WATERHOUSE INVESTORS FAMILY OF FUNDS INC, 497, 1998-12-18

WATERHOUSE INVESTORS FAMILY OF FUNDS INC
497, 1998-12-18

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Waterhouse Investors
Cash Management Funds

Three money market portfolios to choose from:

Money Market Portfolio
U.S. Government Portfolio
Municipal Portfolio

PROSPECTUS

[Waterhouse Securities, Inc. LOGO]

December 18, 1998

As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved the Fund's shares or determined whether this
prospectus is adequate or complete. Any representation to the contrary is a
criminal offense.

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WATERHOUSE INVESTORS CASH MANAGEMENT FUNDS

TABLE OF CONTENTS

ABOUT THE PORTFOLIOS............................................. 3
Investment Objective............................................. 3
Investment Approach.............................................. 3
Risks............................................................ 4
Who May Want to Invest........................................... 4
Past Performance................................................. 5
Expenses......................................................... 6

HOW TO BUY AND SELL SHARES....................................... 7
How to Buy Shares................................................ 8
How to Sell Shares............................................... 9
How to Exchange Portfolios....................................... 10
Telephone Transactions........................................... 10

SHAREHOLDER INFORMATION.......................................... 11
Pricing Your Shares.............................................. 11
Dividends........................................................ 11
Taxes............................................................ 11
Statements to Shareholders....................................... 13
Year 2000 Information............................................ 13

PORTFOLIO MANAGEMENT............................................. 13
Investment Manager............................................... 13
Administrator.................................................... 14
Distributor...................................................... 14
Shareholder Servicing............................................ 14

FINANCIAL HIGHLIGHTS............................................. 15

FOR MORE INFORMATION........................................Back cover

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WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS

ABOUT THE PORTFOLIOS
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INVESTMENT OBJECTIVE
Each Portfolio seeks maximum current income to the extent consistent with
liquidity and preservation of capital and a stable price of $1.00 per share.

There is no guarantee that any Portfolio will be able to maintain a stable
share price.

INVESTMENT APPROACH
Each Portfolio is a no-load money market fund. Each Portfolio invests in high
quality money market securities that the investment manager believes present
minimal credit risk.

Generally, money market securities are short-term debt obligations issued by
banks, corporations or governments. Money market securities may be backed by
loans, receivables or other assets or may be unsecured, and may include
repurchase agreements. In a repurchase agreement, a Portfolio acquires
ownership of a security from a financial institution that agrees to repurchase
the security later at a time and price that determine the yield during the
Portfolio's holding period. Particular types of money market securities are
described in the Portfolios' Statement of Additional Information.

The MONEY MARKET PORTFOLIO has the flexibility to invest in a broad range of
high quality money market securities. The U.S. GOVERNMENT PORTFOLIO offers an
added measure of safety by investing exclusively in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
Municipal Portfolio offers income exempt from federal taxes by investing
primarily in municipal securities.

As money market funds, the Portfolios comply with a range of federal
regulations relating to quality, maturity, liquidity and diversification that
are designed to promote price stability. Under the maturity standards, each
Portfolio maintains an average portfolio maturity of 90 days or less (weighted
by the relative values of its holdings), and generally does not invest in any
securities with a remaining maturity of more than 397 days (approximately 13
months). Under the quality standards, each Portfolio invests only in
securities that at the time of purchase are in the two highest short-term
rating categories or are of equivalent quality in the judgment of the
investment manager.

MONEY MARKET PORTFOLIO. The Money Market Portfolio invests in a broad spectrum
of high quality U.S. dollar-denominated money market instruments. The
Portfolio's investments may include obligations issued of, or guaranteed by,
U.S. or foreign governments, their agencies or instrumentalities, bank
obligations, and corporate debt obligations of U.S. and foreign issuers, as
well as repurchase agreements and asset-backed securities and other money
market instruments.
3

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U.S. GOVERNMENT PORTFOLIO. The U.S. Government Portfolio invests exclusively
in U.S. Treasury bills, notes, bonds and other obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and
repurchase agreements backed by such obligations. A U.S. government guarantee
of the securities owned by the Portfolio, however, does not guarantee the net
asset value of the Portfolio's shares.

MUNICIPAL PORTFOLIO. The Municipal Portfolio seeks maximum current income that
is exempt from federal income taxes to the extent consistent with preservation
of capital and liquidity. The Portfolio invests primarily in a diversified
portfolio of short-term, high quality, tax-exempt municipal obligations. The
Municipal Portfolio normally invests at least 80% of its total assets in
obligations issued or guaranteed by states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities ("municipal securities"). The income from these
securities is exempt from federal income tax, but may be subject to the
federal alternative minimum tax.

The Portfolio may deviate from its investment policies and may adopt temporary
defensive measures when significant adverse market, economic, political or
other circumstances require immediate action in order to avoid losses. During
such periods, the Portfolio may temporarily invest its assets, without
limitation, in taxable money market investments. Interest income from
temporary investments is taxable to shareholders as ordinary income.

Moreover, although the Portfolio does not currently intend to do so on a
regular basis, it may invest more than 25% of its assets in municipal
securities that are repayable out of revenue streams generated from
economically related projects or facilities. Investment in municipal
securities repayable from related revenue streams further concentrates the
Portfolio's risks.

RISKS
The income from each Portfolio will vary with changes in prevailing interest
rates. In addition, each Portfolio's investments are subject to "credit risk,"
which is the risk that an issuer will be unable, or will be perceived to be
unable, to repay its obligations at maturity. Funds that invest primarily in
high quality securities are subject to less credit risk than funds that invest
in lower quality securities. The U.S. Government Portfolio reduces credit risk
by investing exclusively in U.S. government and agency securities.

Although each Portfolio seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in a Portfolio. An
investment in a Portfolio is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

WHO MAY WANT TO INVEST
The Portfolios may be appropriate for the following investors:

o Investors looking to earn income at current money market rates from a
high quality portfolio.

o Investors looking for a liquid investment that preserves capital.

o Investors pursuing a short-term investment goal.

In addition, the Municipal Portfolio may be appropriate for investors looking
for income that is exempt from federal income tax.

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PAST PERFORMANCE
The following bar chart illustrates the risks of investing in the Portfolios
by showing changes in the Portfolios' performance from year to year. The table
below shows the Portfolios' average annual returns. Of course, past
performance is not necessarily an indication of how a Portfolio will perform
in the future.

YEAR-BY-YEAR TOTAL RETURN as of 12/31 each year(1)

Money Market Portfolio

1/1 - 12/31/96: 4.78
1/1 - 12/31/97: 4.95

U.S. Government Portfolio

1/1 - 12/31/96: 4.77
1/1 - 12/31/97: 4.84

U.S. Government Portfolio

1/1 - 12/31/96: 2.98
1/1 - 12/31/97: 3.04

For the periods covered by the bar chart, the highest and lowest quarterly
returns were 1.26% (for the quarter ended 12/31/97) and 1.15% (for the quarter
ended 3/31/97) for the Money Market Portfolio, 1.23% (for the quarter ended
12/31/97) and 1.14% (for the quarter ended 3/31/97) for the U.S. Government
Portfolio, and 0.78% (for the quarter ended 12/31/97) and 0.69% (for the
quarter ended 3/31/97) for the Municipal Portfolio, respectively.

AVERAGE ANNUAL TOTAL RETURN as of 12/31/97(2)

Inception
1 Year (12/20/95)
------ ----------
<S> <C> <C>
Money Market Portfolio 4.95% 4.89%
U.S. Government Portfolio 4.84% 4.83%
Municipal Portfolio 3.04% 3.05%
</TABLE>

1 For the period from 1/1/98 through 9/30/98, total returns for the Money
Market Portfolio, U.S. Government Portfolio, and Municipal Portfolio,
were 3.75%, 3.67%, and 2.21%, respectively.

2 As of 12/31/97, 7-day yields for the Money Market Portfolio, U.S.
Government Portfolio, and Municipal Portfolio were 5.13%, 4.95%, and
3.24%, respectively. As of the same date, the tax-equivalent 7-day yield
for the Municipal Portfolio was 5.06%. For current yield information,
please call 1-800-934-4410.
5

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EXPENSES
As a shareholder, you may pay certain fees and expenses in connection with the
Portfolios, which are described in the table below. Portfolio operating
expenses are paid out of Portfolio assets, so their effect is included in the
share price.
<TABLE>
<CAPTION>

MONEY MARKET U.S. GOVERNMENT MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION FEES
(fees paid directly from
your investment)(1)
Maximum Sales Charge
(Load) Imposed on Purchases None None None

ANNUAL OPERATING EXPENSES
(expenses deducted from
Portfolio assets)
Management Fees(2) 0.35% 0.35% 0.35%
Shareholder
Servicing Fees(2) 0.25% 0.25% 0.25%
12b-1 Fees None None None
Other Expenses(2) 0.35% 0.36% 0.38%
----- ----- -----
Total Operating Expenses(2) 0.95% 0.96% 0.98%
</TABLE>

1 Broker-dealers that are not affiliates of the Portfolios' investment
manager may impose service fees in connection with the sale of Portfolio
shares, no part of which may be received by the Portfolio, the investment
manager or affiliates of the investment manager. These fees may differ
according to the type of account held by the investor.

2 Expenses are based on amounts incurred by the Portfolios during their
most recent fiscal year but do not reflect reduced service fees or
expense reductions (expense reimbursements and fee waivers) by the
investment manager. After these reductions, actual Portfolio expenses for
the fiscal year ended 10/31/98 were:

<TABLE>
<CAPTION>
MONEY MARKET U.S. GOVERNMENT MUNICIPAL
PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------------- ---------
<S> <C> <C> <C>
Management Fees 0.35% 0.35% 0.25%
Shareholder Servicing Fees 0.06% 0.07% 0.09%
Other Expenses 0.34% 0.36% 0.38%
------ ----- -----
Total Operating Expenses 0.75% 0.78% 0.72%
</TABLE>

The amounts in this footnote reflect current expenses. However, the
investment manager currently anticipates that it will limit overall
expense ratios to no more than the amounts indicated in this footnote
indefinitely.

EXAMPLE
This Example is intended to help you compare the cost of investing in a
Portfolio with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in a Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return

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each year and that the Portfolio's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs* would be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $ 97 $ 303 $ 525 $ 1166
U.S. Government Portfolio $ 98 $ 306 $ 531 $ 1178
Municipal Portfolio $ 100 $ 312 $ 542 $ 1201
</TABLE>

* Assuming current expense reduction arrangements, your costs would be:

<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio $ 77 $ 240 $ 417 $930
U.S. Government Portfolio $ 80 $ 249 $ 433 $966
Municipal Portfolio $ 74 $ 230 $ 401 $894
</TABLE>

Amounts used in this example reflect current expenses. However, the investment
manager currently anticipates that it will limit overall expense ratios to no
more than the amounts indicated in this footnote indefinitely.

HOW TO BUY AND SELL SHARES
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Only investors maintaining brokerage, securities, money management or similar
accounts with certain broker-dealers, including Waterhouse Securities, Inc.
("Waterhouse Securities"), are eligible to purchase shares of the Portfolios.

If you would like to purchase shares of a Portfolio through Waterhouse
Securities and you are not already a customer, you need to open a Waterhouse
Securities account by completing and signing a Waterhouse Securities New
Account Application. To request an application, please call 1-800-934-4410.
Mail it, together with your check in the amount you wish to purchase, in the
postage-paid envelope provided with the Waterhouse Securities New Account
Application.

AUTOMATIC SWEEP. By setting up your Waterhouse Securities brokerage account
for automatic sweep, free credit balances in your brokerage account will be
invested or "swept" automatically each business day into the Portfolio you
have selected ("Sweep Portfolio"). This feature keeps your money working for
you while it is not invested in other securities. "Free credit balances"
refers to any settled or cleared funds in your Waterhouse Securities brokerage
account that are available for payment or investment.

To set up your Waterhouse Securities brokerage account for automatic sweep,
you should select one of the money market sweep portfolios in the appropriate
section of the Waterhouse Securities New Account Application. If you already
have a Waterhouse Securities brokerage account but it is not set up to
automatically sweep free credit balances, simply call the Waterhouse
Securities office handling your account. In most cases, an Account Officer
will set up your account for automatic sweep while you are on the phone.

While you may purchase shares of any of the three Portfolios at any time, only
one Portfolio may be designated as your Sweep Portfolio. The sweep feature is
subject to the terms and conditions of your Waterhouse Securities brokerage
account agreement.
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ACCOUNT PROTECTION. Within your Waterhouse Securities brokerage account, you
have access to other investments available at Waterhouse Securities such as
stocks, bonds, options, and other mutual funds. The securities in your
Waterhouse Securities brokerage account, including shares of the Portfolios,
are protected up to $75 million for loss of securities (not including loss due
to market fluctuations of securities or economic conditions). The first
$500,000 is provided by Securities Investor Protection Corporation (known as
"SIPC") of which $100,000 covers cash. The remaining $74.5 million, which
covers securities only, is provided by a private insurance carrier.

INVESTMENT MINIMUMS. There is currently no minimum requirement for initial and
subsequent purchases of Portfolio shares. However, Portfolio shares are
subject to automatic redemption should the Waterhouse Securities brokerage
account in which they are held be closed or if Waterhouse Securities imposes
certain requirements with respect to its brokerage accounts and eligibility
for sweep arrangements, including requirements relating to minimum account
balances. Any minimum balance requirement will not apply to Waterhouse
Securities IRA accounts.

Shares are purchased at the next net asset value (NAV) per share calculated
after an order and payment is received by the Portfolio. There is no sales
charge to buy shares of a Portfolio.

Each Portfolio reserves the right to suspend the offering of shares for a
period of time and to reject any specific purchase order, including certain
purchase orders by exchange.

WATERHOUSE INVESTORS MONEY MANAGEMENT ACCOUNTS. For those Waterhouse
Securities customers who qualify, a Waterhouse Investors Money Management
Account provides additional services over that of a brokerage account. In
addition to having free credit balances in your brokerage account swept
automatically each business day into your Sweep Portfolio, you can access your
investment in the Portfolio by writing checks or using an ATM/VISA Check Card.
You should contact your Waterhouse Securities Account Officer for more
details. To set up your Waterhouse Investors Money Management Account, you
should complete the appropriate section of the Waterhouse Securities New
Account Application.

HOW TO BUY SHARES
CUSTOMERS OF WATERHOUSE SECURITIES
You may purchase shares of a Portfolio either through the automatic sweep
feature or by way of a direct purchase as set forth below.

BY AUTOMATIC SWEEP. Free credit balances in your Waterhouse Securities
brokerage account will be automatically invested each business day in the
Sweep Portfolio you have selected. Checks deposited to your Waterhouse
Securities brokerage account will be automatically invested in the Sweep
Portfolio after allowing three business days for clearance. Net proceeds from
securities transactions in your brokerage account will be automatically
invested on the business day following settlement. Dividends and interest
payments from investments in your brokerage account will be automatically
invested in the Sweep Portfolio on the day they are credited to your account.

DIRECT PURCHASES. A Waterhouse Securities brokerage customer may purchase
shares of any of the Portfolios by placing an order directly with a Waterhouse
Securities Account Officer at 1-800-934-4410. You may buy

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shares by mailing or bringing your check to any Waterhouse Securities office.
Checks should be made payable to "Waterhouse Securities, Inc." and you should
write your Waterhouse Securities account number on the check. The check will
be deposited to your Waterhouse Securities brokerage account. Waterhouse
Securities allows three business days for clearance and shares of a Portfolio
will be purchased on the third business day.

CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than Waterhouse Securities that have entered into a selling agreement
with the Portfolios' distributor ("Selected Brokers"). Affiliates of
Waterhouse Securities, including Jack White & Co., may be Selected Brokers.
Selected Brokers may receive payments as a processing agent from the Transfer
Agent. In addition, Selected Brokers may charge their customers a fee for
their services, no part of which is received by the Portfolio or Waterhouse
Securities.

Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or
different from, those generally applicable to Waterhouse Securities customers.
Any such charges would reduce the return on an investment in a Portfolio.
Investors should acquaint themselves with their Selected Broker's procedures
and should read this prospectus in conjunction with any material and
information provided by their Selected Broker. Investors who purchase
Portfolio shares though a Selected Broker may or may not be the shareholder of
record. Selected Brokers are responsible for promptly transmitting purchase,
redemption and other requests to the Portfolios.

Certain shareholder services, such as sweep programs, may not be available to
customers of Selected Brokers or may differ in scope from programs available
to Waterhouse Securities customers. Shareholders should contact their Selected
Broker for further information. The Portfolios may confirm purchases and
redemptions of a Selected Broker's customers directly to the Selected Broker,
which in turn will provide its customers with confirmation and periodic
statements. The Portfolios are not responsible for the failure of any Selected
Broker to carry out its obligations to its customer.

HOW TO SELL SHARES
To sell (redeem) shares of a Portfolio, you may use any of the methods
outlined above under "How to Buy Shares." Portfolio shares are redeemed at the
next NAV calculated after receipt by the Portfolio of a redemption request in
proper form.

PAYMENT. The proceeds of the redemption of your Portfolio shares ordinarily
will be credited to your brokerage account the following business day after
receipt by the Portfolio of a redemption request in proper form, but not later
than seven calendar days after an order to sell shares is received. If you
purchased shares by check, proceeds may be held in your brokerage account to
allow for clearance of the check (which may take up to ten calendar days).
Each Portfolio reserves the right to make redemption payments in whole or in
part in securities or other property, valued for this purpose as they are
valued in computing the Portfolio's NAV per share.
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AUTOMATIC SWEEP REDEMPTIONS. Shares of your Sweep Portfolio may be sold
automatically to satisfy a debit balance in your Waterhouse Securities
brokerage account. To the extent that there are not a sufficient number of
shares of your Sweep Portfolio to satisfy any such debit, shares that you own
of any other investment portfolio of the Waterhouse Investors Family of Funds
may be sold. In addition, shares will be sold to settle securities
transactions in your Waterhouse Securities brokerage account if on the day
before settlement there is insufficient cash in the account to settle the net
transactions. Your brokerage account, as of the close of business each
business day, will be scanned for debits and pending securities settlements,
and after application of any free credit balance in the account to the debits,
a sufficient number of shares will be sold to satisfy any remaining debits.
Shares may also be sold automatically to provide the cash collateral necessary
to meet your margin obligations to Waterhouse Securities.

If you have a Waterhouse Investors Money Management Account and you withdraw
cash from your Waterhouse Securities brokerage account by way of a check or
ATM/VISA Check Card, shares of your Sweep Portfolio will automatically be sold
to satisfy any resulting debit balance. Holders of the ATM/VISA Check Card
will not be liable for unauthorized withdrawals resulting in redemptions of
Portfolio shares that occur after Waterhouse Securities is notified of the
loss, theft or unauthorized use of the Card. Further information regarding the
rights of holders of the ATM/VISA Check Card is set forth in the Waterhouse
Investors Money Management Agreement provided to each customer who opens a
Waterhouse Investors Money Management Account. ATM cash withdrawals may be
made through participating financial institutions. Although Waterhouse
Securities does not charge for ATM withdrawals, institutions may charge a fee
in connection with their services.

HOW TO EXCHANGE PORTFOLIOS
You may change your designated Sweep Portfolio to any other Portfolio at any
time without charge. You may also exchange shares of one Portfolio for another
Portfolio. To effect an exchange, call your Waterhouse Securities Account
Officer with instructions to move your money from one Portfolio to another, or
you may mail written instructions to your local Waterhouse Securities office.
Your letter should reference your Waterhouse Securities brokerage account
number, the Portfolio from which you are exchanging and the Portfolio into
which you are exchanging. This letter should be signed by at least one
registered account holder.

An exchange involves the redemption of Portfolio shares and the purchase of
shares of another Portfolio at their respective NAVs after receipt of an
exchange request in proper form. Each Portfolio reserves the right to reject
specific exchange orders and, on 60 days' prior written notice, to suspend,
modify or terminate exchange privileges.

TELEPHONE TRANSACTIONS
Customers of Waterhouse Securities automatically have the privilege of
purchasing or redeeming Portfolio shares by telephone. Waterhouse Securities
will employ reasonable procedures to verify the genuineness of telephone
redemption requests. These procedures involve requiring certain personal
identification information. If such procedures are not followed, Waterhouse
Securities may be liable for any losses due to unauthorized or fraudulent
instructions. Neither Waterhouse Securities nor the Portfolios will be liable
for

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following instructions communicated by telephone that are reasonably believed
to be genuine. You should verify the accuracy of your account statements
immediately after you receive them and contact a Waterhouse Securities Account
Officer if you question any activity in the account.

Each Portfolio reserves the right to refuse to honor requests made by
telephone if the Portfolio believes them not to be genuine. The Portfolios
also may limit the amount involved or the number of such requests. During
periods of drastic economic or market change, telephone redemption privileges
may be difficult to implement. The Portfolios reserve the right to terminate
or modify this privilege at any time.

SHAREHOLDER INFORMATION
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PRICING YOUR SHARES
The price of a Portfolio share on any given day is its NAV. Each Portfolio
calculates its NAV per share each day as of 12:00 noon and 4:00 p.m. (Eastern
time). Shares are not priced on days when either the New York Stock Exchange
or the Portfolios' custodian is closed. Each Portfolio's shares are sold at
the next NAV per share calculated after an order and payment are accepted by
the Portfolio in the manner described under "How to Buy and Sell Shares."

Like most money market funds, each Portfolio values its portfolio securities
at amortized cost, which means that they are valued at their acquisition cost
(as adjusted for amortization of premium or discount) rather than at current
market value. This method of valuation minimizes the effect of changes in a
security's market value and helps each Portfolio to maintain a stable $1.00
share price. The Board of Directors has adopted procedures pursuant to which
the NAV of each Portfolio, as determined under the amortized cost method, is
monitored in relation to the market value of the Portfolios.

DIVIDENDS
On each day that the NAV of a Portfolio is determined, such Portfolio's net
investment income will be declared at 4:00 p.m. (Eastern time) as a daily
dividend to shareholders of record as of such day's last calculation of NAV.
All expenses are accrued daily and are deducted before declaration of
dividends to investors.

Dividends and distributions from a Portfolio will be reinvested in additional
full and fractional shares of the same Portfolio at the NAV next determined
after their payable date. Dividends are declared daily and are reinvested
monthly. Shareholders may elect to receive any monthly dividend in cash by
submitting a written election to Waterhouse Securities by the tenth day of the
specific month to which the election to receive cash relates.

TAXES
Dividends derived from interest and short-term capital gains generally are
taxable to a shareholder as ordinary income even though they are reinvested in
additional Portfolio shares. Distributions of net capital gain, if any,
realized by a Portfolio are taxable to shareholders of a Portfolio as a
long-term capital gain (at different rates depending on how long the Portfolio
held its assets and when such assets were sold by the Portfolio), regardless
of the length of time the shareholder may have held shares in the Portfolio at
the time of
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distribution. Due to the nature of their investments, the Portfolios'
distributions will consist primarily of ordinary income.

All or some of the dividends received from the U.S. Government Portfolio may
be exempt from individual state and/or local income taxes. You should consult
with your tax adviser in this regard.

Required tax information will be provided annually. You are encouraged to
retain copies of your account statements or year-end statements for tax
reporting purposes. However, if you have incomplete records, you may obtain
historical account transaction information at a reasonable fee.

You should consult your tax adviser regarding specific questions as to
federal, state and local taxes.

MUNICIPAL PORTFOLIO. The Municipal Portfolio intends to declare and distribute
tax-exempt interest dividends. Shareholders of the Portfolio will not be
required to include the "exempt-interest" portion of dividends paid by the
Portfolio in their gross income for federal income tax purposes. However,
shareholders will be required to report the receipt of exempt-interest
dividends and other tax-exempt interest on their federal income tax returns.
Exempt-interest dividends may be subject to state income taxes or give rise to
a federal alternative minimum tax liability. Exempt-interest dividends also
may affect the amount of social security benefits subject to federal income
tax, may affect the deductibility of interest on certain indebtedness of the
shareholder and may have other collateral federal income tax consequences.

Dividends representing taxable net investment income (such as net interest
income from temporary investments in obligations of the U.S. government, and
any net short-term capital gains), are taxable to shareholders as ordinary
income.

Market discount recognized on taxable and tax-exempt securities is also
taxable as ordinary income and is not treated as excludable income.

To the extent that exempt-interest dividends are derived from certain private
activity bonds (some of which were formerly referred to as industrial
development bonds) issued on or after August 7, 1986, they will be treated as
an item of tax preference and may, therefore, be subject to both the
individual and corporate alternative minimum tax. All exempt-interest
dividends will be included in determining a corporate shareholder's adjusted
current earnings. Seventy-five percent of the excess, if any, of "adjusted
current earnings" over the corporate shareholder's alternative minimum taxable
income, with certain adjustments, will be an upward adjustment for purposes of
the corporate alternative minimum tax. The percentage of dividends that
constitutes exempt-interest dividends, and the percentage thereof (if any)
that constitutes an item of tax preference, will be determined annually and
will be applied uniformly to all dividends of the Portfolio declared during
that year. These percentages may differ from the actual percentages for any
particular day. Shareholders are advised to consult their tax advisers with
respect to alternative minimum tax consequences of an investment in the
Portfolio.

The tax exemption of dividends from the Portfolio for federal income tax
purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. The laws of the several
states and local taxing authorities vary with respect to the taxation of such
income and you are advised to consult your own tax adviser as to the status of
your dividends under state and local tax laws.

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STATEMENTS TO SHAREHOLDERS
The Company does not issue share certificates but records your holdings in
noncertificated form. Your Portfolio activity is reflected in your Waterhouse
Securities brokerage account statement. The Company provides you with annual
audited and semi-annual unaudited financial statements. To reduce expenses,
only one copy of most financial reports is mailed to you if you hold shares of
more than one Portfolio under the same account name and tax identification
number.

YEAR 2000 INFORMATION
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies
and financial and business organizations, each Portfolio could be adversely
affected if the computer systems used by the investment manager or other
Portfolio service providers do not properly address this problem prior to
January 1, 2000. The investment manager and its affiliates have established a
dedicated group to analyze these issues and to implement any systems
modifications necessary to prepare for the Year 2000. Currently, the
investment manager does not anticipate that the transition to the 21st century
will have any material impact on its ability to continue to service the
Portfolios at current levels. In addition, the investment manager has sought
assurances from the Portfolios' other service providers that they are taking
all necessary steps to ensure that their computer systems will accurately
reflect the Year 2000, and the investment manager will continue to monitor the
situation. At this time, however, no assurance can be given that the
Portfolios or their service providers have anticipated every step necessary to
avoid any adverse effect on the Portfolios attributable to the Year 2000
Problem or that interaction with other non-complying computer systems will not
impact their services.

PORTFOLIO MANAGEMENT
- ------------------------------------------------------------------------------

INVESTMENT MANAGER
Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, (the
"investment manager") is the Portfolios' investment manager. The investment
manager formulates guidelines and lists of approved investments for each
Portfolio, makes decisions with respect to and places orders for that
Portfolio's purchases and sales of portfolio securities and maintains records
relating to such purchases and sales.

For its services, each Portfolio pays the investment manager an annual
investment management fee, accrued daily and payable monthly, on a graduated
basis equal to 0.35% of the first $1 billion of average daily net assets of
each Portfolio, 0.34% of the next $1 billion, and 0.33% of assets over $2
billion. The investment manager from time to time may assume certain expenses
of the Portfolios (or waive its fees), which would have the effect of
increasing yield to investors during the period of the expense reduction.
These expense reductions are voluntary and may be changed or eliminated at any
time without further notice to investors.

In addition to the Portfolios and the other investment portfolio in the
Waterhouse Family of Funds, the investment manager currently serves as
investment manager to Waterhouse National Bank (of which it is a subsidiary)
and as of December 3, 1998, had total assets under management in excess of $7
billion.
13

<PAGE>

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

ADMINISTRATOR
As administrator, Waterhouse Securities, an affiliate of the investment
manager, provides certain administrative services to the Portfolios. For its
services as administrator, Waterhouse Securities receives from each Portfolio
an annual fee, payable monthly, of 0.10% of each Portfolio's average daily net
assets. Waterhouse Securities has entered into an agreement with Funds
Distributor, Inc. ("FDI") whereby FDI performs certain administrative services
for the Portfolios. Waterhouse Securities pays FDI's fees for providing these
services.

DISTRIBUTOR
FDI acts as distributor of the Portfolios' shares for no compensation.

SHAREHOLDER SERVICING
The Portfolios' Shareholder Servicing Plan permits each Portfolio to pay
banks, broker-dealers or other financial institutions (including Waterhouse
Securities and its affiliates) for shareholder support services they provide,
at a rate of up to 0.25% of the average daily net assets of each Portfolio.
These services may include, among other services, providing general
shareholder liaison services (including responding to shareholder inquiries),
providing information on shareholder investments, and establishing and
maintaining shareholder accounts and records.

<PAGE>

FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------

The financial highlights table is intended to help you understand each
Portfolio's financial performance since inception of the Portfolio's
operations. Certain information reflects financial results for a single share
of each Portfolio. The total return amount in the table represents the rate
that an investor would have earned on an investment in a Portfolio (assuming
reinvestment of all dividends and distributions). This information has been
audited by Ernst & Young LLP, whose report, along with the Portfolios'
financial statements, are included in the annual report, which is available
upon request by calling Customer Service at 1-800-934-4410.

MONEY MARKET PORTFOLIO U.S. GOVERNMENT PORTFOLIO
------------------------------------------- ----------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996* 1998 1997 1996*
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, begin-
ning of period............... $1.000 $1.000 $ 1.000 $1.000 $1.000 $ 1.000
------ ------ ---------- ------ ------ ----------
Net investment income........... 0.049 0.048 0.041 0.048 0.047 0.041
------ ------ ---------- ------ ------ ----------
Distributions from net
investment income............ (0.049) (0.048) (0.041) (0.048) (0.047) (0.041)
------ ------ ---------- ------ ------ ----------
Net asset value, end of
period....................... $1.000 $1.000 $ 1.000 $1.000 $1.000 $ 1.000
------ ------ ---------- ------ ------ ----------
------ ------ ---------- ------ ------ ----------
RATIOS
Ratio of expenses to
average net assets**......... 0.75% 0.83% 0.79%(A) 0.78% 0.81% 0.73%(A)
Ratio of net investment
income to average net
assets**..................... 4.92% 4.79% 4.64%(A) 4.80% 4.69% 4.64%(A)
Decrease reflected in
above net expense
ratio due to waivers
and/or reimburse-
ments by the Invest-
ment Manager and its
Affiliates................... 0.15% 0.08% 0.13%(A) 0.11% 0.07% 0.18%(A)

SUPPLEMENTAL DATA
Total investment
return (B)................... 5.04% 4.89% 4.82%(A) 4.91% 4.79% 4.82%(A)
Net assets, end of
period....................... $2,957,725,894 $1,787,786,777 $1,342,610,086 $537,403,768 $402,685,311 $371,046,770
-------------- -------------- -------------- ------------ ------------ ------------
-------------- -------------- -------------- ------------ ------------ ------------

MUNICIPAL PORTFOLIO
-------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1996*
----------- ----------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, begin-
ning of period............... $1.000 $1.000 $ 1.000
------ ------ ----------
Net investment income........... 0.029 0.030 0.026
------ ------ ----------
Distributions from net
investment income............ (0.029) (0.030) (0.026)
------ ------ ----------
Net asset value, end of
period....................... $1.000 $1.000 $ 1.000
------ ------ ----------
------ ------ ----------
RATIOS
Ratio of expenses to
average net assets**......... 0.72% 0.74% 0.62%(A)
Ratio of net investment
income to average net
assets**..................... 2.93% 2.97% 2.90%(A)
Decrease reflected in
above net expense
ratio due to waivers
and/or reimburse-
ments by the Invest-
ment Manager and its
Affiliates................... 0.13% 0.10% 0.23%(A)

SUPPLEMENTAL DATA
Total investment
return (B)................... 2.98% 3.01% 3.05%(A)
Net assets, end of
period....................... $381,090,446 $265,623,696 $226,253,394
------------ ------------ ------------
------------ ------------ ------------

* Each Portfolio commenced operations on December 20, 1995.
** The average net assets for the periods ended October 31, 1998, October 31,
1997 and October 31, 1996, were $2,302,804,288, $1,592,722,254 and
$1,104,558,438 for the Money Market Portfolio; $457,821,528, $398,635,777
and $293,708,330 for the U.S. Government Portfolio; and $312,133,086,
$252,444,536 and $196,592,413 for the Municipal Portfolio.
(A) Annualized.
(B) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of the period reported and includes
reinvestment of dividends.

<PAGE>

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

WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS

FOR MORE INFORMATION
- ------------------------------------------------------------------------------

More information on the Portfolios is available upon request, including the
following:

SHAREHOLDER REPORTS. Additional information about the Portfolios' investments
is available in the Portfolios' annual and semi-annual reports to
shareholders.

STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI includes more information
about each Portfolio and its policies. The SAI is on file with the Securities
and Exchange Commission (SEC) and is incorporated by reference into (is
legally considered a part of) this prospectus.

You may request free copies of these materials, along with other information
about the Portfolios, and make shareholder inquiries by contacting:

Waterhouse Securities, Inc.
Customer Service
100 Wall Street
New York, New York 10005

Telephone: 1-800-934-4410
Hearing impaired: TTY 1-800-933-0555
Email: http://www.waterhouse.com

Text-only versions of the Portfolios' prospectus and other documents
pertaining to the Portfolios can be viewed online or downloaded from the SEC
(http:// www.sec.gov).

You also can review each Portfolio's reports and SAI at the SEC's public
reference room in Washington, DC. For a fee, you may obtain this information
by writing the SEC's Public Reference Section, Washington, DC 20549-6009. For
more information about these services, call 1-800-SEC-0330.

The Portfolios are series of Waterhouse Investors Family of Funds, Inc., whose
investment company registration number is 811-9086.

<PAGE>

Waterhouse Investors
Cash Management Funds

Three money market portfolios to choose from:

Money Market Portfolio
U.S. Government Portfolio
Municipal Portfolio

PROSPECTUS

[Waterhouse Securities, Inc. LOGO]

December 18, 1998
<PAGE>

WATERHOUSE DOW 30 FUND

PROSPECTUS

December 18, 1998

AS WITH ANY MUTUAL FUND, THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT
APPROVED OR DISAPPROVED THE FUND'S SHARES OR DETERMINED WHETHER THIS
PROSPECTUS IS ADEQUATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

[Waterhouse Securities, Inc. LOGO]

<PAGE>

WATERHOUSE DOW 30 FUND

TABLE OF CONTENTS

ABOUT THE FUND................................................... 3
Investment Objective............................................. 3
Investment Approach.............................................. 3
Risks............................................................ 4
Who May Want to Invest........................................... 4
Expenses......................................................... 5

ABOUT THE DOW JONES INDUSTRIAL AVERAGE(SM)....................... 6

HOW TO BUY AND SELL SHARES....................................... 8
How to Buy Shares................................................ 9
How to Sell Shares............................................... 10
Telephone Transactions........................................... 11
Brokerage Account Requirements................................... 11

SHAREHOLDER INFORMATION.......................................... 11
Pricing Your Shares.............................................. 11
Dividends........................................................ 12
Taxes............................................................ 12
Year 2000 Information............................................ 12

FUND MANAGEMENT.................................................. 13
Investment Manager............................................... 13
Administrator.................................................... 13
Distributor...................................................... 13
Shareholder Servicing............................................ 13

FINANCIAL HIGHLIGHTS............................................. 14

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

<PAGE>

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

WATERHOUSE DOW 30 FUND

ABOUT THE FUND
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund seeks to track the total return of the Dow Jones Industrial Average
(the "DJIA"(SM)) before Fund expenses. There can be no assurance that the Fund
will achieve this objective.

INVESTMENT APPROACH
The Fund is an "index fund" and invests primarily in the equity securities of
the 30 companies comprising the DJIA (known as the "Dow 30"(SM)) in the same
proportions that they are represented in the DJIA. The Fund employs a
"passively" managed investment approach.

The DJIA currently consists of 30 of the most widely held and actively traded
stocks listed on the New York Stock Exchange. The stocks in the DJIA represent
companies that typically are dominant firms in their respective industries.
The Fund will normally invest substantially all of its total assets in the
stocks of the DJIA and "Equity Equivalents" (described below) that offer
participation in the performance of the stocks in the DJIA. The portion of the
Fund's total assets invested in the stocks in the DJIA will vary from time to
time.

Equity Equivalents include stock index futures contracts and publicly-traded
index securities (such as DIAMONDS(SM)). Stock index futures contracts are
agreements whereby two parties agree to take or make delivery of an amount of
cash based on the value of an index (such as the DJIA) on a specified future
date. Investment in index futures contracts allows an investor to participate
in the performance of the index without the costs of buying the stocks
comprising the index. DIAMONDS represent proportionate undivided interests in
a portfolio of securities consisting of all of the component common stocks of
the DJIA and are listed on the American Stock Exchange. Equity Equivalents may
be used for several purposes: to simulate full investment in the underlying
index while retaining a cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to seek higher investment
returns where an Equity Equivalent is priced more attractively than securities
in the DJIA.

The Fund will attempt to achieve a correlation between the total return
performance of its portfolio and that of the total return of the DJIA of at
least .98 before expenses. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the Fund's net asset value,
including the value of its dividend and capital gain distributions, increases
or decreases in exact proportion to changes in the total return of the DJIA.
The investment manager monitors the correlation of the performance of the Fund
in relation to the DJIA under the supervision of the Board of Directors. In
the unlikely event that a high correlation is not achieved, the Board of
Directors will take appropriate steps based on the reasons for the lower than
expected correlation.
3
<PAGE>
- ------------------------------------------------------------------------------
RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments, if the value of the DJIA goes down. Unlike
other funds that do not attempt to track an index, the Fund may not use
certain techniques to reduce the risk of loss. For example, the Fund will not
keep any significant portion of its assets in cash. As a result, the Fund may
go down in value more than an actively managed fund in the event of a general
market decline. In addition, because the Fund has expenses whereas the DJIA
does not, the Fund's performance will tend to underperform the performance of
the DJIA.

The Fund's "non-diversified" status allows it to invest more than 5% of its
assets in the stock of a single company. To the extent the Fund invests a
greater percentage of its assets in a single company, the Fund has greater
exposure to the performance and risks of the stock of that company.

An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

WHO MAY WANT TO INVEST
The Fund may be appropriate for the following investors:

o Investors looking for a convenient way to seek to track the total return
of the DJIA, one of the most widely followed market indicators in the
world.

o Investors seeking capital growth over the long term (at least five
years).

4
<PAGE>

- ------------------------------------------------------------------------------
EXPENSES

As a shareholder, you may pay certain fees and expenses in connection with the
Fund, which are described in the table below. Fund operating expenses are paid
out of Fund assets, so their effect is included in the share price.

</TABLE>
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION FEES (fees paid directly from your investment)(1)
Maximum Sales Charge (Load) Imposed on Purchases None
ANNUAL OPERATING EXPENSES (expenses deducted from Fund assets)
Management Fees(2) 0.20%
Distribution (12b-1) Fees None
Service Fees(2) 0.25%
Other Expenses(2) 0.36%
----
Total Operating Expenses(2) 0.81%
</TABLE>

1 Broker-dealers that are not affiliates of the Fund's investment manager
may impose service fees in connection with the sale of Fund shares, no
part of which may be received by the Fund, the investment manager or
affiliates of the investment manager. These fees may differ according to
the type of account held by the investor.

2 The table shows the Fund's expenses for the Fund's first fiscal period
before expense reductions by the Fund's investment manager. The
investment manager agreed to reduce expenses of the Fund (through paying
certain expenses and waiving fees) for the first twelve months of the
Fund's operations (March 31, 1998 through March 31, 1999), so that the
Fund's total operating expenses during the period would not exceed 0.25%.
Thereafter, any expense reductions will be voluntary and may be changed
or eliminated at any time without notifying investors. After expense
reductions, actual Fund expenses were:

Management Fees 0.00%
Service Fees 0.03%
Other Expenses 0.22%
------
Total Operating Expenses 0.25%

The amounts in this footnote reflect current expenses. However, the investment
manager currently anticipates that it will limit overall expense ratios to no
more than the amounts indicated in this footnote indefinitely.

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 then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs* would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$82 $259 $450 $1002

* Assuming current expense reduction arrangements that limit the Fund's
operating expenses to 0.25%, your costs would be:

1 year 3 years 5 years 10 years
------ ------- ------- --------
$26 $80 $141 $318

The amounts in this footnote reflect current expenses. However, the investment
manager currently anticipates that it will limit overall expense ratios to no
more than the amounts indicated in this footnote indefinitely.

5
<PAGE>

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

ABOUT THE DOW JONES INDUSTRIAL AVERAGE(SM)
- ------------------------------------------------------------------------------
The Dow Jones Industrial Average was introduced to the investing public by
Charles Dow on May 26, 1896 and originally was composed of only 12 stocks. It
has since become one of the most well known and widely followed indicators of
the U.S. stock market and is the oldest continuing stock market index in the
world. As of September 30, 1998, the 30 "blue-chip" stocks in the DJIA
represented approximately 19% of the over $10 trillion market value of all
U.S. stocks and about 21% of the market value of all stocks listed on the New
York Stock Exchange. Many of the companies represented in the DJIA are
household names and leaders in their respective industries, and their stocks
are broadly held by both individual and institutional investors. Because the
DJIA is so well known and its performance is generally perceived to reflect
that of the overall domestic equity market, it is often used as a benchmark
for investments in equities, mutual funds, and other asset classes.

The DJIA is unique for a market index -- it is price-weighted rather than
market capitalization-weighted. In essence, the DJIA consists of one share of
each of the 30 stocks included in the DJIA. As a result, the relative value of
the stocks in the DJIA are affected only by market price changes. In contrast,
the relative value of stocks comprising other indices are affected by changes
in market capitalization. The market capitalization of a company is determined
by multiplying the market price of its stock by the number of shares
outstanding (or, in other words, available in the market). This distinction
stems from the fact that, when initially created, the DJIA was a simple
average (hence the name), and was computed merely by adding up the prices of
the stocks in the index and dividing that sum by the total number of stocks in
the index. However, it eventually became clear that a method was needed to
smooth out the effects of stock splits and composition changes to prevent
these events from distorting the level of the index. Therefore, a divisor was
created that has been periodically adjusted over time. This divisor, when
divided into the sum of the prices of the stocks in the DJIA, generates the
number that is reported every day in newspapers, on television and radio, and
over the Internet. With the incorporation of the divisor, the DJIA is not
technically an average anymore.

The DJIA is selected and maintained by the editors of The Wall Street Journal
(without consultation with any company that comprises the DJIA), which is
published by Dow Jones & Company, Inc. ("Dow Jones"(SM)). Periodically, the
editors review and make changes to the composition of the DJIA. In selecting a
company's stock to be included in the DJIA, the following criteria are
generally used: (1) the firm is not a utility or a transportation company
(there are separate Dow Jones indices for these sectors); (2) the company has
an excellent reputation in its field; (3) the company has grown successfully;
and (4) the company has a large individual and institutional investor base.
All of the 30 stocks currently included in the DJIA are listed on the New York
Stock Exchange, although this is not a criterion for selection. The inclusion
of any particular company in the DJIA does not constitute a prediction as to
the company's future results of operations or stock market performance. For
the sake of historical continuity, composition changes are rare, and generally
have occurred only after corporate acquisitions or other dramatic shifts in a
company's core business. When the editors do decide that a component stock
needs to be changed, they also review the other stocks in the index to confirm
their continued presence. Thus, when a review is completed, multiple changes
often occur. The most recent composition changes, for example, occurred on
March 17, 1997, and resulted in the withdrawal of Bethlehem Steel Corp.,
Texaco Inc., Westinghouse Electric Corp. (now CBS Corp.), and Woolworth Corp.,

6
<PAGE>

- ------------------------------------------------------------------------------
and the addition of Hewlett-Packard Co., Johnson & Johnson, Travelers Group
Inc. (now Citigroup Inc.), and Wal-Mart Stores Inc.

The DJIA currently consists of the common stock of the following 30 companies:

AlliedSignal Inc. Hewlett-Packard Co.
Aluminum Co. of America International Business Machines Corp.
American Express Co. International Paper Co.
AT&T Corp. J.P. Morgan & Co., Inc.
The Boeing Co. Johnson & Johnson
Caterpillar Inc. McDonald's Corp.
Chevron Corp. Merck & Co., Inc.
Citigroup Inc. Minnesota Mining & Manufacturing Co.
The Coca-Cola Company Philip Morris Cos. Inc.
E.I. du Pont de Nemours and Co. The Procter & Gamble Co.
Eastman Kodak Co. Sears, Roebuck and Co.
Exxon Corp. Union Carbide Corp.
General Electric Co. United Technologies Corp.
General Motors Corp. Wal-Mart Stores, Inc.
The Goodyear Tire & Rubber Co. The Walt Disney Co.

(Copyright) 1998 Dow Jones & Co., Inc.

The following graph shows information regarding the historical performance of
the DJIA. The information in this Prospectus concerning Dow Jones and the DJIA
has been obtained from sources that the Fund believes to be reliable, but the
Fund takes no responsibility for the accuracy of such information. The Fund's
performance is likely to differ from that of the DJIA because of Fund expenses
and transaction costs. Moreover, past performance is not predictive of future
results.

7
<PAGE>

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

History of the DJIA (1897-September 1998)

[THE FOLLOWING TABLE REPRESENTS A BAR GRAPH CHART]

YEAR
ENDED ANNUAL RETURN YEAR-END DIVIDEND YIELD
----- ------------- -----------------------
1896 NA
1897 22.2%
1898 22.5%
1899 9.2%
1900 7.0%
1901 -8.7%
1902 -0.4%
1903 -23.6%
1904 41.7%
1905 38.2%
1906 -1.9%
1907 -37.7%
1908 46.6%
1909 15.0%
1910 -17.9%
1911 0.4%
1912 7.6%
1913 -10.3%
1914 -30.7%
1915 81.7%
1916 -4.2%
1917 -21.7%
1918 10.5%
1919 30.5%
1920 -32.9%
1921 12.7%
1922 21.7%
1923 -3.3%
1924 26.2%
1925 30.0%
1926 0.3%
1927 28.8%
1928 48.2%
1929 -17.2% 5.13%
1930 -33.8% 6.76%
1931 -52.7% 10.78%
1932 -23.1% 7.71%
1933 66.7% 3.40%
1934 4.1% 3.52%
1935 38.5% 3.16%
1936 24.8% 3.92%
1937 -32.8% 7.27%
1938 28.1% 3.22%
1939 -2.9% 4.07%
1940 -12.7% 5.38%
1941 -15.4% 6.84%
1942 7.6% 5.36%
1943 13.8% 4.64%
1944 12.1% 4.31%
1945 26.6% 3.47%
1946 -8.1% 4.23%
1947 2.2% 5.08%
1948 -2.1% 6.49%
1949 12.9% 6.39%
1950 17.6% 6.85%
1951 14.4% 6.07%
1952 8.4% 5.29%
1953 -3.8% 5.74%
1954 44.0% 4.32%
1955 20.8% 4.42%
1956 2.3% 4.60%
1957 -12.8% 4.96%
1958 34.0% 3.43%
1959 16.4% 3.05%
1960 -9.3% 3.47%
1961 18.7% 3.11%
1962 -10.8% 3.57%
1963 17.0% 3.07%
1964 14.6% 3.57%
1965 10.9% 2.95%
1966 -18.9% 4.06%
1967 15.2% 3.34%
1968 4.3% 3.32%
1969 -15.2% 4.24%
1970 4.8% 3.76%
1971 6.1% 3.47%
1972 14.6% 3.16%
1973 -16.6% 4.15%
1974 -27.6% 6.12%
1975 38.3% 4.39%
1976 17.9% 4.12%
1977 -17.3% 5.52%
1978 -3.1% 6.03%
1979 4.2% 6.08%
1980 14.9% 5.64%
1981 -9.2% 6.43%
1982 19.6% 5.17%
1983 20.3% 4.48%
1984 -3.7% 5.00%
1985 27.7% 4.01%
1986 22.6% 3.54%
1987 2.3% 3.67%
1988 11.8% 3.67%
1989 27.0% 3.74%
1990 -4.3% 3.94%
1991 20.3% 3.00%
1992 4.2% 3.05%
1993 13.7% 2.65%
1994 2.1% 2.76%
1995 33.5% 2.28%
1996 26.0% 2.03%
1997 22.6% 1.72%
1998* 0.5% 1.90%

* annualized return (1/1/98 - 9/30/98)

HOW TO BUY AND SELL SHARES
- ------------------------------------------------------------------------------
Investors may purchase shares of the Fund through an account maintained with
Waterhouse Securities, Inc. ("Waterhouse Securities") or certain other
broker-dealers.

If you would like to purchase shares of the Fund through Waterhouse Securities
and you are not already a customer, you need to open a Waterhouse Securities
account by completing and signing a Waterhouse Securities New Account
Application. To request a Waterhouse Dow 30 Fund application, please call
1-800-934-4410. Mail it, together with your check in the amount you wish to
purchase, in the self-addressed stamped envelope provided with the Waterhouse
Securities New Account Application.

Existing Waterhouse Securities customers must have funds in their Waterhouse
Securities account to buy shares of the Fund.

8
<PAGE>

- ------------------------------------------------------------------------------
ACCOUNT PROTECTION. Within your Waterhouse Securities brokerage account, you
have access to other investments available at Waterhouse Securities such as
stocks, bonds, options, and other mutual funds. The securities in your
Waterhouse Securities brokerage account, including shares of the Fund, are
protected up to $75 million for loss of securities (not including loss due to
market fluctuations of securities or economic conditions). The first $500,000
is provided by Securities Investor Protection Corporation (known as "SIPC") of
which $100,000 covers cash. The remaining $74.5 million, which covers
securities only, is provided by a private insurance carrier.

INVESTMENT MINIMUMS. There is a $1,000 minimum for initial purchases and a
$100 minimum for subsequent purchases of shares of the Fund. The Fund may
waive the investment minimums for existing customers of Waterhouse Securities
and otherwise may waive these minimums in its discretion. Initial investment
minimums do not apply to investments made through a periodic investment
program for investors who make a monthly investment of $100 or more or a
quarterly investment of $300 or more or to Waterhouse Securities IRA accounts.

Shares are purchased at the next net asset value (NAV) per share calculated
after an order and payment is received by the Fund. There is no sales charge
to buy shares of the Fund.

The Fund reserves the right to suspend the offering of shares for a period of
time and to reject any specific purchase order, including purchase orders
that, in the reasonable belief of the Fund, have been made by market timers or
short-term traders.

HOW TO BUY SHARES
CUSTOMERS OF WATERHOUSE SECURITIES
Waterhouse Securities brokerage customers may purchase shares of the Fund by
mail or by placing an order directly with a Waterhouse Securities
Representative by telephone at 1-800-934-4443. Waterhouse Securities also
allows the purchase of Fund shares by electronic means for customers with
WATERHOUSE WEBBROKER or Personal Access for Windows Accounts.

Whether by mail, telephone or electronically, please indicate your wish to buy
the Waterhouse Dow 30 Fund and provide the following information:

o your Waterhouse Securities account number

o the dollar or share amount you wish to invest

o the dividend and distribution option you have selected, either:

(a) reinvest dividends and any capital gain distributions; or

(b) pay both dividends and any capital gain distributions in cash; or

(d) reinvest any capital gain distributions and pay dividends in cash.

BY MAIL. You may buy shares of the Fund by mailing a letter of instruction
with the information requested above, signed by one of the registered account
holders in the exact form specified on the account with a check to Waterhouse
Securities, Inc., Processing Center, 525 Washington Boulevard, P.O. Box 2021,
Jersey City, NJ 07303-2021. Checks should be made payable to "Waterhouse
Securities, Inc." and you should write your
9
<PAGE>

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Waterhouse Securities account number on the check. Once you mail your letter,
you may not modify or cancel your instructions.

BY TELEPHONE. You may purchase shares of the Fund by calling your Waterhouse
Securities Representative at 1-800-934-4443.

ELECTRONICALLY. Please refer to product and services information regarding
WATERHOUSE WEBBROKER, Personal Access for Windows and TradeDirect (touch tone
trading). The World Wide Web address for Waterhouse Securities is
http://www.waterhouse.com.

THROUGH PERIODIC INVESTMENT. You may authorize monthly or quarterly amounts of
$100 or more to be withdrawn automatically from your Waterhouse Securities
brokerage account and invested in the Fund. You may sign up for this service
when you open your account at Waterhouse Securities or at another time by
calling your Waterhouse Securities Representative at 1-800-934-4443.

CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than Waterhouse Securities that have entered into a selling agreement
with the Fund's distributor ("Selected Brokers"). Affiliates of Waterhouse
Securities, including National Investors Services Corp., may be Selected
Brokers. Selected Brokers may receive payments as a processing agent from the
Transfer Agent. In addition, Selected Brokers may charge their customers a fee
for their services, no part of which is received by the Fund or Waterhouse
Securities.

Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or
different from, those generally applicable to Waterhouse Securities customers.
Any such charges would reduce the return on an investment in the Fund.
Investors should acquaint themselves with their Selected Broker's procedures
and should read this prospectus in conjunction with any material and
information provided by their Selected Broker. Investors who purchase the
Fund's shares though a Selected Broker may or may not be the shareholder of
record. Selected Brokers are responsible for promptly transmitting purchase,
redemption and other requests to the Fund.

Certain shareholder services, such as periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from
programs available to Waterhouse Securities customers. Shareholders should
contact their Selected Broker for further information. The Fund may confirm
purchases and redemptions of a Selected Broker's customers directly to the
Selected Broker, which in turn will provide its customers with confirmation
and periodic statements. The Fund is not responsible for the failure of any
Selected Broker to carry out its obligations to its customer.

HOW TO SELL SHARES
To sell (redeem) shares of the Fund, you may use any of the methods outlined
above under "How to Buy Shares." Shareholders who have invested through a
Selected Broker should redeem their shares through the Selected Broker. Shares
of the Fund are redeemed at the next NAV calculated after receipt by the Fund
of a redemption request in proper form.

10
<PAGE>

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PAYMENT. The proceeds of the redemption of your Fund shares ordinarily will be
credited to your brokerage account the following business day after receipt by
the Fund of a redemption request in proper form, but not later than seven
calendar days after an order to sell shares is received. If you purchased
shares by check, proceeds may be held in your brokerage account to allow for
clearance of the check (which may take up to ten calendar days). The Fund
reserves the right to make redemption payments in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the Fund's NAV per share.

TELEPHONE TRANSACTIONS
Customers of Waterhouse Securities automatically have the privilege of
purchasing or redeeming Fund shares by telephone. Waterhouse Securities will
employ reasonable procedures to verify the genuineness of telephone redemption
requests. These procedures involve requiring certain personal identification
information. If such procedures are not followed, Waterhouse Securities may be
liable for any losses due to unauthorized or fraudulent instructions. Neither
Waterhouse Securities nor the Fund will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. You
should verify the accuracy of your account statements immediately after you
receive them and contact your Waterhouse Securities Account Officer if you
question any activity in the account.

The Fund reserves the right to refuse to honor requests made by telephone if
the Fund believes them not to be genuine. The Fund also may limit the amount
involved or the number of such requests. During periods of drastic economic or
market change, telephone redemption privileges may be difficult to implement.
The Fund reserves the right to terminate or modify this privilege at any time.

BROKERAGE ACCOUNT REQUIREMENTS
Currently, only customers of Waterhouse Securities and Selected Brokers are
eligible to purchase shares of the Fund. Fund shares may be redeemed
automatically should the brokerage account in which they are held be closed.

SHAREHOLDER INFORMATION
- ------------------------------------------------------------------------------

PRICING YOUR SHARES
The price of a Fund share on any given day is its NAV. The Fund calculates its
NAV per share each day as of the close of the regular session of trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time). Shares are not
priced on days when either the New York Stock Exchange or the Fund's custodian
is closed. Securities owned by the Fund for which market quotations are
readily available are valued at current market value or, in their absence, at
fair value as determined by the Board of Directors pursuant to procedures
approved by the Board. The Fund's shares are sold at the next NAV per share
calculated after an order and payment are accepted by the Fund in the manner
described under "How to Buy and Sell Shares."

RELATIONSHIP TO THE VALUE OF THE DJIA. The Fund intends to conduct its
operations so that its NAV per share on any given day will approximate .001
(or 1/1000) of the closing value of the DJIA (the "Ratio"). There can be no
assurance, however, that the Fund will be able to maintain the NAV per share
at or near the Ratio. For example, as with most mutual funds, each capital
gain distribution will cause a reduction of the NAV per share to the extent of
the amount distributed. In order to maintain the Fund's NAV per share at or
near the Ratio, the Fund may employ certain techniques, including declaring a
share split, share dividend or reverse
11
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share split. Share splits and dividends increase the number of shares
outstanding, resulting in a corresponding decrease in the NAV per share. For
example, a 2-for-1 split would double the number of shares outstanding,
thereby halving the NAV per share. Conversely, reverse splits reduce the
number of shares outstanding. For example, a 1-for-2 reverse share split would
halve the number of shares outstanding, thereby doubling the NAV per share.
These examples are given to illustrate the principles relating to these
techniques; the Fund's use of these techniques is expected to have a more
moderate impact on the Fund's NAV per share. The use of any of these
techniques will not change the absolute dollar value of a shareholder's
investment in the Fund (although the number of shares and the NAV per share
would change) or result in any additional tax burden to shareholders. While it
is the Fund's current intention to maintain the Fund's NAV per share at or
near the Ratio and to utilize the techniques described in this paragraph for
this purpose, the Board of Directors may in the future determine to change
this policy. In the event that the Board of Directors changes this policy,
shareholders will be notified.

DIVIDENDS
It is currently contemplated that dividends of the Fund's net investment
income will be declared daily and paid monthly. No dividend will be declared
on any day on which the Fund does not receive dividend or interest income from
the securities in its portfolio. In addition, any dividends declared will be
net of Fund expenses accrued to date. In the event that the Board of Directors
changes the daily dividend policy, shareholders will be notified. Net capital
gain, if any, realized by the Fund will be distributed at least annually.
Unless a shareholder elects payment in cash, all dividends and distributions
of the Fund are automatically reinvested in additional full and fractional
shares of the Fund at the NAV per share as of the payment date of the dividend
or distribution.

TAXES
Dividends derived from the Fund's net investment income and short-term capital
gains are generally taxable to a shareholder as ordinary income, even when
reinvested in additional Fund shares. Due to the nature of its investments,
the Fund's distributions will consist primarily of ordinary income.
Distributions of net capital gain, if any, realized by the Fund are taxable to
shareholders of the Fund as a long-term capital gain (at different rates
depending on how long the Fund held its assets and when such assets were sold
by the Fund), regardless of the length of time the shareholder may have held
shares in the Fund at the time of distribution.

You should consult your tax adviser regarding specific questions as to
federal, state and local taxes.

12
<PAGE>

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the Year 2000. Currently, the investment manager does not anticipate that the
transition to the 21st century will have any material impact on its ability to
continue to service the Fund at current levels. In addition, the investment
manager has sought assurances from the Fund's other service providers that
they are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and the investment manager will continue to
monitor the situation. At this time, however, no assurance can be given that
the Fund or its service providers have anticipated every step necessary to
avoid any adverse effect on the Fund attributable to the Year 2000 Problem or
that interaction with other non-complying computer systems will not impact
their services.

FUND MANAGEMENT
- ------------------------------------------------------------------------------

INVESTMENT MANAGER
Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, is the
Fund's investment manager. The investment manager oversees the Fund's
investment program, places orders for the Fund's purchases and sales of
portfolio securities and maintains records relating to such purchases and
sales.

For its services, the investment manager receives an annual fee of 0.20% of
the Fund's average daily net assets. The investment manager has agreed to
assume certain expenses of the Fund (or waive its fees) for the first twelve
months of the Fund's operations, so that the total operating expenses payable
by the Fund during the period will not exceed 0.25% of its average daily net
assets. Thereafter, any expense reductions will be voluntary and may be
changed or eliminated at any time without further notice to investors.

In addition to the Fund and the other investment portfolios in the Waterhouse
Investors Family of Funds, the investment manager currently serves as
investment manager to Waterhouse National Bank (of which it is a subsidiary)
and as of December 3, 1998, had total assets under management in excess of $7
billion.

ADMINISTRATOR
As administrator, Waterhouse Securities, an affiliate of the investment
manager, provides certain administrative and management services to the Fund.
The investment manager (and not the Fund) compensates Waterhouse Securities
for providing these services. Waterhouse Securities has entered into an
agreement with Funds Distributor, Inc. ("FDI") whereby FDI performs certain
administrative services for the Portfolios. Waterhouse Securities pays FDI's
fees for providing these services.

DISTRIBUTOR
FDI acts as distributor of the Fund's shares for no compensation.

SHAREHOLDER SERVICING
The Fund's Shareholder Servicing Plan permits the Fund to pay banks,
broker-dealers or other financial institutions (including Waterhouse
Securities and its affiliates) for shareholder support services they provide,
at a rate of up to 0.25% of the average daily net assets of the Fund. These
services may include, among other services, providing general shareholder
liaison services (including responding to shareholder inquiries), providing
information on shareholder investments, and establishing and maintaining
shareholder accounts and records.

<PAGE>

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

FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------

The financial highlights table is intended to help you understand the Fund's
financial performance for the fiscal period from March 31, 1998 (commencement
of operations) through October 31, 1998. Certain information reflects
financial results for a single Fund share. The total return amount in the
table represents the rate that an investor would have lost on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Ernst & Young LLP, whose report, along with
the Fund's financial statements, are included in the annual report, which is
available upon request by calling Customer Service at 1-800-934-4410.

PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................. $ 8.78
-------

INVESTMENT OPERATIONS
Net investment income................................. 08
Net realized and unrealized losses on investments..... (0.19)
-------
TOTAL FROM INVESTMENT OPERATIONS...................... (0.11)
Distributions from net investment income.............. (0.08)
-------
Net asset value, end of period........................ $ 8.59
=======

RATIOS
Ratio of net expenses to average net assets*.......... 0.25%(A)
Ratio of net investment income to average net
assets*............................................. 1.48%(A)
Decrease reflected in above expense ratio due to
waivers/reimbursements by the Investment Manager
and its affiliates.................................. 0.55%(A)

SUPPLEMENTAL DATA
Portfolio turnover rate............................... 8%(A)
Total investment return............................... (1.19%)(B)
Net assets, end of period............................. $62,211,054
===========

* The average net assets for the period was $28,460,853.

(A) Annualized.

(B) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of the period reported and includes
reinvestment of dividends.

14
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DOW JONES & COMPANY, INC. ("DOW JONES"(SM)) DOES NOT GUARANTEE THE ACCURACY
AND/OR THE COMPLETENESS OF THE DOW JONES INDUSTRIAL AVERAGE(SM) OR ANY DATA
INCLUDED THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. DOW JONES MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY WATERHOUSE ASSET MANAGEMENT, INC.
(THE "INVESTMENT MANAGER"), SHAREHOLDERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE DJIA OR ANY DATA INCLUDED THEREIN. DOW JONES MAKES
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
DJIA OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN
NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE
POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS
OR ARRANGEMENTS BETWEEN DOW JONES, THE INVESTMENT MANAGER AND THE FUND.

"Dow Jones(SM)," "Dow Jones Industrial Average(SM)," "DJIA(SM)" and
"DIAMONDS(SM)" are service marks of Dow Jones & Company, Inc. and have been
licensed by the investment manager in connection with the operation of the Fund.
The Fund is not sponsored, endorsed, sold or promoted by Dow Jones or any
corporation that is included in the DJIA. Dow Jones makes no representation or
warranty, express or implied, to the shareholders of the Fund or any member of
the public regarding the advisability of investing in securities generally or in
the Fund particularly. Dow Jones' only relationship to the investment manager is
the licensing of certain trademarks and trade names of Dow Jones and of the
DJIA, which is determined, composed and calculated by Dow Jones without regard
to the investment manager or the Fund. Dow Jones has no obligation to take the
needs of the investment manager or the shareholders of the Fund into
consideration in determining, composing or calculating the DJIA. Dow Jones is
not responsible for and has not participated in the determination of the timing
of, prices at, or quantities of Fund shares to be issued or in the determination
or calculation of the equation by which Fund shares are to be converted into
cash. Dow Jones has no obligation or liability in connection with the
administration, marketing or offering of the Fund.

15
<PAGE>

FOR MORE INFORMATION
- ------------------------------------------------------------------------------
More information on the Fund is available upon request, including the
following:

SHAREHOLDER REPORTS. Additional information about the Fund's investments is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions that
significantly affected the Fund's performance during its last fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI includes more information
about the Fund and its policies. The SAI is on file with the Securities and
Exchange Commission (SEC) and is incorporated by reference into (is legally
considered a part of) this prospectus.

You may request free copies of these materials, along with other information
about the Fund and make shareholder inquiries by contacting:

Waterhouse Securities, Inc.
Mutual Fund Services
100 Wall Street
New York, New York 10005

Telephone: 1-800-457-6516
Hearing impaired: TTY 1-800-933-0555
Email: http://www.waterhouse.com

Text-only versions of the Fund's prospectus can be viewed online or downloaded
from Waterhouse Securities (http://www.waterhouse.com). Other documents
pertaining to the Fund can be viewed online or downloaded from the SEC
(http:// www.sec.gov).

You also can review the Fund's reports and SAI at the SEC's public reference
room in Washington, DC. For a fee, you may obtain this information by writing
the SEC's Public Reference Section, Washington, DC 20549-6009. For more
information about these services, call 1-800-SEC-0330.

The Fund is a series of Waterhouse Investors Family of Funds, Inc., whose
investment company registration number is: 811-9086.

<PAGE>

WATERHOUSE DOW 30 FUND

PROSPECTUS

[Waterhouse Securities, Inc. LOGO]

December 18, 1998

<PAGE>

WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
100 WALL STREET, NEW YORK, NEW YORK 10005
WATERHOUSE SECURITIES, CUSTOMER SERVICE - 1-800-934-4410

STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 18, 1998

This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated December 18, 1998 (the
"Prospectus") for the Money Market Portfolio, the U.S. Government Portfolio and
the Municipal Portfolio, each a series of Waterhouse Investors Family of Funds,
Inc. (the "Company").

Each Portfolio's financial statements and financial highlights for the fiscal
period ended October 31, 1998, including the independent auditors' report
thereon, are included in the Portfolio's Annual Report and are incorporated
herein by reference.

To obtain a free copy of the Prospectus or Annual Report, please write to
Waterhouse Securities, Inc., Customer Service, at 100 Wall Street, New York,
New York 10005, or call 1-800-934-4410.

TABLE OF CONTENTS

PAGE
----

GENERAL INFORMATION ABOUT THE COMPANY...................................... 2

INVESTMENT POLICIES AND RESTRICTIONS ...................................... 2

PORTFOLIO TRANSACTIONS ....................................................20

DIRECTORS AND EXECUTIVE OFFICERS ..........................................22

INVESTMENT MANAGEMENT, DISTRIBUTION
AND OTHER SERVICES ........................................................24

DIVIDENDS AND TAXES .......................................................30

SHARE PRICE CALCULATION ...................................................34

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ............................35

PERFORMANCE ...............................................................35

SHAREHOLDER INFORMATION ...................................................38

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<PAGE>

WATERHOUSE INVESTORS
CASH MANAGEMENT FUNDS
- ------------------------------------------------------------------------------

GENERAL INFORMATION ABOUT THE COMPANY

The Company is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), as an open-end management investment company.
The Company was organized under Maryland law on August 16, 1995 under the name
Waterhouse Investors Cash Management Fund, Inc. and was renamed under its
current name on December 18, 1997. Because the Company offers multiple
portfolios (such as the Portfolios), it is known as a "series company." The
Company currently has four investment portfolios with various investment
objectives and policies. This SAI pertains only to the three Portfolios.

Each Portfolio is "diversified" as that term is defined in the Investment
Company Act. The investment manager of the Portfolios is Waterhouse Asset
Management, Inc. (the "Investment Manager").

INVESTMENT POLICIES AND RESTRICTIONS

Each Portfolio's investment objective, and its investment policies and
restrictions that are designated as fundamental, may not be changed without
approval by holders of a "majority of the outstanding voting securities" of
the Portfolio. Except as otherwise indicated, however, each Portfolio's
investment policies are not fundamental and may be changed without shareholder
approval. As defined in the Investment Company Act, and as used herein, the
term "majority of the outstanding voting securities" of the Company, or of a
particular Portfolio means, respectively, the vote of the holders of the
lesser of (i) 67% of the shares of the Company or such Portfolio present or
represented by proxy at a meeting where more than 50% of the outstanding
shares of the Company or such Portfolio are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Company or such
Portfolio.

The following policies and restrictions supplement those set forth in the
Prospectus. Each Portfolio's investments must be consistent with its
investment objective and policies. Accordingly, not all of the security types
and investment techniques discussed below are eligible investments for each of
the Portfolios.

Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Portfolio's assets that may be invested in any
security or other assets, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after
and as a result of the Portfolio's acquisition of such security or other
asset. Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Portfolio's investment policies and restrictions.

-2-
<PAGE>

As money market funds, the Portfolios rely on Rule 2a-7 under the Investment
Company Act, as amended ("Rule 2a-7"), in their pursuit of a stable net asset
value. Rule 2a-7 imposes certain quality, maturity, liquidity and
diversification standards on the operation of the Portfolios. See "Rule 2a-7
Matters" below.

ASSET-BACKED SECURITIES

Each Portfolio, other than the Municipal Portfolio, may invest in securities
backed by pools of mortgages, loans, receivables or other assets. Payment of
principal and interest may be largely dependent upon the cash flows generated
by the assets backing the securities, and, in certain cases, supported by
letters of credit, surety bonds, or other credit enhancements. The value of
asset-backed securities may also be affected by the creditworthiness of the
servicing agent for the pool, the originator of the loans or receivables, or
the financial institution(s) providing the credit support. The U.S. Government
Portfolio will invest in asset-backed securities only to the extent that such
securities are considered government securities as described below.

BANK OBLIGATIONS

Investments may be made in U.S. dollar-denominated time deposits, certificates
of deposit, and bankers' acceptances of U.S. banks and their branches located
outside of the United States, U.S. savings and loan institutions, U.S.
branches of foreign banks, and foreign branches of foreign banks.

Time deposits are non-negotiable deposits with a banking institution that earn
a specified interest rate over a given period. A certificate of deposit is an
interest-bearing negotiable certificate issued by a bank against funds
deposited in the bank. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. Although the borrower is liable for payment of the
draft, the bank unconditionally guarantees to pay the draft at its face value
on the maturity date. Certificates of deposit and fixed time deposits, which
are payable at the stated maturity date and bear a fixed rate of interest,
generally may be withdrawn on demand by a Portfolio but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation and could reduce the Portfolio's yield.
Although fixed-time deposits do not in all cases have a secondary market,
there are no contractual restrictions on the Portfolio's right to transfer a
beneficial interest in the deposits to third parties. Deposits subject to
early withdrawal penalties or that mature in more than seven days are treated
as illiquid securities if there is no readily available market for the
securities. A Portfolio's investments in the obligations of foreign banks and
their branches, agencies or subsidiaries may be obligations of the parent, of
the issuing branch, agency or subsidiary, or both.

Obligations of U.S. branches and agencies 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 and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office. Investments in

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<PAGE>

foreign bank obligations are limited to banks and branches located in
countries that the Investment Manager believes do not present undue risk.

Investment in foreign bank obligations are subject to the additional risks
associated with foreign securities.

BORROWING

The Portfolios may borrow from banks and engage in reverse repurchase
agreements. As a matter of fundamental policy, each Portfolio will limit
borrowings (including any reverse repurchase agreements) to amounts not in
excess of 33 1/3% of the value of the Portfolio's total assets less
liabilities (other than borrowings). Any borrowings that exceed this amount
will be reduced within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33 1/3% limitation. As a non-fundamental
policy, the Portfolio will borrow money only as a temporary measure for
defensive or emergency purposes, in order to meet redemption requests without
immediately selling any portfolio securities. No Portfolio will borrow from
banks for leverage purposes. As a matter of fundamental policy, a Portfolio
will not purchase any security, other than a security with a maturity of one
day, while reverse repurchase agreements or borrowings representing more than
5% of its total assets are outstanding.

CERTIFICATES OF PARTICIPATION

The Municipal Portfolio may invest in certificates of participation.
Certificates of participation may be variable rate or fixed rate with
remaining maturities of one year or less. A certificate of participation may
be backed by an irrevocable letter of credit or guarantee of a financial
institution that satisfies rating agencies as to the credit quality of the
municipal security supporting the payment of principal and interest on the
certificate of participation. Payments of principal and interest would be
dependent upon the underlying municipal security and may be guaranteed under a
letter of credit to the extent of such credit. The quality rating by a rating
service of an issuer of certificates of participation is based primarily upon
the rating of the municipal security held by the trust and the credit rating
of the issuer of any letter of credit and of any other guarantor providing
credit support to the issue. The Investment Manager considers these factors as
well as others, such as any quality ratings issued by the rating services
identified above, in reviewing the credit risk presented by a certificate of
participation and in determining whether the certificate of participation is
appropriate for investment by the Portfolio. It is anticipated by the
Investment Manager that for most publicly offered certificates of
participation, there will be a liquid secondary market or there may be demand
features enabling the Portfolio to readily sell its certificates of
participation prior to maturity to the issuer or third party. As to those
instruments with demand features, the Portfolio intends to exercise its right
to demand payment from the issuer of the demand feature only upon a default
under the terms of the municipal security, as needed to provide liquidity to
meet redemptions, or to maintain a high quality investment portfolio.

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<PAGE>

COMMERCIAL PAPER AND SIMILAR SECURITIES

Corporate debt securities include corporate bonds and notes and short-term
investments such as commercial paper and variable rate demand notes.
Commercial paper (short-term promissory notes) is issued by companies to
finance their or their affiliates' current obligations and is frequently
unsecured. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.

Variable rate demand notes are unsecured notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Variable rate demand notes are
redeemable upon not more than 30 days' notice. These obligations include
master demand notes that permit investment of fluctuating amounts at varying
rates of interest pursuant to direct arrangement with the issuer of the
instrument. The issuer of these obligations often has the right, after a given
period, to prepay the outstanding principal amount of the obligations upon a
specified number of days' notice. Since these notes are direct lending
arrangements between a Portfolio and the issuer, they are not normally traded.
Although there is no secondary market in the notes, the Portfolio may demand
payment of principal and accrued interest at any time. Variable rate demand
notes must satisfy the same criteria as set forth above for commercial paper.

Loan participation interests represent interests in senior, unsecured, working
capital loans, which rank on the same priority and security level as
commercial paper. They are generally issued by corporate entities that require
some short-term funding but lack the large borrowing need or legal status
required to establish a commercial paper program. These interests are actively
marketed to money market funds and other short-term investors by a number of
dealers. These selling banks are also the originators of the underlying bank
loans. The selling banks reserve the right to allow any secondary marketing or
repurchases of loan parts.

Loan participation interests are sold on a non-recourse basis; in the event of
default of the borrower, an investor would have no direct claim on the
borrower, but rather, would look to the selling bank to proceed against the
borrower. In fact, investors must rely on the selling bank to remit all
principal and interest from loan parts on a regular basis.

A Portfolio will invest only in commercial paper rated in one of the two
highest rating categories by a nationally recognized statistical rating
organization ("NRSRO"), or commercial paper or notes of issuers with a debt
issue (which is comparable in priority and security with the commercial paper
or notes) rated in one of the two highest rating categories for short-term
debt obligations by an NRSRO, or unrated commercial paper or notes of
comparable quality as determined by the Investment Manager, or commercial
paper secured by a letter of credit issued by a domestic or foreign bank rated
in the highest rating category by an NRSRO. For a description of ratings
issued by Moody's Investors Service and Standard & Poor's, two NRSROs, see
"Annex - Ratings of Investments."

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CREDIT ENHANCEMENT FEATURES

Each Portfolio may invest in securities subject to letters of credit or other
credit enhancement features. Such letters of credit or other credit
enhancement features are not subject to federal deposit insurance, and changes
in the credit quality of the issuers of such letters of credit or other credit
enhancement features could cause losses to a Portfolio and affect its share
price.

FOREIGN SECURITIES

Investments may be made in bank obligations of the foreign branches of U.S.
banks, and their non-U.S. branches (Eurodollars), U.S. branches of foreign
banks (Yankee dollars), and foreign branches of foreign banks. Investments
also may be made in U.S. dollar-denominated securities issued or guaranteed by
foreign issuers, including U.S. and foreign corporations or other business
organizations, foreign governments, foreign government agencies or
instrumentalities, and foreign financial institutions.

The obligations of foreign branches of U.S. 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 governmental regulation. Payment of
interest and principal on these obligations may also be affected by
governmental action in the country of domicile of the branch (generally
referred to as sovereign risk). In addition, evidence of ownership of
portfolio securities may be held outside of the United States and the Company
may be subject to the risks associated with the holding of such property
overseas. Various provisions of federal law governing the establishment and
operation of U.S. branches do not apply to foreign branches of U.S. banks.

Obligations of foreign issuers involve certain additional risks. These risks
may include future unfavorable political and economic developments,
withholding taxes, increased taxation, seizures of foreign deposits, currency
controls, interest limitations, or other governmental restrictions that might
affect payment of principal or interest. Additionally, there may be less
public information available about foreign banks and their branches. Foreign
issuers may be subject to less governmental regulation and supervision than
U.S. issuers. Foreign issuers also generally are not bound by uniform
accounting, auditing, and financial reporting requirements comparable to those
applicable to U.S. issuers.

FUNDING AGREEMENTS

Funding agreements are insurance contracts between an investor and an
insurance company. For the issuer (insurance company) they represent senior
obligations under an insurance product. For the investor, and from an Internal
Revenue Service and Securities Exchange Commission perspective, these
agreements are treated as securities. These agreements, like other insurance
products, are backed by claims on the general account of the issuing entity
and rank on the same priority level as other policy holder claims.

Funding agreements are typically issued with a one year final maturity and a
variable interest rate, which may adjust weekly, monthly, or quarterly. Some
agreements carry a

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seven-day put feature. A funding agreement without this feature is
considered illiquid by the Portfolio.

These agreements are regulated by the state insurance board in the state where
they are executed.

GOVERNMENT SECURITIES

Each Portfolio may invest in government securities. The term "government
securities" for this purpose includes marketable securities and instruments
issued or guaranteed by the U.S. government or by its agencies or
instrumentalities, and repurchase agreements with respect to such obligations.
Direct obligations are issued by the U.S. Treasury and include bills,
certificates of indebtedness, notes and bonds. Obligations of U.S. government
agencies and instrumentalities ("Agencies") are issued by government-sponsored
agencies and enterprises acting under authority of Congress. Although
obligations of federal agencies and instrumentalities are not debts of the
U.S. Treasury, in some cases payment of interest and principal on such
obligations is guaranteed by the U.S. government, including, but not limited
to, obligations of the Federal Housing Administration, the Export-Import Bank
of the United States, the Small Business Administration, the Government
National Mortgage Association, the General Services Administration and the
Maritime Administration. In other cases, payment of interest and principal is
not guaranteed, e.g., obligations of the Student Loan Marketing Association,
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation,
Tennessee Valley Authority, Federal Home Loan Bank, and the Federal Farm
Credit Bank. There is no guarantee that the U.S. government will support
securities not backed by its full faith and credit. Accordingly, although
these securities historically have involved little risk of loss of principal
if held to maturity, they may involve more risk that securities backed by the
U.S. government's full faith and credit.

ILLIQUID SECURITIES

Each Portfolio may invest up to 10% of its net assets in illiquid securities.
The term "illiquid securities" for this purpose means securities that cannot
be disposed of within seven days in the ordinary course of business at
approximately the amount at which the Portfolio has valued the securities. In
determining the liquidity of a Portfolio's investments, the Investment Manager
may consider various factors, including (i) the frequency of trades and
quotations, (ii) the number of dealers and prospective purchasers in the
marketplace, (iii) dealer undertakings to make a market, (iv) the nature of
the security (including any demand or tender features), and (v) the nature of
the marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment).

Investments currently considered by the Portfolios to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days upon notice. Also, with regard to the Money Market
Portfolio, the Investment Manager may determine some time deposits to be
illiquid. In the absence of market quotations, illiquid investments are valued
for purposes of monitoring amortized cost valuation at fair value as
determined in good faith by or under the direction of the

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Board of Directors. If through a change in values, net assets, or other
circumstances, a Portfolio were in a position where more than 10% of its net
assets was invested in illiquid securities, it would seek to take appropriate
steps to protect liquidity.

For purposes of the 10% limit on illiquid securities, Rule 144A securities
will not be considered to be illiquid so long as the Investment Manager
determines, in accordance with procedures adopted by the Board of Directors,
that such securities have a readily available market. The Investment Manager
will monitor the liquidity of such securities subject to the supervision of
the Board of Directors.

Municipal lease obligations will not be considered illiquid for purposes of
the Municipal Portfolio's 10% limitation on illiquid securities, provided the
Investment Manager determines that there is a readily available market for
such securities. With respect to municipal lease obligations, the Investment
Manager will consider, pursuant to procedures adopted by the Board of
Directors, the following: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed
by nationally recognized statistical rating organizations in evaluating the
credit quality of a municipal lease obligation, including (i) whether the
lease can be cancelled; (ii) if applicable, what assurance there is that the
assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and
financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g., the
potential for an event of nonappropriation); (v) the legal recourse in the
event of failure to appropriate; and (4) any other factors unique to municipal
lease obligations as determined by the Investment Manager.

INVESTMENT COMPANY SECURITIES

A Portfolio may invest in securities issued by other investment companies to
the extent that such investments are consistent with the Portfolio's
investment objectives and policies and are permissible under the Investment
Company Act. Under the Investment Company Act, the Portfolios may not acquire
collectively more than 3% of the outstanding securities of any one investment
company. In addition, each Portfolio will limit its investments in other
investment companies in accordance with the diversification and quality
requirements of such Portfolio. As a shareholder of another investment
company, a Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that a
Portfolio bears directly in connection with its own operations. Such
investments will be made solely in other no-load money market funds.

MUNICIPAL SECURITIES

Municipal securities include, without limitation, debt obligations issued to
obtain funds for various public purposes, including the construction of a wide
range of public

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facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, public utilities, schools, streets, and water and sewer works.
Other public purposes for which municipal securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to loan to other public institutions and
facilities. In addition, municipal securities include securities issued by or
on behalf of public authorities to finance various privately operated
facilities, such as industrial development bonds or other private activity
bonds that are backed only by the assets and revenues of the non-governmental
user (such as manufacturing enterprises, hospitals, colleges or other
entities).

Municipal securities include municipal bonds, notes and leases. Municipal
securities may be zero-coupon securities. Yields on municipal securities are
dependent on a variety of factors, including the general conditions of the
municipal security markets and the fixed income markets in general, the size
of a particular offering, the maturity of the obligation and the rating of the
issue. Municipal securities historically have not been subject to registration
with the Securities and Exchange Commission ("SEC"), although there have been
proposals that would require registration in the future.

Municipal securities may include other securities similar to those described
below, which are or may become available.

MUNICIPAL BONDS

Municipal bonds can be classified as either "general obligation" or "revenue"
bonds. General obligation bonds are secured by a municipality's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are usually 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 or other tax, but not from general tax revenues. Municipal
bonds include industrial development bonds. Municipal bonds may also be "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer is unable to meet its obligations under the bonds
from current revenues, it may draw on a reserve fund that is backed by the moral
commitment (but not the legal obligation) of the state or municipality that
created the issuer.

Municipal bonds include tax-exempt industrial development bonds, which in most
cases are revenue bonds and generally do not have the pledge of the credit of
the municipality. The payment of the principal and interest on these bonds is
dependent solely on the ability of an initial or subsequent user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Such obligations, which may include lease arrangements, are included
within the term "municipal securities" if the interest paid thereon qualifies
as exempt from federal income tax (other than the Alternative Minimum Tax
(AMT)).

Municipal bonds meet longer term capital needs of a municipal issuer and
generally have maturities of more than one year when issued. General
obligation bonds are used to fund a wide range of public projects, including
construction or improvement of

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schools, highways and roads, and water and sewer systems. The taxes that can
be levied for the payment of debt service may be limited or unlimited as to
rate or amount. Revenue bonds in recent years have come to include an
increasingly wide variety of types of municipal obligations. As with other
kinds of municipal obligations, the issuers of revenue bonds may consist of
virtually any form of state or local governmental entity. Generally, revenue
bonds are secured by the revenues or net revenues derived from a particular
facility, class of facilities, or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from general tax
revenues. Revenue bonds are issued to finance a wide variety of capital
projects including electric, gas, water and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Many of these bonds are additionally secured by a debt service
reserve fund which can be used to make a limited number of principal and
interest payments should the pledged revenues be insufficient. Various forms
of credit enhancement, such as a bank letter of credit or municipal bond
insurance, may also be employed in revenue bond issues. Revenue bonds issued
by housing authorities may be secured in a number of ways, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund. In
recent years, revenue bonds have been issued in large volumes for projects
that are privately owned and operated, as discussed below.

Municipal bonds are considered private activity bonds if they are issued to
raise money for privately owned or operated facilities used for such purposes
as production or manufacturing, housing, health care and other nonprofit or
charitable purposes. These bonds are also used to finance public facilities
such as airports, mass transit systems and ports. The payment of the principal
and interest on such bonds is dependent solely on the ability of the
facility's owner or user to meet its financial obligations and the pledge, if
any, of real and personal property as security for such payment.

While at one time the pertinent provisions of the Internal Revenue Code of
1986, as amended (the "Code") permitted private activity bonds to bear
tax-exempt interest in connection with virtually any type of commercial or
industrial project (subject to various restrictions as to authorized costs,
size limitations, state per capita volume restrictions, and other matters),
the types of qualifying projects under the Code have become increasingly
limited, particularly since the enactment of the Tax Reform Act of 1986. Under
current provisions of the Code, tax-exempt financing remains available, under
prescribed conditions, for certain privately owned and operated facilities of
organizations described in Section 501(c)(3) of the Code, multi-family rental
housing facilities, airports, docks and wharves, mass commuting facilities and
solid waste disposal projects, among others, and for the tax-exempt
refinancing of various kinds of other private commercial projects originally
financed with tax-exempt bonds. In future years, the types of projects
qualifying under the Code for tax-exempt financing could become increasingly
limited.

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MUNICIPAL NOTES

Municipal notes, which may be either "general obligation" or "revenue"
securities, are intended to fulfill the short-term capital needs of the issuer
and generally have maturities not exceeding one year. Examples of municipal
notes are short-term tax anticipation notes, bond anticipation notes, revenue
anticipation notes, construction loan notes, pre-refunded municipal bonds and
tax-free commercial paper. Tax anticipation notes typically are sold to finance
working capital needs of municipalities in anticipation of receiving property
taxes on a future date. Bond anticipation notes are sold on an interim basis in
anticipation of a municipality issuing a longer term bond in the future. Revenue
anticipation notes are issued in expectation of receipt of other types of
revenue such as those available under the Federal Revenue Sharing Program.
Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association) at the end of the project construction period. Pre-refunded
municipal bonds are bonds which are not yet refundable, but for which securities
have been placed in escrow to refund an original municipal bond issue when it
becomes refundable. Tax-free commercial paper is an unsecured promissory
obligation issued or guaranteed by a municipal issuer.

MUNICIPAL LEASE OBLIGATIONS

Municipal lease obligations, which may take the form of a lease, an installment
purchase, or a conditional sale contract, are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities.

Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set
forth requirements that states or municipalities must meet to incur debt.
These may include voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchases, or conditional sale contracts
(which normally provide for title to the leased asset to pass to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting their constitutional and
statutory requirements for the issuance of debt. Many leases and contracts
include "non-appropriation clauses" providing that the governmental issuer has
no obligation to make future payments under the lease or contract unless money
is appropriated for such purposes by the appropriate legislative body on a
yearly or other periodic basis. Non-appropriation clauses free the issuer from
debt issuance limitations. The Portfolio's ability to recover under such a
lease in the event of non-appropriation or default will be limited solely to
the repossession of the leased property in the event foreclosure proves
difficult. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds.

Investment in municipal lease obligations is generally made indirectly (i.e.,
not as a lessor of the property) through a participation interest in such
obligations owned by a bank or other third party. A participation interest
gives the investor a specified,

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undivided interest in the obligation in proportion to its purchased interest
in the total amount of the obligation.

MUNICIPAL PORTFOLIO

The Municipal Portfolio anticipates being as fully invested as practicable in
municipal securities; however, there may be occasions when, as a result of
maturities of portfolio securities, sales of Portfolio shares, or in order to
meet redemption requests, the Portfolio may hold cash that is not earning
income. In addition, there may be occasions when, in order to raise cash to meet
redemptions, the Portfolio may be required to sell securities at a loss.

From time to time, the Portfolio may invest a portion of its assets on a
temporary basis in fixed-income obligations whose interest is subject to
federal income tax. For example, the Portfolio may invest in obligations whose
interest is federally taxable pending the investment or reinvestment in
municipal securities of proceeds from the sale of its shares or sales of
portfolio securities. Should the Portfolio invest in federally taxable
obligations, it would purchase securities that in the Investment Manager's
judgment are of high quality. These would include obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements. In addition, the
Portfolio may deviate from its investment policies and may adopt temporary
defensive measures when significant adverse market, economic, political or
other circumstances require immediate action in order to avoid losses. During
such periods, the Portfolio may temporarily invest its assets, without
limitation, in taxable temporary investments. The Portfolio will purchase
taxable obligations only if they meet its quality requirements.

ADDITIONAL RISK CONSIDERATIONS. The federal bankruptcy statutes relating to
the adjustments of debts of political subdivisions and authorities of states
of the United States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy proceedings without
prior notice to or consent of creditors, which proceedings could result in
material adverse changes in the rights of holders of obligations issued by
such subdivisions or authorities.

Litigation challenging the validity under the state constitutions of present
systems of financing public education has been initiated or adjudicated in a
number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those municipal securities or the tax-free nature of
the interest thereon.

Proposals to restrict or eliminate the federal income tax exemption for
interest on municipal obligations are introduced before Congress from time to
time. Proposals also may be introduced before state legislatures that would
affect the state tax treatment of the Portfolio's distributions. If such
proposals were enacted, the availability of municipal obligations and the
value of the Municipal Portfolio's holdings would be

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affected and the directors would reevaluate the Portfolio's investment
objective and policies.

PUT FEATURES

Put features entitle the holder to sell a security (including a repurchase
agreement) back to the issuer or a third party at any time or at specific
intervals. They are subject to the risk that the put provider is unable to
honor the put feature (purchase the security). Put providers often support
their ability to buy securities on demand by obtaining letters of credit or
other guarantees from domestic or foreign banks. The Investment Manager may
rely on its evaluation of a bank's credit in determining whether to purchase a
security supported by a letter of credit. In evaluating a foreign bank's
credit, the Investment Manager will consider whether adequate public
information about the bank is available and whether the bank may be subject to
unfavorable political or economic developments, currency controls, or other
government restrictions that might affect the bank's ability to honor its
credit commitment. Demand features, standby commitments, and tender options
are types of put features.

REPURCHASE AGREEMENTS

Each Portfolio may enter into repurchase agreements, which are instruments
under which a Portfolio acquires ownership of a security from a broker-dealer
or bank that agrees to repurchase the security at a mutually agreed upon time
and price (which price is higher than the purchase price), thereby determining
the yield during the Portfolio's holding period. Repurchase agreements are, in
effect, loans collateralized by the underlying securities. Maturity of the
securities subject to repurchase may exceed one year. It is each Portfolio's
current policy to engage in repurchase agreement transactions with parties
whose creditworthiness has been reviewed and found satisfactory by the
Investment Manager pursuant to procedures approved by the Board of Directors,
however, it does not presently appear possible to eliminate all risks from
these transactions. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, a Portfolio might have expenses in enforcing its
rights, and could experience losses, including a decline in the value of the
underlying security and loss of income.

REVERSE REPURCHASE AGREEMENTS

Reverse repurchase agreements are transactions in which a Portfolio sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed-upon price on an agreed-upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain
demand agreements, there is no agreed-upon repurchase date and interest
payments are calculated daily, often based upon the prevailing overnight
repurchase rate.

Generally, a reverse repurchase agreement enables a Portfolio to recover for
the term of the reverse repurchase agreement all or most of the cash invested
in the portfolio securities sold and to keep the interest income associated
with those portfolio securities. Such transactions are advantageous only if
the interest cost to the Portfolio of the

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reverse repurchase transaction is less than the cost of obtaining the cash
otherwise. In addition, interest costs on the money received in a reverse
repurchase agreement may exceed the return received on the investments made by
the Portfolio with those monies. The use of reverse repurchase agreement
proceeds to make investments may be considered to be a speculative technique.

While a reverse repurchase agreement is outstanding, a Portfolio will
segregate appropriate liquid assets to cover its obligation under the
agreement. Each Portfolio will enter into reverse repurchase agreements only
with parties whose creditworthiness has been found satisfactory by the
Investment Manager.

RULE 144A SECURITIES

If otherwise consistent with its investment objectives and policies, each
Portfolio, other than the Government Portfolio, may invest in Rule 144A
securities. Rule 144A securities are securities that are not registered under
the Securities Act of 1933 but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the Securities Act of 1933. Any
such security will not be considered illiquid so long as it is determined by
the Company's Board of Directors or the Investment Manager, acting under
guidelines approved and monitored by the Company's Board, that an adequate
trading market exists for that security. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities.

RULE 2A-7 MATTERS

Each Portfolio must comply with the requirements of Rule 2a-7. Under the
applicable quality requirements of Rule 2a-7, the Portfolios may purchase only
U.S. dollar-denominated instruments that are determined to present minimal
credit risks and that are at the time of acquisition "eligible securities" as
defined in Rule 2a-7. Generally, eligible securities are divided into "first
tier" and "second tier" securities. First tier securities are generally those
in the highest rating category (e.g., A-1 by Standard & Poor's) or unrated
securities deemed to be comparable in quality, government securities and
securities issued by other money market funds. Second tier securities are
generally those in the second highest rating category (e.g., A-2 by Standard &
Poor's) or unrated securities deemed to be comparable in quality. See "Annex -
Ratings of Investments."

Except to the limited extent permitted by Rule 2a-7 and except for government
securities, no Portfolio may invest more than 5% of its total assets in the
securities of any one issuer. The Money Market Portfolio may not invest more
than 5% of its total assets in second tier securities. In addition, the Money
Market Portfolio may not invest more than 1% of its total assets or $1 million
(whichever is greater) in the second tier securities of a single issuer. The
Municipal Portfolio's investment in second tier "conduit securities" (as
defined in Rule 2a-7) is limited to 5% of the Portfolio's total assets and,
with respect to second tier conduit securities issued by a single issuer, the
greater of $1 million or 1% of the Portfolio's total assets. Generally,
conduit securities are securities issued to finance non-governmental private
projects, such as retirement

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homes, private hospitals, local housing projects, and industrial development
projects, with respect to which the ultimate obligor is not a government
entity.

Each Portfolio will maintain a dollar-weighted average maturity of 90 days or
less and will limit its investments to securities that have remaining
maturities of 397 calendar days or less or other features that shorten
maturities in a manner consistent with the requirements of Rule 2a-7, such as
interest rate reset and demand features.

SECTION 4(2) PAPER

The Money Market Portfolio may invest in Section 4(2) paper. Section 4(2)
paper is restricted as to disposition under the federal securities laws, and
generally is sold to institutional investors such as the Money Market
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the assistance of
the issuer or investment dealers who make a market in the Section 4(2) paper,
thus providing liquidity. The Investment Manager considers the legally
restricted but readily saleable Section 4(2) paper to be liquid. However,
pursuant to procedures adopted by the Company's Board of Directors, if an
investment in Section 4(2) paper is not determined by the Investment Manager
to be liquid, that investment will be included within the 10% limitation on
illiquid securities. The Investment Manager will monitor the liquidity of the
Portfolio's investments in Section 4(2) paper on a continuous basis.

SECURITIES LENDING

Each Portfolio may lend portfolio securities in amounts up to 33 1/3% of its
respective total assets to brokers, dealers and other financial institutions,
provided such loans are callable at any time by the Portfolio and are at all
times secured by cash or by equivalent collateral. By lending its portfolio
securities, a Portfolio will receive income while retaining the securities'
potential for capital appreciation. As with any extensions of credit, there
are risks of delay in recovery and, in some cases, even loss of rights in the
collateral should the borrower of the securities fail financially. However,
such loans of securities will only be made to firms deemed to be creditworthy
by the Investment Manager.

STANDBY COMMITMENTS

The Municipal Portfolio may acquire standby commitments. Standby commitments
are put options that entitle holders to same day settlement at an exercise
price equal to the amortized cost of the underlying security plus accrued
interest, if any, at the time of exercise. The Municipal Portfolio may acquire
standby commitments to enhance the liquidity of portfolio securities, but only
when the issuers of the commitments present minimal risk of default.
Ordinarily, the Municipal Portfolio may not transfer a standby commitment to a
third party, although it could sell the underlying municipal security to a
third party at any time. The Portfolio may purchase standby commitments
separate from or in conjunction with the purchase of securities subject to
such commitments. In the latter case, the Portfolio would pay a higher price
for the securities acquired, thus reducing their yield to maturity. Standby
commitments will not affect the dollar-

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weighted average maturity of the Portfolio, or the valuation of the securities
underlying the commitments. Issuers or financial intermediaries may obtain
letters of credit or other guarantees to support their ability to buy
securities on demand. The Investment Manager may rely upon its evaluation of a
bank's credit in determining whether to invest in an instrument supported by a
letter of credit. Standby commitments are subject to certain risks, including
the ability of issuers of standby commitments to pay for securities at the
time the commitments are exercised; the fact that standby commitments are not
marketable by the Portfolios; and the possibility that the maturities of the
underlying securities may be different from those of the commitments.

STRIPPED GOVERNMENT SECURITIES

Each of the Portfolios, except the Municipal Portfolio, may purchase U.S.
Treasury STRIPS (Separate Trading of Registered Interest and Principal of
Securities), which are created when the coupon payments and the principal
payment are stripped from an outstanding Treasury bond by the Federal Reserve
Bank. These instruments are issued at a discount to their "face value" and may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors. Bonds
issued by the Resolution Funding Corporation (REFCORP) can also be stripped in
this fashion. REFCORP Strips are eligible investments for the Money Market
Portfolio and the U.S. Government Portfolio. The Money Market Portfolio can
purchase privately stripped government securities, which are created when a
dealer deposits a Treasury security or federal agency security with a
custodian for safekeeping and then sells the coupon payments and principal
payment that will be generated by this security. Proprietary receipts, such as
Certificates of Accrual on Treasury Securities (CATS), Treasury Investment
Growth Receipts (TIGRs), and generic Treasury Receipts (TRs), are stripped
U.S. Treasury securities that are separated into their component parts through
trusts created by their broker sponsors. Bonds issued by the Financing
Corporation (FICO) can also be stripped in this fashion. Because of the view
of the SEC on privately stripped government securities, the Money Market
Portfolio must evaluate them as it would non-government securities pursuant to
regulatory guidelines applicable to all money market funds.

TENDER OPTION BONDS

The Municipal Portfolio may purchase tender option bonds. Tender option bonds
are created by coupling an intermediate- or long-term, fixed-rate, tax-exempt
bond (generally held pursuant to a custodial arrangement) with a tender
agreement that gives the holder the option to tender the bond at its face
value. As consideration for providing the tender option, the sponsor (usually
a bank, broker-dealer, or other financial institution) receives periodic fees
equal to the difference between the bond's fixed coupon rate and the rate
(determined by a remarketing or similar agent) that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. After payment of the tender option fee, the Portfolio
effectively holds a demand obligation that bears interest at the prevailing
short-term tax-exempt rate. Subject to applicable regulatory requirements, the
Municipal Portfolio may buy tender option bonds if the agreement gives the
Portfolio the right to tender the bond to its sponsor no less frequently than
once every 397 days. In selecting tender option bonds

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<PAGE>

for the Portfolio, the Investment Manager will consider the creditworthiness
of the issuer of the underlying bond, the custodian, and the third party
provider of the tender option. In certain instances, a sponsor may terminate a
tender option if, for example, the issuer of the underlying bond defaults on
an interest payment.

VARIABLE OR FLOATING RATE OBLIGATIONS

Each Portfolio may invest in variable rate or floating rate obligations.
Floating rate instruments have interest rates that change whenever there is a
change in a designated base rate while variable rate instruments provide for a
specified periodic adjustment in the interest rate. The interest rate of
variable rate obligations ordinarily is determined by reference to or is a
percentage of an objective standard such as a bank's prime rate, the 90-day
U.S. Treasury Bill rate, or the rate of return on commercial paper or bank
certificates of deposit. Generally, the changes in the interest rate on
variable rate obligations reduce the fluctuation in the market value of such
securities. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less than for fixed-rate
obligations. Each Portfolio determines the maturity of variable rate
obligations and floating rate obligations in accordance with Rule 2a-7, which
allows the Portfolio to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.

WHEN-ISSUED AND DELAYED DELIVERY BASIS SECURITIES

Each Portfolio may invest in when-issued and delayed delivery basis
securities. Typically, no interest accrues to the purchaser until the security
is delivered. When purchasing securities on a when-issued or delayed delivery
basis, a Portfolio assumes the rights and risks of ownership, including the
risk of price and yield fluctuations. A security purchased on a when-issued
basis is subject to changes in market value based upon changes in the level of
interest rates and investors' perceptions of the creditworthiness of the
issuer. Generally such securities will appreciate in value when interest rates
decline and decrease in value when interest rates rise. Because a Portfolio is
not required to pay for securities until the delivery date, these risks are in
addition to the risks associated with each Portfolio's other investments. If a
Portfolio remains substantially fully invested at a time when when-issued or
delayed delivery purchases are outstanding, the purchases may result in a form
of leverage. At the time of delivery of the securities, the value may be more
or less than the purchase price and an increase in the percentage of the
Portfolio's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Portfolio's net
asset value.

When a Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in further gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to
deliver or pay for the securities, a Portfolio could miss a favorable price or
yield opportunity, or could suffer a loss. Each Portfolio may renegotiate
when-issued or delayed delivery transactions after they are entered into, and
may sell underlying securities before they are delivered, which may result in
capital gains or losses. The sale of such securities by the Municipal
Portfolio may result in the realization of gains that are not exempt from
federal income tax.

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<PAGE>

In determining the maturity of portfolio securities purchased on a when-issued
or delayed delivery basis, the Portfolio will consider them to have been
purchased on the date when it committed itself to the purchase. When
when-issued or delayed delivery purchases are outstanding, a Portfolio will
segregate appropriate liquid assets to cover its purchase obligations. A
Portfolio will make commitments to purchase securities on a when-issued or
delayed delivery basis only with the intention of actually acquiring or
disposing of the securities, but the Portfolio reserves the right to sell
these securities before the settlement date if deemed advisable.

ZERO COUPON BONDS

Each Portfolio may invest in zero coupon bonds. Zero coupon bonds do not make
regular interest payments. Instead, they are sold at a discount from their
face value and are redeemed at face value when they mature. Because zero
coupon bonds do not pay current income, their prices can be very volatile when
interest rates change. In calculating its daily dividend, a Portfolio takes
into account as income a portion of the difference between a zero coupon
bond's purchase price and its face value.

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

FUTURE DEVELOPMENTS

Each Portfolio may invest in securities and in other instruments that do not
presently exist but may be developed in the future, provided that each such
investment is consistent with such Portfolio's investment objectives, policies
and restrictions and is otherwise legally permissible under federal and state
laws. The Prospectus and/or SAI will be amended or supplemented as appropriate
to discuss any such new investments.

THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF EACH PORTFOLIO OF
THE COMPANY. EACH PORTFOLIO MAY NOT (UNLESS NOTED OTHERWISE):

(1) with respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government, or
any of its agencies or instrumentalities) if, as a result thereof, (a) more
than 5% of the Portfolio's total assets would be invested in the securities of
that issuer, or (b) the Portfolio would hold more than 10% of the outstanding
voting securities of that issuer;

(2) with respect to the Municipal Portfolio, normally invest less than 80% of
its total assets in obligations issued or guaranteed by states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the income from which
is exempt from federal income tax, but may be subject to federal alternative
minimum tax liability;

(3) issue senior securities, except as permitted under the Investment Company
Act;

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<PAGE>

(4) make short sales of securities or purchase securities on margin (but a
Portfolio may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);

(5) borrow money, except that each Portfolio may: (i) borrow money for
temporary defensive or emergency purposes (not for leveraging or investment),
(ii) engage in reverse repurchase agreements for any purpose, and (iii) pledge
its assets in connection with such borrowing to the extent necessary; provided
that (i) and (ii) in combination do not exceed 33 1/3% of the Portfolio's
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that exceed this amount will be reduced within
three days (not including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation. A Portfolio will not purchase any
security, other than a security with a maturity of one day, while reverse
repurchase agreements or borrowings representing more than 5% of its total
assets are outstanding;

(6) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);

(7) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities;
or, in the case of the Municipal Portfolio, tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or local government,
or a political subdivision, agency or instrumentality of any of the foregoing)
if, as a result, more than 25% of the Portfolio's total assets would be
invested in the securities of companies whose principal business activities
are in the same industry, except that the Money Market Portfolio may invest
more than 25% of its total assets in the financial services industry and the
Municipal Portfolio may invest more than 25% of its total assets in industrial
development bonds related to a single industry. The Money Market Portfolio
specifically reserves the right to invest up to 100% of its assets in
certificates of deposit or bankers' acceptances issued by U.S. banks including
their foreign branches, and U.S. branches of foreign banks, in accordance with
its investment objectives and policies;

(8) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);

(9) buy or sell commodities or commodity (futures) contracts, except for
financial futures and options thereon. This limitation does not apply to
options attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features similar
to options or futures contracts;

(10) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be loaned to other parties, but this limit does
not apply to purchases of debt securities or to repurchase agreements; or

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<PAGE>

(11) purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or to
the extent otherwise permitted by the Investment Company Act; however, a
Portfolio may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objectives, policies, and restrictions as the Portfolio.

THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL. EACH PORTFOLIO DOES NOT CURRENTLY INTEND:

(i) To purchase a security (other than a security issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities, or a security
subject to a "guarantee issued by a non-controlled person," as defined in
Rule 2a-7) if, as a result, more than 5% of its total assets would be invested
in the securities of a single issuer, provided that a Portfolio may invest up
to 25% of its total assets in the first tier securities of a single issuer for
up to three business days;

(ii) to purchase or hold any security if, as a result, more than 10% of its
net assets would be invested in securities that are deemed to be illiquid
because they are subject to legal or contractual restrictions on resale or
because they cannot be sold or disposed of in the ordinary course of business
at approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest
within seven days upon notice and securities restricted as to disposition
under federal securities laws, except for commercial paper issued in reliance
on the "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 ("Section 4(2) paper") and securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933
("Rule 144A securities"), which are determined to be liquid pursuant to
procedures adopted by the Company's Board of Directors; or

(iii) to invest in financial futures and options thereon.

PORTFOLIO TRANSACTIONS

Portfolio transactions are undertaken principally to pursue the objective of
each Portfolio in relation to movements in the general level of interest
rates, to invest money obtained from the sale of Portfolio shares, to reinvest
proceeds from maturing portfolio securities and to meet redemptions of
Portfolio shares. This may increase or decrease the yield of a Portfolio
depending upon the Investment Manager's ability to correctly time and execute
such transactions. Each Portfolio normally intends to hold its portfolio
securities to maturity. The Portfolios do not intend to trade portfolio
securities although they may do so to take advantage of short-term market
movements.

The Investment Manager places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment
Manager. In placing orders for the Portfolio's portfolio transactions, the
Investment Manager seeks "best execution" (i.e., prompt and efficient
execution at the most favorable prices).

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<PAGE>

Consistent with the policy of "best execution," orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, the Investment Manager may give consideration to those firms that
provide market, statistical and other research information to the Company and
the Investment Manager, although the Investment Manager is not authorized to
pay higher prices to firms that provide such services. Any research benefits
derived are available for all clients. Because statistical and other research
information is only supplementary to the Investment Manager's research efforts
and still must be analyzed and reviewed by its staff, the receipt of research
information is not expected to significantly reduce its expenses. In no event
will a broker-dealer that is affiliated with the Investment Manager receive
brokerage commissions in recognition of research services provided to the
Investment Manager.

The Investment Manager may employ broker-dealer affiliates of the Investment
Manager (collectively "Affiliated Brokers") to effect portfolio transactions
for the Portfolios, provided certain conditions are satisfied. Payment of
brokerage commissions to Affiliated Brokers is subject to Section 17(e) of the
Investment Company Act and Rule 17e-1 thereunder, which require, among other
things, that commissions for transactions on securities exchanges paid by a
registered investment company to a broker which is an affiliated person of
such investment company, or an affiliated person of another person so
affiliated, not exceed the usual and customary brokers' commissions for such
transactions. The Board of Directors, including a majority of the directors
who are not "interested persons" of the Company within the meaning of such
term as defined in the Investment Company Act ("Disinterested Directors"), has
adopted procedures to ensure that commissions paid to affiliates of the
Investment Manager by the Fund satisfy the standards of Section 17(e) and Rule
17e-1.

The investment decisions for each Portfolio will be reached independently from
those for each other and for other accounts, if any, managed by the Investment
Manager. On occasions when the Investment Manager deems the purchase or sale
of securities to be in the best interest of one or more Portfolios as well as
other clients of the Investment Manager, the Investment Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or sold,
as well as the expenses incurred in the transaction, will be made by the
Investment Manager in accordance with its policy for aggregation of orders, as
in effect from time to time. In some cases this procedure may affect the size
or price of the position obtainable for a Portfolio.

The Company expects that purchases and sales of portfolio securities usually
will be principal transactions. Purchases and sales of fixed income portfolio
securities are generally effected as principal transactions. These securities
are normally purchased directly from the issuer or from an underwriter or
market maker for the securities.

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<PAGE>

There usually are no brokerage commissions paid for such purchases. Purchases
from underwriters of portfolio 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 ask prices. In the case
of securities traded in the over-the-counter markets, there is generally no
stated commission, but the price usually includes an undisclosed commission or
markup.

DIRECTORS AND EXECUTIVE OFFICERS

Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law.

The directors and executive officers of the Company, along with their
principal occupations over the past five years and their affiliations, if any,
with the Investment Manager and Funds Distributor, Inc. ("FDI"), the Company's
distributor, are listed below.

RICHARD W. DALRYMPLE, Director. Mr. Dalrymple has served as a Director of each
of the Company and National Investors Cash Management Fund, Inc. ("NICM")
since December 12, 1995 and February 26, 1998, respectively. Mr. Dalrymple has
been the President of Teamwork Management, Inc. since January 1997. Mr.
Dalrymple has served as a Director of Dime Bancorp, Inc. since 1990. Mr.
Dalrymple has been a Trustee of The Shannon McCormack Foundation since 1988,
the Kevin Scott Dalrymple Foundation since 1993 and a Director of National
Center for Disability Services since 1983. From 1990 through 1995, Mr.
Dalrymple served as President and Chief Operating Officer of Anchor Bank. From
1985 through 1990, Mr. Dalrymple worked for the Bank of Boston. During this
time, Mr. Dalrymple served as the President of Massachusetts Banking and the
Southern New England Region, and as Department Executive of Banking Services.
He is 54 years old. Mr. Dalrymple's address is 45 Rockefeller Plaza, New York,
NY 10111.

CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director of each of the
Company and NICM since February 26, 1998. Since March 1997, Ms. Lewis has
served as President of The CBL Group providing professional services to
clients in the securities and healthcare industries. Ms. Lewis spent over 30
years at the United States Securities and Exchange Commission (SEC) in various
positions including Senior Financial Analyst, Branch Chief and Assistant
Director. In September 1997, Ms. Lewis was appointed a member of the Board of
Governors of the Philadelphia Stock Exchange. Presently, Ms. Lewis is a member
of the Board of Directors of the Metropolitan Washington Airports Authority
and a director on various healthcare and hospital Boards, including Chairman
Elect of the Board of Trustees of the American Hospital Association. She is 62
years old. Ms. Lewis' address is 2920 W Street Southeast, Washington, DC 20020.

GEORGE F. STAUDTER(*), Director. Mr. Staudter has served as Chairman of the
Board of Directors of the Company since December 12, 1995. Mr. Staudter is a

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Director of Koger Equity, Inc. Mr. Staudter served as a Director of Waterhouse
Investor Services, Inc. from 1987 to 1996. Since 1989, Mr. Staudter has served
as a Managerial and Financial Consultant, rendering investment management, tax
and estate planning services to individual clients, and strategic planning
advice to corporate clients. From 1993 through 1994, Mr. Staudter was the
Chief Executive Officer and served on the Board of Directors for Family Steak
Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter was a principal
and a principal shareholder of Douglas Capital Management, Inc. In this
capacity, Mr. Staudter served as a member of the Investment Committee and
provided investment counseling and tax and financial planning services. He is
67 years old. Mr. Staudter's address is 9637 Preston Trail West, Ponte Vedra,
FL 32082.

LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of the Company
since December 12, 1995. Mr. Toal is Chairman, President and Chief Executive
Officer of Dime Bancorp, Inc., and its subsidiary, The Dime Savings Bank of New
York, FSB (the "Dime"). He joined the Dime in 1991 as President and Chief
Operating Officer. Prior to joining the Dime, Mr. Toal had been President of
PSFS, a $10 billion Philadelphia thrift from 1988 to 1991. Mr. Toal spent 26
years at The Chase Manhattan Bank, N.A., in various senior management positions
in consumer, corporate and international banking areas in the United States,
Europe and Asia. He is 60 years old. Mr. Toal's address is 589 Fifth Avenue, 3rd
Floor, New York, NY 10017.

GEORGE A. RIO(**), President, Treasurer and Chief Financial Officer. Mr. Rio
is Executive Vice President and Director of Client Services of FDI since April
1998. From June 1995 to March 1998, Mr. Rio was Senior Vice President and
Senior Key Account Manager for Putnam Mutual Funds. From May 1994 to June
1995, Mr. Rio was Director of Business Development for First Data Corporation.
From September 1983 to May 1994, Mr. Rio was Senior Vice President and Manager
of Client Services and Director of Internal Audit at The Boston Company. He is
43 years old.

CHRISTOPHER J. KELLEY(**), Vice President and Secretary. Mr. Kelley is Vice
President and Senior Associate General Counsel of FDI, and an officer of
certain investment companies distributed by FDI or its affiliates. From April
1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group.
From October 1992 to March 1994, Mr. Kelley was employed by Putnam Investments
in legal and compliance capacities. He is 34 years old.

(*) THIS DIRECTOR IS AN "INTERESTED PERSON" OF THE COMPANY.
(**) ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109

On December 4, 1998, the officers and directors of the Company, as a group,
owned less than 1% of the outstanding shares of the Fund. Officers and directors
who are interested persons of the Investment Manager or FDI receive no
compensation from the Company. The Company expects to pay or accrue

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total directors' fees of approximately $60,000 per year to those directors who
are not designated above as interested persons. Directors who are interested
persons of the Company may be compensated by the Investment Manager for their
services to the Company.

The Company pays its directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The amounts of compensation that the
Company paid to each director for the fiscal year ended October 31, 1998, are
as follows:

<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Estimated
Compensation Benefits Accrued Annual Total Compensation
Name of Board from as Part of Benefits Upon from Fund Complex (1)
Member Company (5) Company's Expenses Retirement Paid to Board Members (5)
------ ----------- ------------------ ------------ -------------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $19,125 $0 $0 $19,125

Carolyn B. Lewis (2) $11,125 $0 $0 $11,125

Theodore Rosen (3) $10,000 $0 $0 $10,000

George F. Staudter (4) $0 $0 $0 $0

Lawrence J. Toal $20,000 $0 $0 $20,000
</TABLE>

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

(1) "Fund Complex" includes the Company and NICM, an investment company also
advised by the Investment Manager.
(2) Became a director of the Company and NICM on February 26, 1998.
(3) Served as a director of the Company through February 26, 1998.
(4) Interested director of the Company.
(5) Amounts do not include reimbursed expenses for attending Board meetings
or compensation from the Investment Manager or its affiliates.

INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES

Investment Management

Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of each Portfolio. Pursuant to the Investment Management Agreement
with the Company on behalf of each Portfolio, the Investment Manager manages
each Portfolio's investments in accordance with its stated policies and
restrictions, subject to oversight by the Company's Board of Directors.

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<PAGE>

other portfolios of the Company and to the Bank and as of December 3, 1998 had
total assets under management in excess of $7 billion. Personnel of the
Investment Manager may invest in securities for their own account pursuant to a
code of ethics that sets forth all employees' fiduciary responsibilities
regarding the Company, establishes procedures for personal investing and
restricts certain transactions.

The Investment Management Agreement will continue in effect only if such
continuance is specifically approved at least annually by (i) a majority vote
of the directors who are not parties to such agreement or interested persons
of any such party except in their capacity as directors of the Company, cast
in person at a meeting called for such purpose, and (ii) by the vote of a
majority of the outstanding voting securities of each Portfolio, or by the
Company's Board of Directors. The agreement may be terminated as to any
Portfolio at any time upon 60 days prior written notice, without penalty, by
either party, or by a majority vote of the outstanding shares of a Portfolio
with respect to that Portfolio, and will terminate automatically upon
assignment. The Investment Management Agreement was approved by the Board of
Directors of the Company, including a majority of the Disinterested Directors
who have no direct or indirect financial interest in the Agreement, and by the
shareholders of each Portfolio.

The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by
a Portfolio in connection with the matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross
negligence on the Investment Manager's part in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under such agreement. The services of the Investment
Manager to the Portfolios under the Investment Management Agreement are not
exclusive and it is free to render similar services to others.

For the investment management services furnished to each Portfolio, such
Portfolio pays the Investment Manager an annual investment management fee,
accrued daily and payable monthly, on a graduated basis equal to 0.35% of the
first $1 billion of average daily net assets of each such Portfolio, 0.34% of
the next $1 billion, and 0.33% of average daily net assets of each Portfolio
over $2 billion. The Investment Manager agreed to waive a portion of its fee
payable by the Municipal Portfolio through October 15, 1998, which had the
effect of limiting the actual fee paid annually by the Portfolio during that
period to 0.25% of average daily net assets.

The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of each Portfolio's operating expenses.
Expense reimbursements by the Investment Manager or its affiliates will
increase each Portfolio's total returns and yield.

Total fees paid by the Company to the Investment Manager for the fiscal years
ended October 31, 1998, October 31, 1997 and October 31, 1996 were $7,895,374,
$5,512,519 and $3,339,325 for the Money Market Portfolio, $1,602,146,
$1,394,481 and $890,354 for the U.S. Government Portfolio, and $1,092,409,
$883,242 and $595,954 for the

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<PAGE>

Municipal Portfolio, respectively. For the fiscal years ended October 31, 1998
and October 31, 1997, the Investment Manager voluntarily waived $312,133 and
$252,458, respectively, of its investment management fee for the Municipal
Portfolio. For the fiscal year ended October 31, 1996, the Investment Manager
voluntarily waived $8,425, $828 and $171,894 of its investment management fee
for the Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio, respectively.

Administration

Pursuant to an Administration Agreement with the Company, Waterhouse
Securities, as Administrator, provides administrative services to each of the
Portfolios. Administrative services furnished by Waterhouse Securities
include, among others, maintaining and preserving the records of the Company,
including financial and corporate records, computing net asset value,
dividends, performance data and financial information regarding the Company,
preparing reports, overseeing the preparation and filing with the SEC and
state securities regulators of registration statements, notices, reports and
other material required to be filed under applicable laws, developing and
implementing procedures for monitoring compliance with regulatory
requirements, providing routine accounting services, providing office
facilities and clerical support as well as providing general oversight of
other service providers. For its services as administrator, Waterhouse
Securities receives from each Portfolio an annual fee, payable monthly, of
0.10% of average daily net assets of such Portfolio. The fee is accrued daily
as an expense of each Portfolio. Prior to June 11, 1997, the Company retained
the Investment Manager to serve as Administrator, for which it received an
annual fee of 0.10% of each Portfolio's average daily net assets.

Total fees paid by the Company to Waterhouse Securities for the fiscal year
ended October 31, 1998 were $2,302,554 for the Money Market Portfolios, $457,756
for the U.S. Government Portfolio and $312,090 for the Municipal Portfolio. For
the fiscal year ended October 31, 1998, Waterhouse Securities waived $1,788 of
its fee with respect to the Municipal Portfolio. Total fees paid by the Company
to Waterhouse Securities and the Investment Manager, as Administrator, for the
fiscal year ended October 31, 1997 were $1,591,931 for the Money Market
Portfolio, $398,423 for the U.S. Government Portfolio and $252,319 for the
Municipal Portfolio, respectively. Total fees paid by the Company to the
Investment Manager, as Administrator, for the fiscal year ended October 31, 1996
were $956,680 for the Money Market Portfolio, $254,387 for the U.S. Government
Portfolio and $170,273 for the Municipal Portfolio. For the fiscal year ended
October 31, 1996, the Investment Manager waived or reimbursed $308, $1,730 and
$14,089 of its administration fee for the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio, respectively.

Waterhouse Securities has entered into a Subadministration Agreement with FDI
pursuant to which FDI performs certain of the foregoing administrative
services for the Company. Under this Agreement, the Investment Manager pays
FDI's fees for providing such services. In addition, the Investment Manager
may enter into subadministration agreements with other persons to perform such
services from time to time.

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The Administration Agreement will continue in effect only if such continuance
is specifically approved at least annually by a vote of the Board of
Directors, including a majority of Disinterested Directors who have no direct
or indirect financial interest in the Agreement. The Agreement was approved by
the Board of Directors of the Company, including a majority of the
Disinterested Directors of the Company who have no direct or indirect
financial interest in the Agreement. Each Portfolio or Waterhouse Securities
may terminate the Administration Agreement on 60 days' prior written notice
without penalty. Termination by a Portfolio may be by vote of the Company's
Board of Directors, or a majority of the Disinterested Directors of the
Company who have no direct or indirect financial interest in the Agreement, or
by a majority of the outstanding voting securities of such Portfolio. The
Agreement terminates automatically in the event of its "assignment" as defined
in the Investment Company Act.

The Administration Agreement provides that Waterhouse Securities will not be
liable for any error of judgment or of law, or for any loss suffered by a
Portfolio in connection with the matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross
negligence on Waterhouse Securities' part in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under such agreement.

The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt,
Waterhouse Securities and the Investment Manager believe that such laws should
not preclude them from acting as administrator and investment manager,
respectively, to the Company. Accordingly, Waterhouse Securities under the
Administration Agreement and the Investment Manager under the Investment
Management Agreement will only perform administrative and investment
management servicing functions, respectively. However, judicial and
administrative decisions or interpretations of such laws as well as changes in
either state statutes or regulations relating to the permissible activities of
banks or their subsidiaries or affiliates could prevent Waterhouse Securities
or the Investment Manager from continuing to perform all or a part of their
administration or investment management activities, respectively. If
Waterhouse Securities or the Investment Manager were prohibited from so
acting, alternative means of continuing such services would be sought by the
Board of Directors of the Company.

DISTRIBUTION

The distributor of the Company is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Company
and FDI, FDI has the exclusive right to distribute shares of the Company. FDI
may enter into dealer or agency agreements with affiliates of the Investment
Manager and other firms for the sale of Company shares. FDI has entered into
such an agency agreement with Waterhouse Securities. FDI receives no fee from
the Company under the Distribution Agreement for acting as distributor to the
Company. FDI also acts as a subadministrator for the Company.

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<PAGE>

The Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by a vote of the Board of Directors,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement was approved by the Board
of Directors of the Company, including a majority of Disinterested Directors
who have no direct or indirect financial interest in the Agreement. Each
Portfolio may terminate the Distribution Agreement on 60 days' prior written
notice without penalty. Termination by a Portfolio may be by vote of a
majority of the Company's Board of Directors, or a majority of the
Disinterested Directors, or by a majority of the outstanding voting securities
of such Portfolio. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.

SHAREHOLDER SERVICING

The Board of Directors of the Company has approved a Shareholder Servicing
Plan ("Servicing Plan") pursuant to which each Portfolio may pay banks,
broker-dealers or other financial institutions that have entered into a
shareholder services agreement with the Company ("Servicing Agents") in
connection with shareholder support services that they provide. Payments under
the Servicing Plan will be calculated daily and paid monthly at an annual rate
that may not exceed 0.25% of the average daily net assets of each Portfolio.
The shareholder services provided by the Servicing Agents pursuant to the
Servicing Plan may include, among other services, providing general shareholder
liaison services (including responding to shareholder inquiries), providing
information on shareholder investments, establishing and maintaining shareholder
accounts and records, and providing such other similar services as may be
reasonably requested.

The Servicing Plan was approved by the Board of Directors, including a
majority of the Disinterested Directors who have no direct or indirect
financial interest in the Plan or the Shareholder Services Agreement. The
Servicing Plan continues in effect as long as such continuance is specifically
so approved at least annually. The Servicing Plan may be terminated by the
Company with respect to any Portfolio by a vote of a majority of the
Disinterested Directors who have no direct or indirect financial interest in
the Plan or any agreements relating thereto.

Pursuant to a Shareholder Services Agreement between the Company and
Waterhouse Securities, Waterhouse Securities has agreed to provide shareholder
services to each Portfolio pursuant to the Shareholder Servicing Plan. The
Company may enter into similar agreements with other service organizations,
including broker-dealers and banks whose clients are shareholders of the
Company, to act as Servicing Agents and to perform shareholder support
services with respect to such clients.

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<PAGE>

Directors who have no direct or indirect financial interest in the Agreement.
Each Portfolio or Waterhouse Securities may terminate the Shareholder Services
Agreement on 60 days' prior written notice without penalty. Termination by a
Portfolio may be by vote of the Company's Board of Directors, or a majority of
the Disinterested Directors who have no direct or indirect financial interest in
the Agreement. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.

Total fees paid by the Company to Waterhouse Securities for the fiscal years
ended October 31, 1998, October 31, 1997 and October 31, 1996 were $4,668,165,
$3,183,862 and $1,913,360 for the Money Market Portfolio, $796,798, $677,320 and
$432,457 for the U.S. Government Portfolio, and $366,257, $277,561 and $187,300
for the Municipal Portfolio, respectively. For the fiscal year ended October 31,
1998, Waterhouse Securities voluntarily waived $3,308,557, $502,792 and $74,948
of its shareholder servicing fee for the Money Market Portfolio, the U.S.
Government Portfolio and the Municipal Portfolio, respectively. For the fiscal
year ended October 31, 1997, Waterhouse Securities voluntarily waived $1,199,480
and $291,674 of its fee for the Money Market Portfolio and the U.S. Government
Portfolio, respectively. For the fiscal year ended October 31, 1996, Waterhouse
Securities voluntarily waived $1,129,420, $320,311 and $105,266 of its fee for
the Money Market Portfolio, the U.S. Government Portfolio and the Municipal
Portfolio, respectively.

Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Company in connection with the investment of
fiduciary assets in Company shares. Servicing Agents, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers are urged to consult their legal advisers before investing such
assets in Company shares.

TRANSFER AGENT AND CUSTODIAN

The Bank (also referred to as the "Transfer Agent") serves as transfer and
dividend disbursing agent for each Portfolio. For the services provided under
the Transfer Agency and Dividend Disbursing Agency Agreement, which include
furnishing periodic and year-end shareholder statements and confirmations of
purchases and sales, reporting share ownership, aggregating, processing and
recording purchases and redemptions of shares, processing dividend and
distribution payments, forwarding shareholder communications such as proxies,
shareholder reports, dividend notices and prospectuses to beneficial owners,
receiving, tabulating and transmitting proxies executed by beneficial owners and
sending year-end tax reporting to shareholders and the Internal Revenue Service,
the Transfer Agent receives an annual fee, payable monthly, of 0.20% of each
Portfolio's average daily net assets. The Transfer Agent is permitted to
subcontract any or all of its functions with respect to all or any portion of a
Portfolio's shareholders to one or more qualified sub-transfer agents or
processing agents, which may be affiliates of the Transfer Agent, FDI or
broker-dealers authorized to sell shares of a Portfolio pursuant to a selling
agreement with FDI. The Transfer Agent is permitted to compensate those agents
for their services; however, that

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<PAGE>

compensation may not increase the aggregate amount of payments by the Portfolios
to the Transfer Agent.

The Transfer Agent has entered into a Sub-Transfer Agency and Dividend
Disbursing Agency Agreement with National Investor Services Corp., an
affiliate of the Investment Manager, pursuant to which it performs certain of
the foregoing transfer and dividend disbursing agency services for the
Company. Under this agreement, the Transfer Agent compensates the Sub-Transfer
and Dividend Disbursing Agent for providing such services. In addition, the
Transfer Agent may enter into sub-transfer agency and dividend disbursing
agency agreements with other persons to perform such services from time to
time.

Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian"), 90
Washington Street, New York, NY 10286, acts as the custodian of each
Portfolio's assets. The Custodian, among other things, maintains a custody
account or accounts in the name of each Portfolio, receives and delivers all
assets for the Portfolio upon purchase and upon sale or maturity, collects all
income and other payments and distributions with respect to the assets of the
Portfolio, and pays expenses of the Portfolio.

OTHER EXPENSES

Each Portfolio pays the expenses of its operations, including the costs of
shareholder and board meetings, the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent,
reports and notices to shareholders, the costs of calculating net asset value,
brokerage commissions or transaction costs, taxes, interest, insurance
premiums, Investment Company Institute dues and the fees and expenses of
qualifying the Portfolio and its shares for distribution under federal and
state securities laws. In addition, each Portfolio pays for typesetting,
printing and mailing proxy material, prospectuses, statements of additional
information, notices and reports to existing shareholders, and the fees of the
Disinterested Directors. Each Portfolio is also liable for such nonrecurring
expenses as may arise, including costs of any litigation to which the Company
may be a party, and any obligation it may have to indemnify the Company's
officers and directors with respect to any litigation. The Company's expenses
generally are allocated among its investment portfolios (such as the
Portfolios) on the basis of relative net assets at the time of allocation,
except that expenses directly attributable to a particular investment
portfolio are charged to that portfolio.

DIVIDENDS AND TAXES

DIVIDENDS

On each day that the net asset value ("NAV") of a Portfolio is determined,
such Portfolio's net investment income will be declared at 4:00 p.m. (Eastern
time) as a daily dividend to shareholders of record as of such day's last
calculation of NAV.

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<PAGE>

Each Portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Portfolio consists of
accrued interest income plus or minus amortized discount or premium minus
accrued expenses. Expenses of each Portfolio are accrued each day.

Because each Portfolio's income is entirely derived from interest or gains
from the sale of debt instruments, dividends from a Portfolio will not qualify
for the dividends received deduction available to corporate shareholders.

Distributions of income realized with respect to market discount will be made,
at least annually, as determined by the Board of Directors, to maintain each
Portfolio's NAV at $1.00 per share.

CAPITAL GAIN DISTRIBUTIONS

If a Portfolio realizes any net capital gain, such gain will be distributed at
least once during the year as determined by the Board of Directors, to
maintain its NAV at $1.00 per share. Short-term capital gain distributions by
a Portfolio are taxable to shareholders as ordinary income, not as capital
gain. Any realized capital loss to the extent not offset by realized capital
gain will be carried forward. It is not anticipated that a Portfolio will
realize any capital gain from the sale of securities held for more than 12
months, but if it does so, this gain will be distributed annually.

TAX STATUS OF THE COMPANY

The Fund intends to continue to meet the requirements of the Code applicable
to regulated investment companies and to distribute all of its investment
company taxable income and net realized gain, if any, to shareholders.
Accordingly, it is not anticipated that any Portfolio will be liable for
Federal income or excise taxes to which it would otherwise be subject.
Qualification as a regulated investment company does not, of course, involve
governmental supervision of management or investment practices or policies.

Each Portfolio is treated as a separate entity from the other Portfolios for
tax purposes.

STATE AND LOCAL TAX ISSUES. Shareholders are urged to consult with their tax
advisers as to whether any of the dividends paid by the U.S. Government
Portfolio are exempt from state and local taxation. The exemption from state
and local income taxation does not preclude states from assessing other taxes
on the ownership of U.S. government securities whether such securities are
held directly or through the Company.

FEDERAL INCOME TAX ISSUES - MUNICIPAL PORTFOLIO. Distributions from the
Municipal Portfolio will constitute exempt-interest dividends to the extent of
the Portfolio's tax-exempt interest income (net of expenses and amortized bond
premium). Exempt-interest dividends distributed to shareholders of the
Municipal Portfolio are excluded from gross income for federal income tax
purposes. However, shareholders required to file a federal income tax return
will be required to report the receipt of exempt-interest dividends on their
returns. Moreover, while exempt-interest dividends are excluded

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<PAGE>

from gross income for federal income tax purposes, they may be subject to
alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences as discussed below. Distributions by the Municipal
Portfolio of any investment company taxable income (which include any
short-term capital gains and market discount) will be taxable to shareholders.

Dividend distributions resulting from a recharacterization of gain from the
sale of bonds purchased with market discount are not considered income for
purposes of the Municipal Portfolio's policy of investing so that at least 80%
of its income is free from federal income tax.

AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of
tax preference includable in AMTI for both corporate and noncorporate
taxpayers. Corporate investors should note that 75% of the amount by which
adjusted current earnings (which includes all tax-exempt interest) exceeds the
AMTI of the corporation constitutes an upward adjustment for purposes of the
corporate AMT. Shareholders are advised to consult their tax advisers with
respect to alternative minimum tax consequences of an investment in the
Municipal Portfolio.

Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to federal
income tax. Receipt of exempt-interest dividends may result in other
collateral federal income tax consequences to certain taxpayers. Prospective
investors should consult their own tax advisers as to such consequences.

Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund portfolio which distributes exempt-interest dividends during the
year is not deductible for federal income tax purposes. Further, the Municipal
Portfolio may not be an appropriate investment for (i) persons who are
"substantial users" of facilities financed by industrial development bonds
held by the Municipal Portfolio or are "related persons" to such users; or
(ii) persons who are investing through a tax-exempt retirement plan, IRA or
Keogh Account.

A separate tax is imposed on corporations at a rate of 0.12 percent of the
excess of such corporation's "modified" AMTI over $2,000,000. A portion of
tax-exempt interest, including exempt-interest dividends, may be includable in
modified AMTI. Corporate shareholders are advised to consult with their tax
advisers with respect to the consequences of SARA.

The Municipal Portfolio purchases municipal obligations based on opinions of
bond counsel regarding the federal income tax status of the obligations. These
opinions generally will be based on covenants by the issuers regarding
continuing compliance

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<PAGE>

with federal tax requirements. If the issuer of an obligation fails to comply
with its covenant at any time, interest on the obligation could become
federally taxable, either prospectively or retroactively to the date the
obligation was issued.

Each of the Portfolios may invest in obligations such as zero coupon bonds,
issued with original issue discount ("OID") for federal income tax purposes.
Accrued OID constitutes income subject to the distribution requirements
applicable to regulated investment companies, although such income may not be
represented by any cash payment. Accordingly, it may be necessary for a
Portfolio to dispose of other assets in order to satisfy such distribution
requirements.

OTHER TAX INFORMATION

The Transfer Agent will send each shareholder a notice in January describing
the tax status of dividend and capital gain distributions (where applicable)
for the prior year.

Each Portfolio generally is required by law to withhold 31% ("back-up
withholding") of certain dividends, distributions of capital gains and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number and in the case of entities, an employer identification number) and in
certain other circumstances. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the shareholder
of the account, and may be claimed as a credit on such shareholder's federal
income tax return. You should consult your own tax adviser regarding the
withholding requirement. Dividends paid to foreign investors generally will be
subject to a 30% (or lower treaty rate) withholding tax.

The information above, together with the information set forth in the
Prospectus and this SAI, is only a summary of some of the federal income tax
consequences generally affecting each Portfolio and its shareholders, and no
attempt has been made to present a detailed explanation of the tax treatment
of each Portfolio or to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
Company distributions and on redemptions or other dispositions of shares of
the Portfolios, and shares may be subject to state and local personal property
taxes. Investors should consult their tax advisers to determine whether a
Portfolio is suitable to their particular tax situation.

Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.

INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS

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<PAGE>

1998 financial statements and the report thereon of Ernst & Young LLP from the
Portfolios' October 31, 1998 annual report (as filed with the SEC on December
10, 1998 pursuant to Section 30(b) of the Investment Company Act and Rule 30b2-1
thereunder (Accession Number 0000889812-98-002901)) are incorporated herein by
reference.

SHARE PRICE CALCULATION

The price of each Portfolio's shares on any given day is its NAV per share.
NAV is calculated by the Company for each Portfolio on each day that the New
York Stock Exchange (the "NYSE") and the Custodian are open. Currently, the
NYSE is closed on weekends and New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. In addition to these holidays, the
Custodian generally is closed on Veteran's Day and Columbus Day.

Each Portfolio values its portfolio instruments at amortized cost, which means
that they are valued at their acquisition cost, as adjusted for amortization
of premium or accretion of discount, rather than at current market value. The
amortized cost value of an instrument may be higher or lower than the price
each Portfolio would receive if it sold the instrument.

Valuing a Portfolio's instruments on the basis of amortized cost and use of
the term "money market fund" are permitted by Rule 2a-7. Each Portfolio must
adhere to certain conditions under Rule 2a-7.

The Board of Directors of the Company oversees the Investment Manager's
adherence to SEC rules concerning money market funds, and has established
procedures designed to stabilize each Portfolio's NAV per share at $1.00. At
such intervals as they deem appropriate, the Board of Directors considers the
extent to which NAV calculated by using market valuations would deviate from
$1.00 per share. Market valuations are obtained by using actual quotations
provided by market makers, estimates of current market value, or values
obtained from yield data relating to classes of money market instruments
published by reputable sources at the mean between the bid and asked prices of
the instruments. If a deviation were to occur between the NAV per share
calculated by reference to market values and a Portfolio's NAV per share,
which the Board of Directors of the Company believed may result in material
dilution or other unfair results to shareholders, the directors have agreed
promptly to consider what corrective action they deem appropriate to eliminate
or reduce, to the extent reasonably practicable, the dilution or unfair
results. Such corrective action could include selling portfolio securities
prior to maturity; withholding dividends; redeeming shares in kind;
establishing NAV by using available market quotations; and such other measures
as the directors may deem appropriate.

During periods of declining interest rates, each Portfolio's yield based on
amortized cost may be higher than the yield based on market valuations. Under
these

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<PAGE>

circumstances, a shareholder of any Portfolio would be able to retain a somewhat
higher yield than would result if each Portfolio utilized market valuations to
determine its NAV. The converse would apply in a period of rising interest
rates.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares of each Portfolio are sold on a continuous basis by the distributor.

Each Portfolio does not currently impose a minimum for initial or subsequent
investments. However, minimum requirements may be imposed or changed at any
time. Each Portfolio may waive minimum investment requirements for purchases
by directors, officers or employees of the Company, Waterhouse or any of its
subsidiaries.

The Company normally calculates the NAV of each Portfolio as of 12:00 noon and
4:00 p.m. (Eastern time) each day that the NYSE and the Custodian are open. To
the extent that portfolio securities are traded in other markets on days when
the NYSE or the Custodian is closed, a Portfolio's NAV may be affected on days
when investors do not have access to the Company to purchase or redeem shares.
In addition, trading in some of a Portfolio's portfolio securities may not
occur on days when the Company is open for business.

If the Board of Directors determines that existing conditions make cash
payments undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing a Portfolio's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes, and will
incur any costs of sale, as well as the associated inconveniences. An in kind
distribution of portfolio securities will be less liquid than cash. The
shareholder may have difficulty in finding a buyer for portfolio securities
received in payment for redeemed shares. Portfolio securities may decline in
value between the time of receipt by the shareholder and conversion to cash. A
redemption in kind of a Portfolio's portfolio securities could result in a
less diversified portfolio of investments for the Portfolio and could affect
adversely the liquidity of the Portfolio's portfolio.

The Company may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other
than its customary weekend or holiday closings, emergency circumstances as
determined by the SEC exist, or for such other circumstances as the SEC may
permit.

PERFORMANCE

The historical performance calculation for a Portfolio may be shown in the
form of "yield," "effective yield" and, for the Municipal Portfolio only, "tax
equivalent yield" and "tax equivalent effective yield." These various measures
of performance are described below.

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<PAGE>

Each Portfolio's yield is computed in accordance with a standardized method
prescribed by rules of the SEC. Under that method, the yield quotation is
based on a seven-day period and is computed for each Portfolio as follows: the
first calculation is net investment income per share for the period, which is
accrued interest on portfolio securities, plus or minus amortized discount or
premium (excluding market discount for the Municipal Portfolio), less accrued
expenses. This number is then divided by the price per share (expected to
remain constant at $1.00) at the beginning of the period ("base period
return"). The result is then divided by 7 and multiplied by 365 and the
resulting yield figure is carried to the nearest one-hundredth of one percent.
Realized capital gains or losses and unrealized appreciation or depreciation
of investments are not included in the calculation.

The yield for each Portfolio for the seven day period ended October 31, 1998
was 4.66% for the Money Market Portfolio, 4.35% for the U.S. Government
Portfolio and 2.51% for the Municipal Portfolio.

Each Portfolio's effective yield is determined by taking the base period
return (computed as described above) and calculating the effect of assumed
compounding. The formula for effective yield is:

[(base period return + 1) 365/7] -1.

The effective yield for each Portfolio for the seven day period ended October
31, 1998 was 4.77% for the Money Market Portfolio, 4.44% for the U.S. Government
Portfolio and 2.54% for the Municipal Portfolio.

The tax equivalent yield of the shares of the Municipal Portfolio is computed
by dividing that portion of the yield of the Portfolio (computed as described
above) that is tax-exempt by an amount equal to one minus the stated federal
income tax rate (normally assumed to be the maximum applicable marginal tax
bracket rate) and adding the result to that portion, if any, of the yield of
the Portfolio that is not tax-exempt.

The tax equivalent yield for the Municipal Portfolio for the seven day period
ended October 31, 1998 was 3.97%. The assumed federal income tax rate is 36%.

Tax equivalent effective yield is computed in the same manner as tax equivalent
yield, except that effective yield is substituted for yield in the calculation.

Each Portfolio's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in that Portfolio
will actually yield for any given future period. Actual yields will depend not
only on changes in interest rates on money market instruments during the period
in which the investment in the Portfolio is held, but also on such matters as
expenses of that Portfolio. The performance of the Company's Portfolios may be
compared to that of other money market mutual funds tracked by Lipper Analytical
Services, Inc. ("Lipper"), a widely

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<PAGE>

used independent research firm that ranks mutual funds by overall performance,
investment objectives and assets. Lipper performance calculations include the
reinvestment of all capital gain and income dividends for the periods covered by
the calculations. A Portfolio's performance also may be compared to other money
market funds as reported by IBC/Donoghue's Money Fund Report(R), a reporting
service on money market funds. As reported by Money Fund Report, all investment
results represent total return (annualized results for the period net of
management fees and expenses) and one year investment results are effective
annual yields assuming reinvestment of dividends.

BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408, a financial reporting
service which each week publishes average rates of bank and thrift institution
money market deposit accounts and interest bearing checking accounts, reports
results for the BANK RATE MONITOR National Index. The rates published by the
BANK RATE MONITOR National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by 100 of the
leading bank and thrift institutions in the ten largest Consolidated
Metropolitan Statistical Areas. Account minimums range upward from $2,000 in
each institution and compounding methods vary. Interest bearing checking
accounts generally offer unlimited checking while money market deposit
accounts generally restrict the number of checks that may be written. If more
than one rate is offered, the lowest rate is used. Rates are determined by the
financial institution and are subject to change at any time specified by the
institution. Bank products represent a taxable alternative income producing
product. Bank and thrift institution account deposits may be insured.
Shareholder accounts in the Company are not insured. Bank savings accounts
compete with money market mutual fund products with respect to certain
liquidity features but may not offer all of the features available from a
money market mutual fund, such as check writing. Bank checking accounts
normally do not pay interest but compete with money market mutual fund
products with respect to certain liquidity features (e.g., the ability to
write checks against the account). Bank certificates of deposit may offer
fixed or variable rates for a set term. (Normally, a variety of terms are
available.) Withdrawal of these deposits prior to maturity will normally be
subject to a penalty. In contrast, shares of a Portfolio are redeemable at the
NAV next determined (normally, $1.00 per share) after a request is received
without charge.

Investors may also want to compare a Portfolio's performance to that of U.S.
Treasury Bills or Notes because such instruments represent alternative income
producing products. Treasury obligations are issued in selected denominations.
Rates of Treasury obligations are fixed at the time of issuance and payment of
principal and interest is backed by the full faith and credit of the U.S.
Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Generally, the values of obligations with shorter maturities will
fluctuate less than those with longer maturities. A Portfolio's yield will
fluctuate.

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<PAGE>

TAX-EXEMPT VERSUS TAXABLE YIELD. Investors may want to determine which
investment - tax-exempt or taxable - will provide a higher after-tax return.
To determine the tax equivalent yield, simply divide the yield from the
tax-exempt investment by an amount equal to 1 minus the investor's marginal
federal income tax rate.

OTHER ADVERTISEMENT MATTERS

In connection with its advertisements, the Portfolios may provide information
about their Investment Manager, Waterhouse Securities or any of their other
service providers, including information relating to policies, business
practices or services. For instance, a Portfolio may provide information about
Waterhouse Securities in its advertisements, including the difference between
commissions paid on stock trades executed by Waterhouse Securities compared to
full-price and discount brokers (as illustrated below) and a description of
services available through Waterhouse Securities. This example is for
illustrative purposes only; investors should contact the Customer Service
Department at Waterhouse Securities at 1-800-934-4410 for information about
services and commissions.

<TABLE>
<CAPTION>
Full Price 200 shares 300 shares 500 shares 500 shares 1,000 shares
Brokers @ $25 @ $20 @ $15 @ $18 @ $14
------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Merrill Lynch $129.50 $164.85 $205.54 $225.23 $308.28
Salomon Smith Barney 139.61 166.39 212.15 235.26 351.51
Prudential 146.35 173.35 218.35 240.35 359.35
Waterhouse
Securities 35.00 40.82 52.05 57.62 90.33

<CAPTION>
Discount 200 shares 300 shares 500 shares 500 shares 1,000 shares
Brokers @ $25 @ $20 @ $15 @ $18 @ $14
------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Schwab $89.00 $95.60 $101.50 $106.60 $123.60
Fidelity 113.00 127.00 155.00 155.00 165.00
Quick & Reilly 60.50 65.00 77.75 81.50 94.00
Waterhouse
Securities 35.00 40.82 52.05 57.62 90.33
</TABLE>

Survey date 12/9/98. Services may vary by firm. Commission rates surveyed are
for stocks and may vary for other products. Waterhouse Securities minimum
commission $35. This information is subject to change.

SHAREHOLDER INFORMATION

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<PAGE>

preemptive or conversion rights. Shares of the Company have equal rights with
respect to voting, except that the holders of shares of an investment portfolio
will have the exclusive right to vote on matters affecting only the rights of
the holders of that portfolio. For example, holders of a Portfolio will have the
exclusive right to vote on any investment management agreement or investment
restriction that relates only to that Portfolio. Shareholders of the investment
portfolios of the Company do not have cumulative voting rights, and therefore
the holders of more than 50% of the outstanding shares of the Company voting
together for the election of directors may elect all of the members of the Board
of Directors. In such event, the remaining holders cannot elect any members of
the Board of Directors.

The Board of Directors may authorize the issuance of additional shares, and
may, from time to time, classify or reclassify issued or any unissued shares
to create one or more new classes or series in addition to those already
authorized by setting or changing in any one or more respects the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption, of such shares; provided, however, that any such
classification or reclassification shall not substantially adversely affect
the rights of holders of issued shares. Any such classification or
reclassification will comply with the provisions of the Investment Company
Act.

The Articles of Incorporation permit the directors to issue the following
number of full and fractional shares, par value $.0001, of the investment
portfolios: 60 billion shares of the Money Market Portfolio; 20 billion shares
of the U.S. Government Portfolio; 10 billion shares of the Municipal
Portfolio; and 10 billion shares of the Waterhouse Dow 30 Fund. Each
investment portfolio share is entitled to participate pro rata in the
dividends and distributions from that portfolio.

The Company will not normally hold annual shareholders' meetings. Under
Maryland law and the Company's By-laws, an annual meeting is not required to
be held in any year in which the election of directors is not required to be
acted upon under the Investment Company Act. The Company's By-Laws provide
that special meetings of shareholders, unless otherwise provided by law or by
the Articles of Incorporation, may be called for any purpose or purposes by a
majority of the Board of Directors, the Chairman of the Board, the President,
or the written request of the holders of at least 10% of the outstanding
shares of capital stock of the corporation entitled to be voted at such
meeting to the extent permitted by Maryland law.

Each director serves until the next election of directors and until the election
and qualification of his successor or until such director sooner dies, resigns,
retires or is removed by the affirmative vote of a majority of the outstanding
voting securities of the Company. In accordance with the Investment Company Act
(i) the Company will hold a shareholder meeting for the election of directors at
such time as less than a majority of the directors have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Directors,
less than two-thirds of the directors have been elected by the shareholders,
that vacancy will be filled only by a vote of the shareholders.

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<PAGE>

- ------------------------------------------------------------------------------
ANNEX -- RATINGS OF INVESTMENTS

STANDARD AND POOR'S AND MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS

Commercial paper rated by Standard & Poor's has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper
is rated A-1, A-2 or A-3.

The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service ("Moody's"). Among the factors
considered by them in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and an appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships that exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations. Relative strength or weakness of the above factors
determines whether the issuer's commercial paper is rated Prime-1, -2 or -3.

MIG-1 AND MIG-2 MUNICIPAL NOTES

Ratings of Moody's for state and municipal notes and other short-term loans
will be designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short run. Loans
designated MIG-1 are of the best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both. Loans designated
MIG-2 are of high quality, with margins of protection ample although not so
large as in the preceding group.

STANDARD & POOR'S BOND RATINGS, CORPORATE BONDS

AAA. This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

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<PAGE>

AA. Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.

A. Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions.

MOODY'S INVESTORS SERVICE BOND RATINGS

Aaa. Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.

Aa. Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long term risks appear somewhat larger than in Aaa
securities.

A. Bonds that are rated A 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
that suggest a susceptibility to impairment sometime in the future.

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<PAGE>

WATERHOUSE DOW 30 FUND
100 WALL STREET, NEW YORK, NEW YORK 10005
WATERHOUSE SECURITIES, CUSTOMER SERVICE - 1-800-934-4410

STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 18, 1998

This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated December 18, 1998 (the
"Prospectus") for the Waterhouse Dow 30 Fund (the "Fund"), a series of
Waterhouse Investors Family of Funds, Inc. (the "Company").

The Fund's financial statements and financial highlights for the fiscal period
ended October 31, 1998, including the independent auditors' report thereon,
are included in the Fund's Annual Report and are incorporated herein by
reference.

To obtain a free copy of the Prospectus or Annual Report, please write to
Waterhouse Securities, Inc., Customer Service, at 100 Wall Street, New York,
New York 10005, or call 1-800-934-4410.

TABLE OF CONTENTS

PAGE
----

GENERAL INFORMATION ABOUT THE FUND...................................... 3

INVESTMENT POLICIES AND RESTRICTIONS ................................... 3

PORTFOLIO TRANSACTIONS .................................................10

DIRECTORS AND EXECUTIVE OFFICERS .......................................12

INVESTMENT MANAGEMENT, DISTRIBUTION
AND OTHER SERVICES .....................................................15

DIVIDENDS AND TAXES ....................................................20

SHARE PRICE CALCULATION ................................................22

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION .........................23

PERFORMANCE ............................................................24

SHAREHOLDER INFORMATION ................................................28

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<PAGE>

DOW JONES & COMPANY, INC. ("DOW JONES"SM) DOES NOT GUARANTEE THE ACCURACY
AND/OR THE COMPLETENESS OF THE DOW JONES INDUSTRIAL AVERAGESM ("DJIA"SM) OR
ANY DATA INCLUDED THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. DOW JONES MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY WATERHOUSE ASSET
MANAGEMENT, INC. (THE "INVESTMENT MANAGER"), SHAREHOLDERS OF THE FUND, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE DJIA OR ANY DATA INCLUDED THEREIN.
DOW JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE DJIA OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS
OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF
NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF
ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES, THE INVESTMENT MANAGER AND
THE FUND.

"Dow Jones(SM)," "Dow Jones Industrial Average(SM)," "DJIA(SM)" and
"DIAMONDS(SM)" are service marks of Dow Jones & Company, Inc. and have been
licensed by the Investment Manager in connection with the operation of the
Fund. The Fund is not sponsored, endorsed, sold or promoted by Dow Jones or
any corporation that is included in the DJIA. Dow Jones makes no
representation or warranty, express or implied, to the shareholders of the
Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly. Dow Jones' only relationship
to the Investment Manager is the licensing of certain trademarks and trade
names of Dow Jones and of the DJIA, which is determined, composed and
calculated by Dow Jones without regard to the Investment Manager or the Fund.
Dow Jones has no obligation to take the needs of the Investment Manager or the
shareholders of the Fund into consideration in determining, composing or
calculating the DJIA. Dow Jones is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities
of Fund shares to be issued or in the determination or calculation of the
equation by which Fund shares are to be converted into cash. Dow Jones has no
obligation or liability in connection with the administration, marketing or
offering of the Fund.

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<PAGE>

WATERHOUSE DOW 30 FUND
- -------------------------------------------------------------------------------

GENERAL INFORMATION ABOUT THE FUND

The Company is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), as an open-end management investment company.
The Company was organized under Maryland law on August 16, 1995 under the name
Waterhouse Investors Cash Management Fund, Inc. and was renamed under its
current name on December 18, 1997. Because the Company offers multiple
portfolios (such as the Fund), it is known as a "series company." The Company
currently has four investment portfolios with various investment objectives
and policies. The Fund commenced operations on March 31, 1998 and was
originally called the Waterhouse Dow Jones Industrial Average(SM) Index Fund.
The Fund was renamed under its current name on July 22, 1998.

The investment objective of the Fund is to track the total return of the Dow
Jones Industrial Average(SM) ("DJIA"(SM)) before Fund expenses. The investment
manager of the Fund is Waterhouse Asset Management, Inc. (the "Investment
Manager").

INVESTMENT POLICIES AND RESTRICTIONS

The Fund's investment objective, and its investment policies and restrictions
that are designated as fundamental, may not be changed without approval by
holders of a "majority of the outstanding voting securities" of the Fund.
Except as otherwise indicated, however, the Fund's investment policies are not
fundamental and may be changed without shareholder approval. As defined in the
Investment Company Act, and as used herein, the term "majority of the
outstanding voting securities" of the Company, or of the Fund, means,
respectively, the vote of the holders of the lesser of (i) 67% of the shares
of the Company or the Fund or represented by proxy at a meeting where more
than 50% of the outstanding shares of the Company or the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Company or the Fund.

The following policies and restrictions supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other assets, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security
or other asset. Accordingly, any subsequent change in values, net assets, or
other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and restrictions.

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<PAGE>

COMMON STOCK

The Fund will invest primarily in the common stock of the 30 companies
comprising the DJIA. Common stockholders are the owners of the company issuing
the stock and, accordingly, vote on various corporate governance matters such
as mergers. They are not creditors of the company, but rather, upon
liquidation of the company are entitled to their pro rata share of the
company's assets after creditors (including fixed income security holders)
and, if applicable, preferred stockholders, are paid.

CASH AND CASH EQUIVALENTS

The Fund will hold from time to time a certain portion of its assets in cash
or cash equivalents to retain flexibility in meeting redemptions, paying
expenses, and timing of new investments. Cash equivalents may include (i)
short-term obligations issued or guaranteed by the United States government,
its agencies or instrumentalities ("U.S. Government Securities"), (ii)
certificates of deposit, bankers' acceptances and interest-bearing savings
deposits of commercial banks doing business in the United States that have a
minimum rating of A-1 from Standard & Poor's ("S&P") or P-1 from Moody's
Investors Service ("Moody's") or a comparable rating from another nationally
recognized statistical rating organization ("NRSRO") or unrated securities of
comparable quality, (iii) commercial paper rated at least A-1 by S&P or P-1 by
Moody's or a comparable rating from another NRSRO or unrated securities of
comparable quality, (iv) repurchase agreements covering any of the securities
in which the Fund may invest directly, and (v) money market mutual funds. The
Fund will not invest in cash or cash equivalents as part of a temporary
defensive strategy to protect against potential stock market declines.

DIAMONDS(SM) AND OTHER INDEX SECURITIES

The Fund may invest in publicly-traded index securities, including DIAMONDS.
DIAMONDS are shares of a publicly-traded unit investment trust that owns the
stocks in the DJIA in approximately the same proportions as represented in the
DJIA. DIAMONDS trade on the AMEX at approximately .01 (or 1/100) of the value
of the DJIA. Because DIAMONDS replicate the DJIA, any price movement away from
the value of the underlying stocks is generally quickly eliminated by
professional traders. In light of the structural features of DIAMONDS, the
Investment Manager believes that the movement of DIAMONDS share prices should
closely track the movement of the DJIA. The DIAMONDS program bears operational
expenses, which are deducted from the dividends paid to DIAMONDS investors. To
the extent the Fund invests in these securities, the Fund must bear these
expenses in addition to the expenses of its own operation. The Fund also may
invest in Standard & Poor's Depositary Receipts, index securities similar to
DIAMONDS that are based on the Standard & Poor's 500 Index and also are traded
on the AMEX.

INVESTMENT COMPANY SECURITIES

The Fund may invest in securities issued by other investment companies (or
series thereof) to the extent that such investments are consistent with the
Fund's investment objectives and policies and are permissible under the
Investment Company Act. Under one of the Investment Company Act's limitations,
the Fund may invest in shares of

-4-

<PAGE>

investment companies to the extent the Fund and its affiliated persons do not
own more than 3% of the outstanding securities of any one issuer of these
securities, provided that the issuer is not obligated to redeem securities
representing more than 1% of the issuer's total outstanding securities during
any period of less than 30 days. A separate limitation of the Investment
Company Act may limit the Fund from (i) investing more than 10% of its assets
in shares of investment companies; (ii) investing more than 5% of its assets
in any one investment company; or (iii) acquiring more than 3% of the voting
stock of an acquired investment company. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment company securities include shares of registered unit investment
trusts, including DIAMONDS and Standard & Poor's Depositary Receipts.

FUTURES CONTRACTS

The Fund may invest in stock index futures contracts. A futures contract is a
bilateral agreement wherein one party agrees to accept, and the other party
agrees to make, delivery of cash, an underlying debt security or the currency
as called for in the contract at a specified future date and at a specified
price. For futures contracts with respect to an index, delivery is of an
amount of cash equal to a specified dollar amount times the difference between
the index value at the time of the contract and the close of trading of the
contract. Use of futures contracts is subject to regulation by the several
futures exchanges upon which futures are traded and the Commodity Futures
Trading Commission (the "CFTC").

The Fund may purchase index futures contracts for several reasons: to simulate
full investment in the underlying index while retaining a cash balance for
fund management purposes, to facilitate trading, to reduce transactions costs,
or to seek higher investment returns when a futures contract is priced more
attractively than securities in the index.

As required by applicable regulatory guidelines, the Fund will set aside cash
or other appropriate liquid assets in a segregated account in the prescribed
manner. Any assets held in a segregated account cannot be sold or closed out
while the futures contract is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that the use of
segregation involving a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.

SPECIAL CHARACTERISTICS AND RISKS OF FUTURES TRADING. No price is paid upon
entering into futures contracts; rather, the Fund is required to deposit an
amount of cash or U.S. Government securities generally equal to 5% or less of
the contract value. This amount is known as initial margin. Subsequent
payments, called variation margin, to and from the broker, would be made on a
daily basis as the value of the futures position varies. The initial margin in
futures transactions is in the nature of a performance bond

-5-

<PAGE>

or good-faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied.

Holders of futures contracts can enter into offsetting closing transactions by
selling a futures contract with the same terms as the position held. Positions
in futures contracts may be closed only on an exchange or board of trade
providing a secondary market for such futures contracts.

Under certain circumstances, futures exchanges may establish daily limits in
the amount that the price of a futures contract may vary either up or down
from the previous day's settlement price. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Prices could move to the daily limit for several
consecutive trading days with little or no trading and thereby prevent prompt
liquidation of positions. In such event, it may not be possible for the Fund
to close a position, and in the event of adverse price movements, the Fund
would have to make daily cash payments of variation margin. In addition:

(1) Successful use of futures contracts will require different skills and
techniques than investing in individual securities. Moreover, futures
contracts relate not to the current level of the underlying instrument but to
the anticipated levels at some point in the future; thus, for example, trading
of stock index futures contracts may not reflect the trading of the securities
that are used to formulate an index or even actual fluctuations in the index
itself.

(2) The price of index futures contracts may not correlate perfectly with
movement in the index due to price distortions in the futures market or
otherwise. There may be several reasons unrelated to the value of the
underlying securities that cause this situation to occur.

(3) There is no assurance that a liquid secondary market will exist for any
particular contract at any particular time. In such event, it may not be
possible to close a position, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin.

(4) The Fund's activities in the futures markets may result in a higher
portfolio turnover rate and additional transaction costs in the form of added
brokerage commissions.

CFTC REQUIREMENTS. The Fund will invest in futures contracts that are subject
to the jurisdiction of the CFTC subject to the requirements of Section 4.5 of
the rules of the CFTC. Under that section the Fund is permitted to purchase
such futures or options contracts only for bona fide hedging purposes within
the meaning of the rules of the CFTC; provided, however, that in addition,
with respect to positions in commodity futures contracts not for bona fide
hedging purposes, the Fund will limit the aggregate initial margin and
premiums required to establish these positions (subject to certain exclusions)
to no more than 5% of the liquidation value of the Fund's assets after taking

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<PAGE>

into account unrealized profits and losses on any such contract into which the
Fund has entered.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements, which are instruments under
which the Fund acquires ownership of a security from a broker-dealer or bank
that agrees to repurchase the security at a mutually agreed upon time and
price (which price is higher than the Fund's purchase price), thereby
determining the yield during the Fund's holding period. Repurchase agreements
are, in effect, loans collateralized by the underlying securities. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Fund might have expenses in enforcing its rights to the proceeds of the
repurchase agreement or collateral thereunder, and could experience losses,
including a decline in the value of the underlying security and loss of
income.

REVERSE REPURCHASE AGREEMENTS

Reverse repurchase agreements are transactions in which the Fund sells a
security and simultaneously commits to repurchase that security from the buyer
at an agreed-upon price on an agreed-upon future date. The resale price in a
reverse repurchase agreement reflects a market rate of interest that is not
related to the coupon rate or maturity of the sold security. For certain
demand agreements, there is no agreed-upon repurchase date and interest
payments are calculated daily, often based upon the prevailing overnight
repurchase rate.

Generally, a reverse repurchase agreement enables the Fund to recover for the
term of the reverse repurchase agreement all or most of the cash invested in
the portfolio securities sold and to keep the interest income associated with
those portfolio securities. Such transactions are advantageous only if the
interest cost to the Fund of the reverse repurchase transaction is less than
the cost of obtaining the cash otherwise. In addition, interest costs on the
money received in a reverse repurchase agreement may exceed the return
received on the investments made by the Fund with those monies. The use of
reverse repurchase agreement proceeds to make investments may be considered to
be a speculative technique.

While a reverse repurchase agreement is outstanding, the Fund will maintain
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been found
satisfactory by the Investment Manager.

ILLIQUID SECURITIES

The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, repurchase agreements maturing in more than
seven days.

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<PAGE>

The Board of Directors has the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Board has delegated the
function of making day-to-day determinations of liquidity to the Investment
Manager, pursuant to guidelines approved by the Board. The Investment Manager
takes into account a number of factors in reaching liquidity determinations,
including but not limited to: (1) the frequency of trades and quotations for
the security; (2) the number of dealers willing to purchase or sell the
security and the number of other potential buyers; (3) the willingness of
dealers to undertake to make a market in the security; and (4) the nature of
trading in the marketplace, including the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer.
The Investment Manager monitors the liquidity of the securities in the Fund's
portfolio and reports periodically on such decisions to the Board.

SECURITIES LENDING

The Fund may lend portfolio securities in amounts up to 33 1/3% of its total
assets to brokers, dealers and other financial institutions, provided such
loans are callable at any time by the Fund and are at all times secured by
cash or by equivalent collateral. By lending its portfolio securities, the
Fund will receive income while retaining the securities' potential for capital
appreciation. As with any extensions of credit, there are risks of delay in
recovery and, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, such loans of securities
will only be made to firms deemed to be creditworthy by the Investment
Manager.

BORROWING

The Fund may borrow from banks and engage in reverse repurchase agreements. As
a matter of fundamental policy, the Fund will limit borrowings (including any
reverse repurchase agreements) to amounts not in excess of 33 1/3% of the
value of the Fund's total assets less liabilities (other than borrowings). As
a non-fundamental policy, the Fund will borrow money only as a temporary
measure for defensive or emergency purposes, in order to meet redemption
requests without immediately selling any portfolio securities.

DIVERSIFICATION AND CONCENTRATION

The Fund is classified as "non-diversified" for purposes of the Investment
Company Act, which means that the Fund is not limited by the Investment
Company Act with regard to the portion of its assets that may be invested in
the securities of a single issuer. To the extent the Fund makes investments in
excess of 5% of its assets in the securities of a particular issuer, its
exposure to the risks associated with that issuer is increased. Because the
Fund invests in a limited number of issuers, the performance of particular
securities may adversely affect the performance of the Fund or subject the
Fund to greater price volatility than that experienced by diversified
investment companies.

The Fund will not concentrate its assets in the securities of issuers in any
industry. As a fundamental policy, except as set forth below, the Fund may not
purchase securities if, immediately after the purchase, more than 25% of the
value of the Fund's total assets

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<PAGE>

would be invested in the securities of issuers conducting their principal
business activities in the same industry. This limitation does not apply to
investments in U.S. Government Securities, repurchase agreements covering U.S.
Government Securities and shares of other investment companies, including unit
investment trusts and mutual funds. The Fund's investments in issuers
representing particular industries will reflect the composition of the DJIA
which, by design, reflects a range of industries; however, in the event that
the DJIA includes concentration in a particular industry, the Fund's holdings
will reflect a comparable level of concentration. Historically, emphasis by
the DJIA in particular industries has been minimized through periodic
recomposition.

INVESTMENT RESTRICTIONS

The following are the fundamental investment restrictions of the Fund. The Fund
may not (unless noted otherwise):

(1) issue senior securities, except as permitted under the Investment Company
Act;

(2) make short sales of securities, except as may be described in the
Prospectus and SAI from time to time, or purchase securities on margin (but
the Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities);

(3) borrow money, except as permitted under the Investment Company Act;

(4) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);

(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
repurchase agreements with respect to these securities, and shares of
investment companies and series thereof) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided, however,
that this restriction does not apply to the extent that more than 25% of the
DJIA is represented by securities of companies whose principal business
activities are in any one industry;

(6) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);

(7) buy or sell physical commodities or physical commodity (futures)
contracts, which do not include financial futures and options thereon as
described in the Prospectus and SAI from time to time; or

(8) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be loaned to other parties, but this limit does
not apply to purchases of debt securities or to repurchase agreements.

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<PAGE>

THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
BY VOTE OF THE BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL. THE FUND MAY
NOT:

(i) purchase or hold any security if, as a result, more than 15% of its net
assets would be invested in securities that are deemed to be illiquid because
they are subject to legal or contractual restrictions on resale or because
they cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued, including repurchase
agreements not entitling the holder to payment of principal and interest
within seven days upon notice and securities restricted as to disposition
under federal securities laws, except for commercial paper issued in reliance
on the "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933 and securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933, which are determined to be
liquid pursuant to procedures adopted by the Company's Board of Directors; or

(ii) purchase securities of other investment companies, except to the extent
permitted by the Investment Company Act; however, the Fund may,
notwithstanding any other fundamental investment policy or limitation, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives,
policies, and restrictions as the Fund.

LICENSE AGREEMENT

The Investment Manager is a party to the License Agreement with Dow Jones that
grants to the Investment Manager and to the Fund a non-exclusive license to
use the DJIA, the proprietary data contained therein, and related trademarks
and service marks solely in connection with the operations of the Fund. As the
licensee, the Investment Manager pays Dow Jones a licensing fee. Accordingly,
the DJIA and Dow Jones related marks are not assets of the Fund and can be
withdrawn from the Fund. Currently, the License Agreement is scheduled to
expire five years from the commencement date of initial issuance of the Fund
and is subject to a renewal term of three years (the "Renewal Term") after
which the license is automatically extended for successive additional terms of
one year each (each, an "Additional Term") unless either Dow Jones or the
Investment Manager gives written notice to the other that the Agreement will
not be extended at least 90 days before the expiration of the Renewal Term or
such Additional Term. As a condition to the Renewal Term, the assets of the
Fund must be at least $250 million. The parties thereto may extend the term of
the License Agreement beyond its final expiration date without the consent of
any of the shareholders of the Fund.

PORTFOLIO TRANSACTIONS

The Investment Manager places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment
Manager. In placing

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orders for the Fund's portfolio transactions, the Investment Manager seeks
"best execution" (i.e., prompt and efficient execution at the most favorable
prices).

Consistent with the policy of "best execution," orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, the Investment Manager may give consideration to those firms that
provide market, statistical and other research information to the Company and
the Investment Manager. In addition, the Fund may pay higher than the lowest
available commission rates when the Investment Manager believes it is
reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction, viewed in terms of
either the particular transaction or the Investment Manager's overall
responsibilities with respect to accounts as to which it exercises investment
discretion. Any research benefits derived are available for all clients.
Because statistical and other research information is only supplementary to
the Investment Manager's research efforts and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
significantly reduce its expenses. In no event will a broker-dealer that is
affiliated with the Investment Manager receive brokerage commissions in
recognition of research services provided to the Investment Manager.

The Investment Manager intends to employ broker-dealer affiliates of the
Investment Manager (collectively "Affiliated Brokers") to effect portfolio
transactions for the Fund, provided certain conditions are satisfied. Payment
of brokerage commissions to Affiliated Brokers is subject to Section 17(e) of
the Investment Company Act and Rule 17e-1 thereunder, which require, among
other things, that commissions for transactions on securities exchanges paid
by a registered investment company to a broker which is an affiliated person
of such investment company, or an affiliated person of another person so
affiliated, not exceed the usual and customary brokers' commissions for such
transactions. The Board of Directors, including a majority of the directors
who are not "interested persons" of the Company within the meaning of such
term as defined in the Investment Company Act ("Disinterested Directors"), has
adopted procedures to ensure that commissions paid to affiliates of the
Investment Manager by the Fund satisfy the standards of Section 17(e) and Rule
17e-1. Certain transactions may be effected for the Fund by a broker-dealer
affiliate of the Investment Manager at no net cost to the Fund; however, the
broker-dealer may be compensated by another broker-dealer in connection with
such transaction for the order flow to the second broker-dealer. Receipt of
such compensation will be subject to the Fund's procedures pursuant to Section
17(e) and Rule 17e-1.

The investment decisions for the Fund will be reached independently from those
for other accounts, if any, managed by the Investment Manager. On occasions
when the Investment Manager deems the purchase or sale of securities to be in
the best interest of one or more clients of the Investment Manager, the
Investment Manager, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to,

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<PAGE>

aggregate the securities to be so sold or purchased in order to obtain the
most favorable price or lower brokerage commissions and efficient execution.
In such event, allocation of the securities so purchased or sold, as well as
the expenses incurred in the transaction, will be made by the Investment
Manager in accordance with its policy for aggregation of orders, as in effect
from time to time. In some cases this procedure may affect the size or price
of the position obtainable for the Fund.

Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions. In transactions on stock exchanges in
the United States, these commissions generally are negotiated. In all cases,
the Fund will attempt to negotiate best execution.

Purchases and sales of fixed income portfolio securities are generally
effected as principal transactions. These securities are normally 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. Purchases from underwriters of portfolio 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
ask prices. In the case of securities traded in the over-the-counter markets,
there is generally no stated commission, but the price usually includes an
undisclosed commission or markup.

For the fiscal period ended October 31, 1998, the Fund paid no brokerage
commissions.

DIRECTORS AND EXECUTIVE OFFICERS

Responsibility for overall management of the Company rests with its Board of
Directors in accordance with Maryland law.

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<PAGE>

Department Executive of Banking Services. He is 54 years old. Mr. Dalrymple's
address is 45 Rockefeller Plaza, New York, NY 10111.

CAROLYN B. LEWIS, Director. Ms. Lewis has served as a Director of each of the
Company and NICM since February 26, 1998. Since March 1997, Ms. Lewis has served
as President of The CBL Group providing professional services to clients in the
securities and healthcare industries. Ms. Lewis spent over 30 years at the
United States Securities and Exchange Commission (SEC) in various positions
including Senior Financial Analyst, Branch Chief and Assistant Director. In
September 1997, Ms. Lewis was appointed a member of the Board of Governors of
the Philadelphia Stock Exchange. Presently, Ms. Lewis is a member of the Board
of Directors of the Metropolitan Washington Airports Authority and a director on
various healthcare and hospital Boards, including Chairman Elect of the Board of
Trustees of the American Hospital Association. She is 62 years old. Ms. Lewis'
address is 2920 W Street Southeast, Washington, DC 20020.

GEORGE F. STAUDTER(*), Director. Mr. Staudter has served as Chairman of the
Board of Directors of the Company since December 12, 1995. Mr. Staudter is a
Director of Koger Equity, Inc. Mr. Staudter served as a Director of Waterhouse
Investor Services, Inc. from 1987 to 1996. Since 1989, Mr. Staudter has served
as a Managerial and Financial Consultant, rendering investment management, tax
and estate planning services to individual clients, and strategic planning
advice to corporate clients. From 1993 through 1994, Mr. Staudter was the
Chief Executive Officer and served on the Board of Directors for Family Steak
Houses of Florida, Inc. From 1986 through 1988, Mr. Staudter was a principal
and a principal shareholder of Douglas Capital Management, Inc. In this
capacity, Mr. Staudter served as a member of the Investment Committee and
provided investment counseling and tax and financial planning services. He is
67 years old. Mr. Staudter's address is 9637 Preston Trail West, Ponte Vedra,
FL 32082.

LAWRENCE J. TOAL, Director. Mr. Toal has served as a Director of the Company
since December 12, 1995. Mr. Toal is Chairman, President and Chief Executive
Officer of Dime Bancorp, Inc. and its subsidiary, The Dime Savings Bank of New
York, FSB (the "Dime"). He joined the Dime in 1991 as President and Chief
Operating Officer. Prior to joining the Dime, Mr. Toal had been President of
PSFS, a $10 billion Philadelphia thrift from 1988 to 1991. Mr. Toal spent 26
years at The Chase Manhattan Bank, N.A., in various senior management positions
in consumer, corporate and international banking areas in the United States,
Europe and Asia. He is 60 years old. Mr. Toal's address is 589 Fifth Avenue, 3rd
Floor, New York, NY 10017.

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<PAGE>

1983 to May 1994, Mr. Rio was Senior Vice President and Manager of Client
Services and Director of Internal Audit at The Boston Company. He is 43 years
old.

CHRISTOPHER J. KELLEY(**), Vice President and Secretary. Mr. Kelley is Vice
President and Senior Associate General Counsel of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From April 1994 to
July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
October 1992 to March 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. He is 34 years old.

(*) THIS DIRECTOR IS AN "INTERESTED PERSON" OF THE COMPANY.
(**) ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109

On December 4, 1998, the officers and directors of the Company, as a group,
owned less than 1% of the outstanding shares of the Fund.

Officers and directors who are interested persons of the Investment Manager or
FDI receive no compensation from the Company. The Company expects to pay or
accrue total directors' fees of approximately $60,000 per year to those
directors who are not designated above as interested persons. Directors who are
interested persons of the Company may be compensated by the Investment Manager
for their services to the Company.

Carolyn B. Lewis (2) $11,125 $0 $0 $11,125

Theodore Rosen (3) $10,000 $0 $0 $10,000

George F. Staudter (4) $0 $0 $0 $0

Lawrence J. Toal $20,000 $0 $0 $20,000
</TABLE>

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<PAGE>

INVESTMENT MANAGEMENT, DISTRIBUTION AND OTHER SERVICES

INVESTMENT MANAGEMENT

Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of the Fund. Pursuant to the Investment Management Agreement with the
Company on behalf of the Fund, the Investment Manager manages the Fund's
investments in accordance with its stated policies and restrictions, subject
to oversight by the Company's Board of Directors.

The Investment Manager is a wholly owned subsidiary of Waterhouse National Bank
(the "Bank"), which is a wholly owned subsidiary of Waterhouse Investor
Services, Inc. ("Waterhouse"), which is in turn a wholly owned subsidiary of The
Toronto-Dominion Bank ("TD Bank"). The Bank offers various banking products and
services primarily to the customers of Waterhouse Securities, the principal
subsidiary of Waterhouse. TD Bank, a Canadian chartered bank, is subject to the
provisions of the Bank Act of Canada. The Investment Manager also currently
serves as investment manager to the other portfolios of the Company and to the
Bank and as of December 3, 1998 had total assets under management in excess of
$7 billion. Personnel of the Investment Manager may invest in securities for
their own account pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the Company, establishes procedures for
personal investing and restricts certain transactions.

The Investment Management Agreement, which is dated February 26, 1998, will
continue in effect for an initial two-year term, and thereafter from year to
year so long as continuation is specifically approved at least annually by a
vote of the Board of Directors or by vote of the shareholders of the Fund, and
in either case by a majority of Disinterested Directors who have no direct or
indirect financial interest in the Agreement. The agreement may be terminated
as to the Fund at any time upon 60 days prior written notice, without penalty,
by either party, or by a majority vote of the outstanding shares of the Fund,
and will terminate automatically upon assignment.

The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by
the Fund in connection with the matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross
negligence on the Investment Manager's part in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under such agreement. The services of the Investment
Manager to the Fund under the Investment Management Agreement are not
exclusive and it is free to render similar services to others.

For the investment management services furnished to the Fund, the Fund pays
the Investment Manager an annual investment management fee, accrued daily and
payable monthly, of 0.20% of the Fund's average daily net assets.

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<PAGE>

The Investment Manager and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of the Fund's operating expenses. Expense
reimbursements by the Investment Manager or its affiliates will increase the
Fund's total return. The Investment Manager has agreed to assume certain
expenses of the Fund (or waive its fees) for the first twelve months of the
Fund's operations, so that the total operating expenses payable by the Fund
during the period will not exceed 0.25% of its average daily net assets.
Thereafter, any such fee waivers or reductions will be voluntary and may be
reduced or eliminated at any time without further notice to investors.

For the fiscal period ended October 31, 1998, the Investment Manager waived
its entire investment management fee of $33,188.

ADMINISTRATION

Pursuant to an Administration Agreement with the Company and the Investment
Manager, Waterhouse Securities, as Administrator, provides administrative
services to the Fund. Administrative services furnished by Waterhouse
Securities include, among others, maintaining and preserving the records of
the Company, including financial and corporate records, computing net asset
value, dividends, performance data and financial information regarding the
Company, preparing reports, overseeing the preparation and filing with the
Securities and Exchange Commission (the "SEC") and state securities regulators
of registration statements, notices, reports and other material required to be
filed under applicable laws, developing and implementing procedures for
monitoring compliance with regulatory requirements, providing routine
accounting services, providing office facilities and clerical support as well
as providing general oversight of other service providers. The Investment
Manager (and not the Fund) compensates Waterhouse Securities for providing
services under the Administration Agreement at the annual rate of 0.10% of the
Fund's average daily net assets.

Waterhouse Securities has entered into a Subadministration Agreement with FDI
pursuant to which FDI performs certain of the foregoing administrative
services for the Company. Waterhouse Securities pays FDI's fees for providing
the services under the Agreement. In addition, Waterhouse Securities may enter
into subadministration agreements with other persons to perform such services
from time to time.

The Administration Agreement, which is dated February 26, 1998, will continue
in effect for an initial two-year term, and thereafter from year to year so
long as such continuation is specifically approved at least annually by a vote
of the Board of Directors, including a majority of Disinterested Directors who
have no direct or indirect financial interest in the Agreement. The Fund or
Waterhouse Securities may terminate the Administration Agreement on 60 days'
prior written notice without penalty. Termination by the Fund may be by vote
of the Company's Board of Directors, or a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement,
or by a majority of the outstanding voting securities of the Fund. The
Agreement terminates automatically in the event of its "assignment" as defined
in the Investment Company Act.

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<PAGE>

The Administration Agreement provides that Waterhouse Securities will not be
liable for any error of judgment or of law, or for any loss suffered by the
Fund in connection with the matters to which such agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on
Waterhouse Securities' part in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations and duties under
such agreement.

The Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt,
Waterhouse Securities and the Investment Manager believe that such laws should
not preclude them from acting as administrator and investment manager,
respectively, to the Company. Accordingly, Waterhouse Securities under the
Administration Agreement and the Investment Manager under the Investment
Management Agreement will perform only administrative and investment
management servicing functions, respectively. However, judicial and
administrative decisions or interpretations of such laws as well as changes in
either state statutes or regulations relating to the permissible activities of
banks or their subsidiaries or affiliates could prevent Waterhouse Securities
or the Investment Manager from continuing to perform all or a part of their
administration or investment management activities, respectively. If
Waterhouse Securities or the Investment Manager were prohibited from so
acting, alternative means of continuing such services would be sought by the
Board of Directors.

DISTRIBUTION

The Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by a vote of the Board of Directors,
including a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement was approved by the Board of
Directors, including a majority of Disinterested Directors who have no direct or
indirect financial interest in the Agreement. The Fund may terminate the
Distribution Agreement on 60 days' prior written notice without penalty.
Termination by the Fund may be by vote of a majority of the Company's Board of
Directors, or a majority of the Disinterested Directors, or by a majority of the
outstanding voting securities of the Fund. The Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.

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<PAGE>

SHAREHOLDER SERVICING

The Board of Directors has approved a Shareholder Servicing Plan ("Servicing
Plan") pursuant to which the Fund may pay banks, broker-dealers or other
financial institutions that have entered into a shareholder services agreement
with the Company ("Servicing Agents") in connection with shareholder support
services that they provide. Payments under the Servicing Plan will be calculated
daily and paid monthly at an annual rate that may not exceed 0.25% of the
average daily net assets of the Fund. The shareholder services provided by the
Servicing Agents pursuant to the Servicing Plan may include, among other
services, providing general shareholder liaison services (including responding
to shareholder inquiries), providing information on shareholder investments,
establishing and maintaining shareholder accounts and records, and providing
such other similar services as may be reasonably requested.

The Servicing Plan was approved by the Board of Directors, including a
majority of the Disinterested Directors who have no direct or indirect
financial interest in the Plan or the Shareholder Services Agreement. The
Servicing Plan continues in effect as long as such continuance is specifically
so approved at least annually. The Servicing Plan may be terminated by the
Company with respect to the Fund by a vote of a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Plan or any
agreements relating thereto.

Pursuant to a Shareholder Services Agreement between the Company and Waterhouse
Securities, Waterhouse Securities has agreed to provide shareholder services to
the Fund pursuant to the Shareholder Servicing Plan. The Company may enter into
similar agreements with other service organizations, including broker-dealers
and banks whose clients are shareholders of the Company, to act as Servicing
Agents and to perform shareholder support services with respect to such clients.
For the fiscal year ended October 31, 1998, Waterhouse Securities received
$41,485 in shareholder servicing fees and waived $36,900.

The Shareholder Services Agreement with Waterhouse Securities will continue in
effect only if such continuance is specifically approved at least annually by
a vote of the Board of Directors, including a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Agreement.
The Agreement was approved by the Board of Directors, including a majority of
the Disinterested Directors who have no direct or indirect financial interest
in the Agreement. The Fund may terminate the Shareholder Services Agreement on
60 days' prior written notice without penalty. Termination by the Fund may be
by vote of the Company's Board of Directors, or a majority of the
Disinterested Directors who have no direct or indirect financial interest in
the Agreement. The Agreement terminates automatically in the event of its
"assignment" as defined in the Investment Company Act.

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<PAGE>

the Currency, the Federal Reserve Board or the Federal Deposit Insurance
Corporation, and investment advisers and other money managers are urged to
consult their legal advisers before investing such assets in Company shares.

TRANSFER AGENT AND CUSTODIAN

National Investor Services Corp. (the "Transfer Agent"), 55 Water Street, New
York, an affiliate of the Investment Manager, serves as transfer and dividend
disbursing agent for the Fund. For the services provided under the Transfer
Agency and Dividend Disbursing Agency Agreement, which include furnishing
periodic and year-end shareholder statements and confirmations of purchases
and sales, reporting share ownership, aggregating, processing and recording
purchases and redemptions of shares, processing dividend and distribution
payments, forwarding shareholder communications such as proxies, shareholder
reports, dividend notices and prospectuses to beneficial owners, receiving,
tabulating and transmitting proxies executed by beneficial owners and sending
year-end tax reporting to shareholders and the Internal Revenue Service, the
Transfer Agent receives an annual fee, payable monthly, of 0.05% of the Fund's
average daily net assets. The Transfer Agent is permitted to subcontract any
or all of its functions with respect to all or any portion of the Fund's
shareholders to one or more qualified sub-transfer agents or processing
agents, which may be affiliates of the Transfer Agent, FDI or broker-dealers
authorized to sell shares of the Fund pursuant to a selling agreement with
FDI. The Transfer Agent is permitted to compensate those agents for their
services; however, that compensation may not increase the aggregate amount of
payments by the Fund to the Transfer Agent. For the fiscal year ended October
31, 1998, the Transfer Agent waived its entire fee of $8,297.

Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian"), 90
Washington Street, New York, NY 10286, acts as the custodian of the Fund's
assets. The Custodian, among other things, maintains a custody account or
accounts in the name of the Fund, receives and delivers all assets for the
Fund upon purchase and upon sale or maturity, collects all income and other
payments and distributions with respect to the assets of the Fund, and pays
expenses of the Fund.

OTHER EXPENSES

The Fund pays the expenses of its operations, including the costs of
shareholder and board meetings; the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent;
reports and notices to shareholders; the costs of calculating net asset value;
brokerage commissions or transaction costs; taxes; interest; insurance
premiums; Investment Company Institute dues; and the fees and expenses of
qualifying the Fund and its shares for distribution under federal and state
securities laws. In addition, the Fund pays for typesetting, printing and
mailing proxy material, prospectuses, statements of additional information,
notices and reports to existing shareholders, and the fees of the
Disinterested Directors. The Fund is also liable for such nonrecurring
expenses as may arise, including costs of any litigation to which the Company
may be a party, and any obligation it may have to indemnify the Company's
officers and directors with respect to any litigation. The Company's expenses
generally are allocated among its investment portfolios (such as

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<PAGE>

the Fund) on the basis of relative net assets at the time of allocation,
except that expenses directly attributable to a particular investment
portfolio are charged to that portfolio.

DIVIDENDS AND TAXES

DIVIDENDS

It is currently contemplated that dividends of the Fund's net investment
income will be declared daily and paid monthly. No dividends will be declared
on any day on which the Fund does not receive dividends or interest income
from the securities in its portfolio. In addition, any dividends declared will
be net of Fund expenses accrued to date. In the event the Board of Directors
changes the daily dividend policy, shareholders will be notified.

CAPITAL GAIN DISTRIBUTIONS

If the Fund realizes any net capital gain, such gain will be distributed at
least once during the year as determined by the Board of Directors. Short-term
capital gain distributions by the Fund are taxable to shareholders as ordinary
income, not as capital gain. Any realized capital loss to the extent not
offset by realized capital gain will be carried forward.

TAX STATUS OF THE COMPANY

The Fund intends to continue to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gain, if any, to
shareholders. Accordingly, it is not anticipated that the Fund will be liable
for Federal income or excise taxes to which it would otherwise be subject.
Qualification as a regulated investment company does not, of course, involve
governmental supervision of management or investment practices or policies.

The Fund is treated as a separate entity from the other investment portfolios
of the Company for tax purposes.

OTHER TAX INFORMATION

The Transfer Agent will send each shareholder a notice in January describing
the tax status of dividend and capital gain distributions (where applicable)
for the prior year.

Long-term capital gains realized by non-corporate taxpayers are subject to a
reduced maximum tax rate.

It is expected that a portion of the Fund's dividends from net investment
income will be eligible for the dividends received deduction for corporations.
The amount of such dividends eligible for the dividends received deduction is
in general, limited to the amount of qualifying dividends from domestic
corporations received during the Fund's fiscal year. You should consult with
your tax adviser in this regard.

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<PAGE>

Any dividend or distribution received by a shareholder on shares of the Fund
will have the effect of reducing the NAV of the shares by the amount of the
dividend or distribution. Furthermore, a dividend or distribution made shortly
after the purchase of shares by a shareholder, although in effect a return of
capital to that particular shareholder, would be taxable to the shareholder as
described above.

Dividends declared in October, November or December to shareholders of record
and paid during the following January are treated as paid on December 31 for
federal income and excise tax purposes. The Fund may adjust its schedule for
dividend reinvestment for the month of December to assist in complying with
reporting and minimum distribution requirements contained in the Internal
Revenue Code.

Redemptions of Fund shares are taxable events, and, accordingly, shareholders
may recognize gains or losses on such transactions. Except for dealers, any
such gains or losses will be capital gains or losses, and will be long-term
capital gains or losses if such shares were held for more than 12 months. In
the case of an individual, any such capital gain will be taxable at the maximum
rate of 20%. In the case of a corporation, long-term capital gain is taxable
at the same rates as ordinary income. A loss realized on a redemption of Fund
shares will be disallowed if other Fund shares are acquired (whether through
dividend reinvestment or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date the shares are redeemed. In such
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. If a shareholder holds shares for six months or less and
during that period receives a distribution taxable to the shareholder as a
capital gain, any loss realized on the sale of the shares during that
six-month period would be a long-term capital loss to the extent of the
distribution.

The Fund generally is required by law to withhold 31% ("back-up withholding")
of certain dividends, distributions of capital gains and redemption proceeds
paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number
and in the case of entities, an employer identification number) and in certain
other circumstances. Any tax withheld as a result of backup withholding does
not constitute an additional tax imposed on the shareholder of the account,
and may be claimed as a credit on such shareholder's federal income tax
return. You should consult your own tax adviser regarding the withholding
requirement. Dividends paid to foreign investors generally will be subject to
a 30% (or lower treaty rate) withholding tax.

The information above, together with the information set forth in the
Prospectus and this SAI, is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to present a detailed explanation of the tax treatment of the
Fund or to discuss individual tax consequences. In addition to federal income
taxes, shareholders may be subject to state and local taxes on Company
distributions and on redemptions or other dispositions of shares of the
Portfolios, and shares may be subject to state and local personal property
taxes. Investors should consult their tax advisers regarding specific
questions as to

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<PAGE>

federal, state and local taxes or to determine whether the Fund is suitable to
their particular tax situation.

Foreign shareholders should consult their tax advisers regarding foreign tax
consequences applicable to their purchase of Company shares.

INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS

The Company's independent auditors, Ernst & Young LLP, 787 Seventh Avenue, New
York, New York 10019, audit and report on the Company's annual financial
statements, review certain regulatory reports and the Company's federal income
tax returns, and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Company. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements. The Fund's October 31, 1998 financial statements and the report
thereon of Ernst & Young LLP from the Fund's October 31, 1998 annual report (as
filed with the SEC on December 10, 1998 pursuant to Section 30(b) of the
Investment Company Act and Rule 30b2-1 thereunder (Accession Number
0000889812-98-002900)) are incorporated herein by reference.

SHARE PRICE CALCULATION

The price of the Fund's shares on any given day is its net asset value ("NAV")
per share. NAV is calculated by the Company for the Fund on each day that the
New York Stock Exchange (the "NYSE") and the Custodian are open. Currently,
the NYSE is closed on weekends and New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. In addition to these holidays, the
Custodian generally is closed on Veteran's Day and Columbus Day.

Securities owned by the Fund for which market quotations are readily available
are valued at current market value. The Fund values its securities as follows.
A security listed or traded on an exchange is valued at its last sale price
(prior to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the
security is valued at the mean of the last bid and asked prices. All other
securities for which over-the-counter market quotations are readily available
generally are valued at the mean of the current bid and asked prices. When
market quotations are not readily available, securities are valued at fair
value as determined in good faith by the Board. Debt securities may be valued
on the basis of valuations furnished by pricing services that utilize
electronic data processing techniques to determine valuations for normal
institutional-size trading units of debt securities, without regard to sale or
bid prices, when such valuations are believed to more accurately reflect the
fair market value of such securities. Debt obligations with remaining
maturities of 60 days or less generally are valued at amortized cost. The
amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the
impact of fluctuating interest rates on the market value of the security.

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<PAGE>

The Fund intends to conduct its operations so that its NAV per share on any
given day will approximate .001 (or 1/1000) of the closing value of the DJIA
(the "Ratio"). There can be no assurance, however, that the Fund will be able
to maintain the NAV per share at or near the Ratio. For example, as with most
mutual funds, each capital gain distribution will cause a reduction of the NAV
per share to the extent of the amount distributed. In order to maintain the
Fund's NAV per share at or near the Ratio, the Fund may employ certain
techniques, including declaring a share split, share dividend or reverse share
split. Share splits and dividends increase the number of shares outstanding,
resulting in a corresponding decrease in the NAV per share. For example, a
2-for-1 split would double the number of shares outstanding, thereby halving
the NAV per share. Conversely, reverse splits reduce the number of shares
outstanding. For example, a 1-for-2 reverse share split would halve the number
of shares outstanding, thereby doubling the NAV per share. These examples are
given to illustrate the principles relating to these techniques; the Fund's
use of these techniques is expected to have a more moderate impact on the
Fund's NAV per share. The use of any of these techniques will not change the
absolute dollar value of a shareholder's investment in the Fund (although the
number of shares and the NAV per share would change) or result in any
additional tax burden to shareholders. While it is the Fund's current
intention to maintain the Fund's NAV per share at or near the Ratio and to
utilize the techniques described in this paragraph for this purpose, the Board
of Directors may in the future determine to change this policy. In the event
that the Board of Directors changes this policy, shareholders will be
notified.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares of the Fund are sold on a continuous basis by the distributor.

The minimum initial investment in shares of the Fund is $1,000. The minimum
subsequent investment is $100. Minimum requirements may be imposed or changed at
any time and the Fund may waive minimum investment requirements in its
discretion. Initial investment minimums do not apply to investments made through
a periodic investment program for investors who make a monthly investment of
$100 or more or a quarterly investment of $300 or more or to Waterhouse
Securities IRA accounts.

The Company normally calculates the NAV per share of the Fund as of the close
of the regular session of trading on the NYSE (normally 4:00 p.m. Eastern
time) each day that the NYSE and the bank which serves as the Custodian are
open. To the extent that portfolio securities are traded in other markets on
days when the NYSE or the Custodian are closed, the Fund's net asset value may
be affected on days when investors do not have access to the Company to
purchase or redeem shares. In addition, trading in some of the Fund's
portfolio securities may not occur on days when the Company is open for
business.

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<PAGE>

per share. Shareholders receiving securities or other property on redemption may
realize a gain or loss for tax purposes, and will incur any costs of sale, as
well as the associated inconveniences. An in kind distribution of portfolio
securities will be less liquid than cash. The shareholder may have difficulty in
finding a buyer for portfolio securities received in payment for redeemed
shares. Portfolio securities may decline in value between the time of receipt by
the shareholder and conversion to cash. A redemption in kind of the Fund's
portfolio securities could result in a less diversified portfolio of investments
for the Fund and could affect adversely the liquidity of the Fund's portfolio.

PERFORMANCE

The historical performance calculation for the Fund may be shown in the form
of "total return" or "yield." These various measures of performance are
described below.

Quotations of performance may from time to time be used in advertisements,
sales literature, shareholder reports or other communications to shareholders
or prospective investors. All performance information supplied by the Fund is
historical and is not intended to indicate future returns. The Fund's total
return and yield fluctuate in response to market conditions and other factors.
The value of the Fund's shares when redeemed may be more or less than their
original cost.

In performance advertising, the Fund may compare its performance information
with data published by independent evaluators such as Morningstar, Inc.,
Lipper Analytical Services, Inc., or other companies that track the investment
performance of investment companies ("Fund Tracking Companies"). The Fund may
also compare any of its performance information with the performance of
recognized stock, bond and other indexes, including but not limited to the Dow
Jones Industrial Average, Standard & Poor's 500 Composite Stock Index, Russell
2000 Index, Morgan Stanley - Europe, Australian and Far East Index, Lehman
Brothers Intermediate Government Index, Lehman Brothers Intermediate
Government/Corporate Index, Salomon Brothers Bond Index, Shearson Lehman Bond
Index, U.S. Treasury bonds, bills or notes and changes in the Consumer Price
Index as published by the U.S. Department of Commerce. The Fund may refer to
general market performances over past time periods such as those published by
Ibbotson Associates (for instance, its "Stocks, Bonds, Bills and Inflation
Yearbook"). In addition, the Fund may refer in such materials to mutual fund
performance rankings and other data published by Fund Tracking Companies.
Performance advertising may also refer to discussions of the Fund and
comparative mutual fund data and ratings reported in independent periodicals,
such as newspapers and financial magazines.

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<PAGE>

TOTAL RETURN CALCULATIONS

Standardized total returns quoted in advertising and sales literature reflect
all aspects of the Fund's return, including the effect of reinvesting
dividends and capital gain distributions, and any change in the Fund's net
asset value per share over the period. Average annual returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in the Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the
rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate that would equal 100%
growth on a compounded basis in ten years. While average annual returns are a
convenient means of comparing investment alternatives, investors should
realize that the performance is not constant over time but changes from year
to year, and that average annual returns represent averaged figures as opposed
to the actual year-to-year performance of the Fund.

Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $10,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period.

Since March 30, 1998 (the Fund's inception), the Fund's total return
(unannualized) was -1.19%.

In addition to average annual returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an
investment over a stated period. Total returns may be broken down into their
components of income and capital (including capital gain and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration. Period total return is calculated according to the following
formula:

PT = (ERV/P-1)

Where:

PT = period total return.
The other definitions are the same as in average annual total return
above.

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<PAGE>

SEC YIELD CALCULATIONS

Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day and that the Fund's yield for any given period is not an
indication or representation by the Fund of future yields or rates of return
on the Fund's shares. The yields of the Fund are not fixed or guaranteed, and
an investment in the Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of the Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to
compare the Fund's yield information directly to similar information regarding
investment alternatives which are insured or guaranteed.

Standardized yields for the Fund used in advertising are computed by dividing
the Fund's dividend and interest income (in accordance with specific
standardized rules) for a given 30 days or one month period, net of expenses,
by the average number of shares entitled to receive distributions during the
period, dividing this figure by the Fund's NAV per share at the end of the
period and annualizing the result (assuming compounding of income in
accordance with specific standardized rules) in order to arrive at an annual
percentage rate. Capital gain and loss generally are excluded from these
calculations.

Income calculated for the purpose of determining the Fund's standardized yield
differs from income as determined for other accounting purposes. Because of
the different accounting methods used, and because of the compounding assumed
in yield calculations, the yield quoted for the Fund may differ from the rate
of distribution the Fund paid over the same period or the rate of income
reported in the Fund's financial statements.

OTHER ADVERTISEMENT MATTERS

The Fund may advertise other forms of performance. For example, the Fund may
quote unaveraged or cumulative total returns reflecting the change in the
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series
of redemptions over any time period.

The Fund may also include various information in its advertisements. Information
included in the Fund's advertisements may include, but is not limited to (i)
portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer, industry or by maturity, (ii) statements or illustrations relating to
the appropriateness of types of securities and/or mutual funds that may be
employed by an investor to meet specific financial goals, such as funding
retirement, paying for children's education and financially supporting aging
parents, (iii) information regarding the effects of automatic investment and
systematic withdrawal plans, including the principle of dollar cost averaging,

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<PAGE>

(iv) descriptions of the Fund's portfolio manager(s) and the portfolio
management staff of the Investment Manager or summaries of the views of the
portfolio managers with respect to the financial markets, (v) the results of a
hypothetical investment in the Fund or the DJIA over a given number of years,
including the amount that the investment would be at the end of the period, (vi)
the effects of investing in a tax-deferred account, such as an individual
retirement account or Section 401(k) pension plan and (vii) the net asset value,
net assets or number of shareholders of the Fund as of one or more dates.

In connection with its advertisements, the Fund may provide information about
its Investment Manager, Waterhouse Securities or any of the Fund's other
service providers, including information relating to policies, business
practices or services. For instance, the Fund may provide information about
Waterhouse Securities in its advertisements, including the difference between
commissions paid on stock trades executed by Waterhouse Securities compared to
full-price and discount brokers (as illustrated below) and a description of
services available through Waterhouse Securities. This example is for
illustrative purposes only; investors should contact the Customer Service
Department at Waterhouse Securities at 1-800-934-4410 for information about
services and commissions.

- --------- Survey date 12/9/98. Services may vary by firm. Commission rates
surveyed are for stocks and may vary for other products. Waterhouse Securities
minimum commission $35. This information is subject to change. The Fund may
advertise information regarding the effects of periodic investment, including
the principle of dollar cost averaging. In a dollar cost averaging program, an
investor invests a fixed dollar amount in the Fund at period intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low.

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<PAGE>

While such a strategy does not ensure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares had been purchased at those intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares through periods of low price levels. For example, if an investor invests
$100 a month for a period of six months in the Fund the following will be the
relationship between average cost per share ($14.35 in the example given) and
average price per share:

Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.000
2 $100 $12 8.333
3 $100 $15 6.666
4 $100 $20 5.000
5 $100 $18 5.555
6 $100 $16 6.250
---- --- -----
Total Invested $600 Avg. Price $15.17 Total Shares 41.804

SHAREHOLDER INFORMATION

Each investment portfolio issues shares of common stock in the Company. The
Board of Directors may increase the number of authorized shares or create
additional series or classes of Company or portfolio shares without
shareholder approval. Shares are fully paid and nonassessable when issued, are
transferable without restriction, and have no preemptive or conversion rights.
Shares of the Company have equal rights with respect to voting, except that
the holders of shares of the Fund will have the exclusive right to vote on
matters affecting only the rights of the holders of the Fund. For example,
holders of a particular investment portfolio will have the exclusive right to
vote on any investment management agreement or investment restriction that
relates only to such investment portfolio. Shareholders of the investment
portfolios do not have cumulative voting rights, and therefore the holders of
more than 50% of the outstanding shares of the Company voting together for the
election of directors may elect all of the members of the Board of Directors.
In such event, the remaining holders cannot elect any members of the Board of
Directors.

The Board of Directors may authorize the issuance of additional shares, and may,
from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act.

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<PAGE>

Each director serves until the next election of directors and until the
election and qualification of his successor or until such director sooner
dies, resigns, retires or is removed by the affirmative vote of a majority of
the outstanding voting securities of the Company. In accordance with the
Investment Company Act (i) the Company will hold a shareholder meeting for the
election of directors at such time as less than a majority of the directors
have been elected by shareholders, and (ii) if, as a result of a vacancy in
the Board of Directors, less than two-thirds of the directors have been
elected by the shareholders, that vacancy will be filled only by a vote of the
shareholders.

As of December 4, 1998, Toronto Dominion Investments Inc., owned of record and
beneficially approximately 7% of the Fund's outstanding shares.

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