE>

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.

As a diversified portfolio, 75% of the assets of the 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, the 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 the Fund which may not
be changed without shareholder approval. For purposes of these policies and
limitations, the Fund considers certificates of deposit and demand and time
deposits issued by a U.S. branch of a

-24-
<PAGE>

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 the Fund's securities 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 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 Fund.

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 Fund 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
Fund. 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 Fund 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.

-25-
<PAGE>

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 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"). Shares may be purchased directly by
individuals ("Direct Investors") or by Institutional Investors (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 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 Fund's 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 Fund, CGFSC will send confirmations of such
transactions and periodic account statements directly to the shareholders of
record. Shares in the Fund 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 the 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) 881-9358 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. Investors may

-26-
<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).

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) 881-9358 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 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 Institutional Shares by instructing CGFSC by telephone
at (800) 881-9358 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 and
Institutional Investors may be required to redeem Shares and Institutional
Shares, respectively, in the Fund after 60 days' written notice if due to the
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 the Fund, and the balance in such account
falls below that minimum, the Customer

-27-
<PAGE>

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 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
the Fund's portfolio securities.

The Trust reserves the right to honor any request for redemption or
repurchase of the 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 the 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 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 the Fund. Amounts paid to

-28-
<PAGE>

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.

Exchange Privilege
------------------

Investors and Customers of Shareholder Organizations may exchange
Shares having a value of at least $500 for Shares of the Value Equity or Optimum
Growth Funds 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 the Trust or Excelsior Funds,
Inc.'s Money or Government Money Funds. 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 involving the Trust's International Equity
Fund may be subject to a 2% redemption fee. See the International Equity Fund's
Prospectus for further details. 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. The
Trust may also refuse an exchange request if it determines that such exchange
would not be in the best interests of the Fund or its shareholders. 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.

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 NY"):

-29-
<PAGE>

. 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 Fund 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 and the minimum subsequent investment is $50. 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
Fund 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 Shares Class of
the Fund to bear certain expenses in connection with the distribution of such
shares. As required by Rule 12b-1, the Trust's 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 the Trust (in the Trust's 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 Shares Class of the Fund may
compensate the Distributor monthly for its services which are intended to result
in the sale of such shares. The compensation may not exceed the annual rate of
0.25% of the average daily net asset value of the Fund's outstanding 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

-30-
<PAGE>

("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).

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
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 outstanding Shares of the Fund.

-31-
<PAGE>

MANAGEMENT OF THE FUNDS
-----------------------

Trustees and Officers
---------------------

The business and affairs of the Trust 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:

<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 1997),
c/o Excelsior Funds, Inc. Board, President and President, Treasurer and Director (since
73 Tremont Street and Treasurer 1995) of Excelsior Funds, Inc. and Excelsior
Boston, MA 02108 Tax-Exempt Funds, Inc.; Chairman of the Boards
Age: 68 (since 1997), President, Treasurer and Trustee
of the Trust (since 1995) and Excelsior Funds
(1995-1999); 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 Excelsior Funds, Inc. and Excelsior
Continuation Investments Group, Inc. Tax-Exempt Funds, Inc. (since 1996); Trustee of
1251 Avenue of the Americas the Trust (since 1994); Trustee, Excelsior
9th Floor Funds (from 1994 to 1999); Director, Parsons
New York, NY 10020 Brinkerhoff, Inc. (engineering firm) (since
Age: 57 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. (1993-1998); 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.

-32-
<PAGE>

Wolfe J. Frankl Director Retired; Director of Excelsior Funds, Inc. and
c/o Excelsior Funds, Inc. Excelsior Tax-Exempt Funds, Inc. (since 1986);
73 Tremont Street Director of UST Master Variable Series, Inc.
Boston, MA 02108 (from 1994 to June 1997); Trustee of the Trust
Age: 79 (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 Excelsior Funds, Inc. and Excelsior
Comprehensive Health Services, Inc. Tax-Exempt Funds, Inc. and Trustee of the Trust
8229 Boone Blvd., Suite 700 (since July 30, 2000); Chief Executive Officer,
Vienna, VA 22182 Comprehensive Health Services, Inc. (health
Age: 55 care management and administration).

Jonathan Piel Director Director of Excelsior Funds, Inc. and Excelsior
c/o Excelsior Funds, Inc. Tax-Exempt Funds, Inc. (since 1996); Trustee of
73 Tremont Street the Trust (since 1994); Trustee of Excelsior
Boston, MA 02108 Funds (from 1994 to 1999); Vice President and
Age: 61 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).
</TABLE>

-33-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ----------- ------------------
<S> <C> <C>
Robert A. Robinson Director Director of Excelsior Funds, Inc. and Excelsior
Church Pension Group Tax-Exempt Funds, Inc. (since 1987); Director
800 Second Avenue of UST Master Variable Series, Inc. (from 1994
New York, NY 10017 to June 1997); Trustee of the Trust (since
Age: 74 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 (property management) (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).

Alfred C. Tannachion/2/ Director Retired; Director of Excelsior Funds, Inc. and
c/o Excelsior Funds, Inc. Excelsior Tax-Exempt Funds, Inc. (since 1985);
73 Tremont Street Chairman of the Board of Excelsior Funds, Inc.
Boston, MA 02108 and Excelsior Tax-Exempt Funds, Inc. (1991-1997)
Age: 74 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).

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
</TABLE>

/2./ This director is considered to be an "interested person" of the Company as
defined in the 1940 Act.

-34-
<PAGE>

<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years and
Name and Address the Company Other Affiliations
---------------- ------------- -----------------------
<S> <C> <C>
Eddie Wang Assistant Manager of Blue Sky Compliance, Chase Global
Chase Global Funds Secretary Funds Services Company (November 1996 to
Services Company present); and Officer and Manager of Financial
73 Tremont Street Reporting, Investors Bank & Trust Company
Boston, MA 02108-3913 (January 1991 to November 1996).
Age: 39

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 August 1, 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.

The following chart provides certain information about fees received
by the trustees in the most recently completed fiscal year.

-35-
<PAGE>

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE TRUST
AGGREGATE ACCRUED AS ESTIMATED ANNUAL AND FUND
COMPENSATION FROM PART OF TRUST BENEFITS UPON COMPLEX* PAID TO
THE TRUST EXPENSES RETIREMENT 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)**

Morrill Melton Hall, Jr.**** 0 None None 0
</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 C omplex for which trustee
served as director or trustee.

*** Donald L. Campbell resigned as a director/trustee of the Companies on
July 31, 2000.

**** Mr. Hall became a director/trustee 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.

Investment Advisory Services
----------------------------

U.S. Trust NY and U.S. Trust Company (together with U.S. Trust NY,
"U.S. Trust" or the "Adviser") serve as co-investment advisers to the Fund,
subject to the general supervision

-36-
<PAGE>

and guidance of the Board of Trustees of the Trust. In the Advisory Agreement,
the Adviser has agreed to provide the services described in the Prospectuses.

The Advisory Agreement will continue in effect with respect to the
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 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.

The 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. The 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 the Fund, except that U.S. Trust NY 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 one of the nation's largest
financial 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.

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 0.80% of the average daily net assets of the
Fund.

From time to time, the Adviser may voluntarily or contractually waive
all or a portion of the advisory fees payable to it by the Fund, which waiver,
if voluntary, may be terminated at any time. Currently, the Adviser has
contractually agreed to waive fees and reimburse expenses in order to keep total
operating expenses from exceeding 1.05% for the Shares Class and 0.80% of the
Institutional Shares Class for the period commencing on the date of this
Statement of Additional Information and ending March 31, 2001.

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<PAGE>

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 Fund with general administrative and operational
assistance. Under the Administration Agreement, the Administrators have agreed
to maintain office facilities for the Fund, furnish the Fund with statistical
and research data, clerical, accounting, and bookkeeping services, and certain
other services required by the Fund, and to compute the net asset values, net
income and realized capital gains or losses, if any, of the Fund. The
Administrators prepare annual and semiannual shareholder reports, 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 Fund's financial accounts and records, and
generally assist in the Fund's 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.

CGFSC's offices are located at 73 Tremont Street, Boston, MA 02108.

SHAREHOLDER ORGANIZATIONS
-------------------------

The Trust has entered into agreements with certain Shareholder
Organizations. Such agreements require the Shareholder Organizations to provide
shareholder administrative

-38-
<PAGE>

services to their Customers who beneficially own Shares and Institutional Shares
in consideration for the 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 record-holder of Shares and Institutional 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
and Institutional 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 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" (as defined in the 1940 Act) of the Trust will be committed
to the discretion of such disinterested trustees.

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 the Fund and the preparation,
printing and mailing of

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<PAGE>

prospectuses for such purposes; and membership dues in the Investment Company
Institute allocable to the Trust.

Custodian and Transfer Agent
----------------------------

The Chase Manhattan Bank ("Chase"), a wholly-owned subsidiary of The
Chase Manhattan Corporation, serves as custodian of the Trust's assets. Under
the Custodian Agreement, Chase has agreed to: (i) maintain a separate account or
accounts in the name of each Fund; (ii) make receipts and disbursements of money
on behalf of each Fund; (iii) collect and receive all income and other payments
and distributions on account of each Fund's 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 Trust's Board of Trustees concerning each Fund's operations. Chase may,
at its own expense, open and maintain custody accounts with respect to each Fund
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 Trust 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 Fund; (ii)
address and mail all communications by the Fund to its 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 Fund's 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.

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 Fund.

-40-
<PAGE>

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. The 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 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 the Fund, portfolio turnover is not expected to have a material
effect on the net asset value of the Fund. The 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 the 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. Purchases and
sales of the Fund's portfolio securities will usually be principal transactions
without brokerage commissions. In certain foreign countries, debt securities in
which the Fund may invest are traded on exchanges at fixed commission rates. Any
transactions for which the 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 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
Fund, 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 Agreement provides 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 Agreement authorizes the Adviser, to the
extent permitted by law and subject to the review of the Trust's Board of
Trustees, to cause the Fund to pay a broker which furnishes brokerage and
research services a higher commission than that which might be

-41-
<PAGE>

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 Fund. Such information may be
useful to the Adviser in serving the Fund 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 Fund.

Investment decisions for the 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, the 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 the Fund or the size of the position obtainable for the Fund. In
addition, when purchases or sales of the same security for the 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 the Fund. Such an event might
also adversely affect the Fund.

PORTFOLIO VALUATION
-------------------

The Trust determines the net asset value of the Fund's Institutional
Shares and Shares each day both the New York Stock Exchange (the "NYSE") and the
Adviser are open for business (a "Business Day"). As a result, the 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 the 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 the Fund that are allocated to a particular class of shares less all
of the 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

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<PAGE>

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 Fund that 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 exchange on which such securities are primarily
traded or at the last sale price on such national securities market. Securities
in the Fund which are traded only on over-the-counter markets are valued on the
basis of closing over-the-counter bid prices, and securities in the Fund 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 Trust's Board of Trustees. Absent unusual
circumstances, debt securities maturing in 60 days or less are valued at
amortized cost.

Securities of the Fund 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 Trust's Board of Trustees. 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 Trust's Board of Trustees. 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 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 administrators have
undertaken to price the securities held by the Fund, 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 Trust's
Board of Trustees.

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 the 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

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<PAGE>

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.

INDEPENDENT AUDITORS
--------------------

Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of the Company.

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 19103-6996, is
counsel to the Company and will pass upon the legality of the shares offered by
the Prospectuses.

ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------

The following supplements the tax information contained in the
Prospectuses.

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 the Fund of
liability for federal income taxes to the extent its earnings are distributed in
accordance with applicable requirements. If, for any reason, the Fund does not
qualify for a taxable year for the special federal tax treatment afforded
regulated investment companies, the 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 the 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 Fund intends to make sufficient
distributions or deemed distributions of its 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

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<PAGE>

by shareholders and paid by the Fund on December 31 of such year if such
dividends are actually paid during January of the following year.

The 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 the 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, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.

While of the Fund might invest in municipal securities, the interest
on which might otherwise be exempt from tax, it is generally not expected that
the Fund will satisfy the requirements under the Code to pass-through such
exempt income to shareholders as tax-exempt dividends.

The 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 the Fund
will generally be treated as ordinary income or loss by the Fund. Investment by
the Fund in certain "passive foreign investment companies" may also have to be
limited in order to avoid a tax on the Fund. Such 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 the
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 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.

-45-
<PAGE>

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

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

From time to time, performance quotations of the Fund's shares may be
included in advertisements, sales literature or shareholder reports. These
performance figures are calculated in the following manner.

Yield. The Company may provide annualized "yield" quotations for each
class of shares of the Fund. The "yield" of the Fund refers to the income
generated by an investment in the 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 shares of the 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 Fund 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 Fund may quote the standardized effective 30-day
(or one month) yield for its shares, calculated in accordance with the method
prescribed by the SEC for mutual funds. Such yield will be calculated for the
Fund's shares according to the following formula:

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

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

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

c = average daily number of shares outstanding 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

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<PAGE>

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 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 the Fund to all shareholder accounts 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).

Total Return. The Company may provide period and annualized "total
rates of return" and non-standardized total return data for each class of shares
of the Fund. The "total rate of return" refers to the change in the value of an
investment in the Fund's shares 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
return is generated over a one-year period, and that all dividends and capital
gains distributions are reinvested in the shares. The "average annual total
return" for the Fund's shares 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.

The Fund may also advertise the "aggregate total return" for its
shares which is computed by determining the aggregate compounded rates of return
during specified periods that

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<PAGE>

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 the
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.

Performance Results. Any yield or total return quotation provided for
the Fund's shares should not be considered as representative of the performance
of the Fund in the future since the net asset value of shares of the 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 the Fund's shares 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.
Any fees charged by shareholder organizations to customers that have invested in
shares will not be included in calculations of performance.

Distribution Rate. The Fund may also quote its distribution rate.
Distribution rate is calculated by annualizing the per share distribution for
the most recent calendar month and dividing such annualized distribution by the
net asset value per share on the last day of such month. The distribution rate
of the 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 the Fund's shares with
performance quoted with respect to other investment companies or types of
investments.

In connection with communicating its performance to current or
prospective shareholders, the 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. The Fund 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 the Fund's performance made by independent
sources may also be used in

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<PAGE>

advertisements concerning the Fund. Sources for the 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.

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 seven
active series, although additional series may be established from time to time.

The shares of the Fund are classified into two separate classes of
shares representing Shares and Institutional Shares. 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 written declaration consented to by a majority of the
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
account,

-49-
<PAGE>

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 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

-50-
<PAGE>

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 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 Trust not belonging to a particular portfolio of the Trust. In determining
the Fund's net asset value, assets allocable to each class of the Fund are
charged with the direct liabilities in respect of such class and with a share of
the general liabilities of the Trust which are normally allocated in proportion
to the relative asset values of the Trust's portfolios at the time of
allocation. Subject to the provisions of the Trust's Trust Instrument
determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets with respect to the
Fund, are conclusive.

-51-
<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.

A-1
<PAGE>

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 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.

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:

A-2
<PAGE>

"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:

"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.

A-3
<PAGE>

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 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.

A-4
<PAGE>

"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action 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
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 in 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

A-5
<PAGE>

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; their 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) 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.

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

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

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

A-6
<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 serve 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

A-7
<PAGE>

to satisfy a higher portion of their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all obligations.

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.

- Rating Alert: 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.

A-8
<PAGE>

"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.

"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.

A-9
<PAGE>

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

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

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

Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.

A-10
<PAGE>

APPENDIX B
----------

The High Yield Fund may enter into futures contracts and options.
Such transactions are described in this Appendix.

I. Interest Rate Futures Contracts.
--------------------------------

Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.

The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.

Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by the Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.

Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase

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price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.

Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade
and the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.

A public market now exists in futures contracts covering various
financial instruments including long-term Treasury Bonds and Notes; Government
National Mortgage Association ("GNMA") modified pass-through mortgage-backed
securities, three-month Treasury Bills; and ninety-day commercial paper. The
Fund may trade in any futures contract for which there exists a public market,
including, without limitation, the foregoing instruments.

II. Stock Index Futures Contracts.
------------------------------

General. A stock index assigns relative values to the stocks included
-------
in the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.

The Fund will sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Fund may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the Fund
will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the long futures position, but a
long futures position may be terminated without a corresponding purchase of
securities.

In addition, the Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its holdings. For example, in the
event that the Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. The Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of its portfolio will decline prior to the time of sale.

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<PAGE>

III. Futures Contracts on Foreign Currencies.
----------------------------------------

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 may be used by the Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.

IV. Margin Payments.
----------------

Unlike when the Fund purchases or sells a security, no price is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not involve
the borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instrument fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking-to-market." For example, when the Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value the
Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.

V. Risks of Transactions in Futures Contracts.
-------------------------------------------

There are several risks in connection with the use of futures by the
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price
of the futures moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would be
in a better position than if it

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<PAGE>

had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Fund involved will experience either a loss or gain on the
future which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Fund may buy or sell futures contracts in
a greater dollar amount than the dollar amount of securities being hedged if the
volatility over a particular time period of the prices of such securities has
been greater than the volatility over such time period of the future, or if
otherwise deemed to be appropriate by the Fund. Conversely, the Fund may buy or
sell fewer futures contracts if the volatility over a particular time period of
the prices of the securities being hedged is less than the volatility over such
time period of the future contract being used, or if otherwise deemed to be
appropriate by the Fund. It is also possible that, where the Fund has sold
futures to hedge its portfolio against a decline in the market, the market may
advance and the value of securities held in the Fund may decline. If this
occurred, the Fund would lose money on the future and also experience a decline
in value in its portfolio securities.

Where futures are purchased to hedge against a possible increase in
the price of securities or a currency before the Fund is able to invest its cash
(or cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Fund then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of securities to
be purchased.

In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Fund may still not
result in a successful hedging transaction over a short time frame.

Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade

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<PAGE>

will exist for any particular contract or at any particular time. In such event,
it may not be possible to close a futures investment position, and in the event
of adverse price movements, the Funds would continue to be required to make
daily cash payments of variation margin. However, in the event futures contracts
have been used to hedge portfolio securities, such securities will not be sold
until the futures contract can be terminated. In such circumstances, an increase
in the price of the securities, if any, may partially or completely offset
losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures
contract.

Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
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.

Successful use of futures by the Fund is also subject to the Fund's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held in its Portfolio 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
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.

VI. Options on Futures Contracts
----------------------------

The 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
or sale of an option also entails the risk that

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<PAGE>

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 securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. 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 the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). The writing of an option on a futures contract involves risks similar to
those risks relating to the sale of futures contracts. Although permitted by
their fundamental investment policies, the Fund does not currently intend to
write futures options during the current fiscal year, and will not do so in the
future absent any necessary regulatory approvals.

VII. Accounting and Tax Treatment.
-----------------------------

Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.

Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold for
their fair market value on the last business day of such year, a process known
as "mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and sixty
percent of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Fund holds the futures contract ("the
40-60 rule"). The amount of any capital gain or loss actually realized by the
Fund in a subsequent sale or other disposition of those futures contracts will
be adjusted to reflect any capital gain or loss taken into account by the Fund
in a prior year as a result of the constructive sale of the contracts. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund, losses as to such contracts to sell will
be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
will also be applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts, deductions for interest and carrying charges will not
be allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell which are properly identified as such, the Fund may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the last
business day of the Fund's taxable year, but gains and losses will be subject to
such short sales, wash sales, loss deferral rules and the requirement to
capitalize interest and carrying charges. Under temporary regulations, the Fund
would be allowed (in lieu of the foregoing) to elect either (1) to offset gains
or losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic

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<PAGE>

basis during the taxable year. Under either election, the 40-60 rule will apply
to the net gain or loss attributable to the futures contracts, but in the case
of a mixed straddle account election, no more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Opinions on futures contracts generally receive federal tax
treatment similar to that described above.

Certain foreign currency contracts entered into by the Fund may be
subject to the "mark-to-market" process. If the Fund makes a Capital Asset
Election with respect to such contracts, the contracts will be subject to the
40-60 rule, described above. Otherwise, such gain or loss will be treated as
100% ordinary gain or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department as has broad authority
to issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Foreign currency contracts entered into by the
Fund may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.

Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
"mark-to-market" rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. "Section 988 hedging transactions" are not subject to
the mark-to-market or loss deferral rules under the Code. It is anticipated
that some of the non-U.S. dollar denominated investments and foreign currency
contracts that the Fund may make or may ender into will be subject to the
special currency rules described above. Gain or loss attributable to the
foreign

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<PAGE>

currency component of transactions engaged in by the Fund which are not subject
to special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.

Under the federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income must be derived
from gains realized on the sale or other disposition of securities held for less
than three months. With respect to futures contracts and other financial
instruments subject to the "mark-to-market" rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contract or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the "mark-to-market" rules, and will be treated as being
derived from a security held for less than three months only if the contract or
instrument is terminated (or transferred) during the taxable year (other than by
reason of the mark-to-market rules) and less than three months have elapsed
between the date the contract or instrument is acquired and the termination
date. In determining whether the 30% test is met for a taxable year, increases
and decreases in the value of the Fund's futures contracts and other investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.

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